Tech stocks surge, and UK Budget looms

Kathleen Brooks XTB UK

It’s UK Budget day, and the chancellor will unveil his tax and spending plans at approximately 1230pm. It is widely expected to be a ‘steady as she goes budget’ and few surprises are expected. In the lead up to the budget, global stocks are rallying led by tech and the oil price is

higher by more than 1% and Brent crude is back above $111 per barrel.

UK assets struggle ahead of the Budget

Risk sentiment is picking up as we move through the week, however, for the UK is missing out. Ahead of Healey’s speech the pound is lower and the FTSE 100 is also poised to open down a notch at 0.1%. This is largely not down to Healey’s plans, and the movement in the pound and the FTSE in recent days is down to global factors.

The bond market is always sensitive to Budget risks, but here the news is better for Healey. In the past week, there has been a large flattening of the UK yield curve, with long-end yields staging a decent recovery and short end yields rising, largely because of the recent surge in energy prices, which are down to global factors.

Healey’s Budget overshadowed by tech news

Much to John Healey’s relief, the UK Budget is not the main story for financial markets today. The AI trade is back in focus after SK Hynix shares jumped more than 10%, after the company reported record revenues for last quarter, and said that its memory chips are sold out through 2029. The company also reported that customer requests for its chips are two times its supply capacity. The piece de resistance was the announcement of a record shareholder returns policy worth upwards of $45bn. This helped spur huge investor interest and the best rally in the Kospi in over a month, the Korean index rose more than 6.6% earlier today.

AI trade comes up against strong earnings

The recent rout in the AI trade is coming up against some strong earnings figures, which is injecting life and confidence back into the tech trade. There are more earnings coming this evening, including the hyperscalers Microsoft and Alphabet. Their numbers will be closely watched. Investors want to see how these two mega-cap tech stocks are monetizing their AI investments.

These results could determine if the tech/ AI rally has legs. Any signs of 1, a failure to monetise investments, or 2, a slowdown in capex spend, could have big repercussions for the AI trade on Wednesday night and Thursday. It will also help to determine if the Nasdaq 100 can regain the 30,000 level. For now, futures markets are pricing a higher open for the large cap US tech index today, and a return above this level.

Anthropic taps up individual investors for IPO

Other news that has impacted the AI trade include reports that Anthropic is pushing ahead with its IPO plans, and is hiring JP Morgan to sell shares to individuals, which could make it one of the largest ever IPOs. This was used by SpaceX when it launched earlier this year, so expect more hype around the IPO in the coming weeks. OpenAI is also reportedly using Google AI chips as it expands its AI build out.

Rally in AI stocks ignore Fed rate hike warnings

For now, the rally in tech stocks is impervious to the rising oil price and the risks posed by political elections across the world, Budgets and the Federal Reserve meeting this evening.

Fed becomes an afterthought in major day for event risk

There is a huge amount of event risk on Wednesday, so tonight’s Fed meeting almost feels like an afterthought. This is a dangerous mindset for investors, however. Although the Fed Funds Futures market is only predicting a 14% chance of a rate hike later today, there is a 76% chance of a hike in December, and US interest rates are expected to rise to 4.5% - 4.75%, in the next 12 months.

What to expect from the Fed

Warsh will need to explain any decision to hold rates steady tonight, as inflation continues to rise. We expect the FOMC’s statement and Warsh’s press conference to remain hawkish and vigilant on the inflation threats, which could support the dollar. In the past week, the dollar is the top performing major currency, rising 0.6% on a broad basis. We doubt tonight’s Fed meeting will challenge its dominance.

Midterms premium attached to the Oil price

The threat of an intense military campaign from the US against Iran after next week’s US Midterm elections pushed up the oil price on Wednesday. We expect Brent crude oil to remain comfortably above $110 per barrel or higher until after the Midterm elections, when we see what Donald Trump actually has planned for the war in the Middle East.

Chart 1: US100 tests major resistance zone at 30,000

Author

Kathleen Brooks

XTB UK

Kathleen has nearly 15 years’ experience working with some of the leading retail trading and investment companies in the City of London.

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