European markets are mixed this morning as the tech stock rout continues. The FTSE 100 is marginally in the red despite some support from basic resources stocks and oil majors, while shares are up in Paris and down slightly in Frankfurt. The rise in bond yields is concentrating risks around chips and AI, so Europe is less exposed.
Global bond yields remained near multi-year/multi-decade highs, putting pressure on stock markets, but they have eased somewhat, with the US 30-year yield backing off its 19-year high at 5.339 per cent to 5.269 per cent, while the UK 30-year down to 5.80 per cent from its two-decade peak at 5.877 per cent.
Chipmakers bore the brunt and led the fallout, with Micron and Intel each falling 7 per cent and Nvidia 2 per cent, pulling the Nasdaq down 1.3 per cent for the session. The broader S&P 500 declined 0.7 per cent, while the Dow Jones held up better, sliding 0.2 per cent for the day. Asian markets took the cue as the Kospi – the AI hardware/infrastructure proxy play – tumbled nearly 6 per cent overnight, while the Nikkei 225 fell more than 3 per cent. SK Hynix slipped 10 per cent and announced a massive 40 trillion won ($29bn) share buyback, aiming to reassure investors.
European stocks had a broadly weak Tuesday, with the Stoxx 600 down 0.7 per cent and Germany’s Dax down 0.8 per cent, while the FTSE 100 edged 0.1 per cent higher on higher oil prices. Although Brent has now failed to break out above $92 a couple of times in the last two sessions. Without further escalation by either belligerent, we could see some geopolitical risk premia taken off the table. Gold was reluctant to sustain any move beyond $4,400 and is back to $4,355.
UK inflation accelerated in July, but there’s nothing in the report to worry the Bank of England. If anything, there ought to be some relief, and the print should give the BoE some breathing space to resist calls for hikes. Twelve-month CPI picked up to 2.9 per cent from 2.6 per cent in June, as expected and largely due to a 13 per cent rise in the energy price cap. There is likely more inflation in the post, but the key component for the BoE is wages, and yesterday’s labour market report shows pay growth is cooling sharply. Markets accordingly trimmed expectations for a hike from about one-in-four to less than one-in-five as the two-year gilt yield dipped a couple of points.
Back to bonds, which are driving everything right now. Assessments of causes are plentiful – we can sum it up as excess/reckless fiscal spending being punished as the Middle East conflict underlines the likelihood that we have entered a more fragmented era for the global economy, as Hermione Taylor explains here. AI capex spending is growing and needs to be absorbed, adding to corporate bond pressure.
But I would point to the last Federal Reserve meeting as the main catalyst, with the lack of forward guidance and uncertainty about the policy path under Kevin Warsh leading to a de-anchoring of expectations. Despite the hawkish split on the committee, with three members voting for a hike, the market is reading no forward guidance as essentially dovish, which, alongside war, fiscal risks and worries about greater issuance, is driving up expectations for long-term higher inflation, and ergo long-term bond yields.
By Neil Wilson, investor strategist at Saxo UK
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