The week in markets

Read this article to understand:

• The factors behind market volatility last week
• Why investors are starting to scrutinise the AI investment boom more closely
• Why bond yields and rate expectations fell in the face of robust data

The weekend news set an uneasy tone to the beginning of the week as Houthi militants struck Riyadh’s main airport again, raising fears of a wider conflict near vital Red Sea shipping lanes. Meanwhile, an apparent US-brokered “energy ceasefire” between Russia and Ukraine failed to get off the ground. Brent crude climbed 1.8 per cent to around $106 a barrel on Monday, and European natural gas reached its highest level since 2022.

Despite those concerns, markets entered the week in relatively good shape. The S&P 500 was hovering near an all-time high, US economic growth remained solid and expectations for the third-quarter corporate earnings season were bullish.

That confidence faced a more serious challenge when concerns emerged around AI. Reports that Chinese memory-chip producers were making significant technological progress sparked a sharp sell-off across semiconductor stocks. South Korea’s KOSPI fell more than six per cent in a single session, Samsung lost almost eight per cent and SK Hynix nearly nine per cent.¹

The Philadelphia Semiconductor Index extended its losing streak as investors questioned whether the profitability at some of the biggest beneficiaries of the AI boom could be affected amid greater competition than previously assumed.

As the week progressed, investors’ attention shifted from who would benefit from AI to how it was being financed. Cloud-computing group CoreWeave became the focal point of market discussion. The company’s shares fell more than 15 per cent at one stage, while the cost of insuring its debt rose sharply, highlighting growing concerns around leverage and funding requirements.¹

Oracle suffered its largest decline since June, while the Philadelphia Semiconductor Index fell for six consecutive sessions, leaving it down almost 12 per cent over that period. This was painful for a market that has become increasingly dependent on a handful of large technology companies.

What made the week’s market reaction particularly interesting was that it unfolded alongside a run of US economic data that would normally have dominated headlines. US consumer prices rose 0.6 per cent in September, pushing annual inflation up to 3.7 per cent. Producer prices increased 1.3 per cent, the strongest monthly rise since March 2022, and retail sales grew comfortably more than expected. Jobless claims remained extremely low at 199,000.

Taken together, the data pointed to an economy that remains surprisingly strong with inflation proving difficult to extinguish.

The initial response was predictable. Markets’ assessment of the probability of another Federal Reserve rate rise in October rose to almost 60 per cent from around 22 per cent, while ten-year Treasury yields climbed to 5.33 per cent.

However, the rise in rate expectations and bond yields proved short lived.  As concerns around AI-related financing intensified, bond yields fell and expectations of a near-term rate increase faded. Investors increasingly concluded that tighter financial conditions within parts of the technology sector could ultimately slow activity, which could lessen the pressure for tighter monetary policy.

Calmer conditions returned towards the end of the week after Nvidia’s chief executive, Jensen Huang, publicly backed CoreWeave, helping the company’s shares rebound from an intraday loss of almost ten per cent to close nearly six per cent higher. Investors were further reassured when Federal Reserve Chair Kevin Warsh struck an upbeat tone on the US economy and highlighted the potential for AI to drive productivity gains.

The S&P 500 rebounded, despite continued weakness in semiconductor stocks, while the ten-year Treasury yield fell to just beneath 5.10 per cent by Friday morning.

The week’s defining feature was not inflation or economic data, but a growing debate around the sustainability of the AI investment boom. After nearly two years of driving markets higher, investors are beginning to ask tougher questions about competition, financing and returns, not just growth potential. That shift from enthusiasm to scrutiny is a natural and necessary stage of any major investment cycle.²

Past performance is not a reliable indicator of future results.