Global equity markets are attempting a modest rebound following last week's sell-off, supported by slightly lower oil prices and hopes of easing tensions in the Middle East. However, investors face a crucial week of central bank decisions and corporate earnings, with particular attention on the sustainability of AI investments.
All eyes are on the Federal Reserve, which announces its interest rate decision on Wednesday, followed by the European Central Bank on Thursday and the Bank of Japan on Friday. Markets expect all three to leave rates unchanged, while the Bank of Canada is expected to raise rates by 25 basis points.
Important US inflation data will also be in focus on Thursday, with the release of the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve's preferred inflation gauge, right a day after the Fed announcement.
Meanwhile, the busiest week of the Q3 earnings season is approaching, with approximately 250 companies valued above USD 10 billion reporting results, including more than 36% of S&P 500 members.
Major companies reporting include Boeing, Airbus, Coca-Cola, Unilever, Air Liquide, Linde, Sanofi and Eli Lilly. However, particular attention will focus on technology giants Microsoft, Alphabet and Amazon, where AI investment spending and profitability will be closely scrutinized. All three are expected to report double-digit revenue growth. However, investors are increasingly shifting their attention from revenue growth toward AI-related capital expenditure, financing requirements and returns on investment.
Last week's market reaction to Meta's earnings illustrated this shift. Despite an initially positive response, shares subsequently reversed as investors assessed the company's decision to increase future spending commitments by USD 125 billion to USD 825 billion.
Meanwhile, Anthropic has reportedly filed to go public, with key financial information emerging ahead of a potential stock market debut. The disclosures provides investors with greater insight into the company's revenue growth, profitability, financing requirements and the financial sustainability of its AI business model.
Beyond monetary policy and earnings, geopolitical developments in the Middle East and potential Russia-Ukraine negotiations remain key drivers of market sentiment. Reports of a possible US delegation traveling to Tehran have renewed hopes for a diplomatic breakthrough and an easing of regional tensions. On the other hand, last week, the US State Department has ordered some diplomats and their families to leave Saudi Arabia as attacks could further escalate.
Markets:
Equities: Global stock markets are attempting a modest recovery following last week's sharp sell-off.
Bonds: Government bond yields trading almost unchanged to Friday’s close. - US 2y yield 4.71%, US 10y yield 4.99%, Japan 10y yield 2.79% - France 10y yield 4.91%
Commodities: Oil prices retreat slightly, WTI touching USD 101/barrel and Brent around USD 115/barrel;
Precious metals stabilized, gold at USD 4’020/oz, silver below USD 54/ozCurrencies: US dollar stronger - Japanese Yen weaker USDJPY 158 - Swiss franc weaker
Cryptos: trading lower - Bitcoin around USD 80k
Volatility: The VIX index falls back from 20 towards 17 - The window for relatively inexpensive portfolio hedging is there
My View: The rebound looks surprisingly shy at this stage, especially considering the magnitude of last week's sell-off. So far, I see little evidence of renewed investor confidence. Instead, the recovery appears largely driven by opportunistic buying rather than a fundamental improvement in market sentiment.
As I have repeatedly highlighted in recent Market Insights and Weekly Market Snapshots, the risks surrounding the AI investment boom, excessive valuations, extraordinary capital expenditure and increasingly debt-financed growth have been building for quite some time.
Recent market reactions to technology earnings suggest that investors are finally beginning to question the sustainability of these developments.
This week's earnings announcements could provide further evidence. The crucial question is no longer simply how fast AI-related revenues are growing, but whether the enormous investments required to generate that growth can deliver adequate returns.
Even more concerning are reports of tightening credit conditions for smaller AI companies, with some reportedly struggling to secure additional financing. This could indicate growing caution among lenders about the sustainability of the AI investment cycle and the risk that a significant portion of the debt accumulated may ultimately not be repaid.
If access to financing continues to deteriorate, the consequences could extend well beyond individual AI companies, potentially affecting suppliers, infrastructure providers and the broader technology sector.
Meanwhile, inflation remains another major concern. I continue to maintain my conviction that the Federal Reserve could raise interest rates again, against the prevailing market consensus, or perhaps more accurately, market hopes. Recent inflation developments and persistent energy-related pressures reinforce my view.
A combination of disappointing earnings guidance, further increases in AI spending commitments, tightening financing conditions and a more hawkish monetary policy outlook could trigger another wave of selling pressure.
I therefore remain cautious and see no reason to increase equity exposure at current levels. Maintaining substantial cash reserves, selective short positions and downside protection continues to be my preferred strategy.
This week could prove to be a defining moment for financial markets. Will investors regain confidence, or will last week's sell-off turn out to have been just the beginning of a much broader correction?
The coming days may provide some crucial answers. I will be monitoring developments very closely.
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