Wall Street has fallen with enthusiasm this Friday (Dow Jones:-1.07%; S&P500: -1.24%; Nasdaq:-1.54%) after the US stock market will close on Thursday with increases and with the S&P 500 and the Nasdaq Composite renewing historical highs thanks to the push of artificial intelligence (AI). This Friday’s falls have caused the indices to close a mixed week, with decreases of 0.08% for the Nasdaq and 0.17% for the Dow Jones, while the S&P 500 Jones has added 0.13%. This shift in the market occurs after the president of the United States, Donald Trump, has invited his Chinese counterpart, Xi Jinping, to visit the White House next September 24. Likewise, Trump has announced in an interview with ‘Fox News’ that Beijing has agreed to buy American oilin addition to collaborating in peace negotiations with Iran, contributing to the reopening of the Strait of Hormuz and not supplying military equipment to Tehran.
Xi, on the other hand, has been more cautious. The Chinese president assured that both countries have agreed a «strategic stability» framework for the next three yearsaccording to Chinese state media. For its part, the Chinese Foreign Ministry stated this Friday that both parties reached «a series of new consensuses» to build a «constructive» and stable long-term bilateral relationship. Nevertheless, The purchase of American energy was not officially confirmed. It is worth remembering that China is the largest buyer of Iranian oilsince it acquires nine out of every ten barrels that the Islamic country exports. Analysts believe the meeting has gone «pretty good»as indicated by Ipek Ozkardeskaya, senior strategist at Swissquote, but they also point out that a lot of work and time is needed to achieve concrete agreements. Without going any further, Beijing warned that poor management of Taiwan situation could cause «clashes and even conflicts» between both superpowers. Likewise, rivalry in key fields such as advanced technology or rare earths limit cooperation between both countries. It is worth remembering that Xi mentioned the call «Thucydides trap»the geopolitical concept that describes the tendency toward conflict when an emerging power threatens to displace a dominant power. Michael Strobaek, global chief investment officer at Lombard Odier, warned before the summit that «there has been little preparation relative to that which normally underpins major diplomatic agreements.» «The market is pricing in a positive US-China summit and is instead focusing on the lack of progress to reopen the Strait of Hormuz«explains Kathleen Brooks, director of analysis at XTB.
AI, AI AND MORE AI
In this context, the market has continued to rise in recent days thanks to the momentum of the artificial intelligence (AI). According to Ozkardeskaya, this shows that The conflict in Iran and its impact on prices and inflation is, for the moment, minor for the market. This, despite the fact that inflation data on both sides of the Atlantic have shown a non-negligible rise in the CPI in April and production prices, which has also pushed up bond yields, «reflecting the continued expectation of more restrictive monetary policies globally».
And the situation does not seem to be changing in the short term.. Oil has risen again this Friday, with the Brent at $109.35 and the WTIat 105.45. US crude inventories fell by 4.3 million barrels in the last week and about 12 million in the last three, with a significant increase in imports to cover the Middle East supply shortfall. Coupled with little progress in the peace negotiations, it is likely that the prices remain high in the short term.
Likewise, different consumer-oriented companies have indicated that this rise in prices is eating into the money and the savings capacity of American consumers. «The data of retail sales yesterday showed resilience in April but, beneath the surface, 13.1% of US credit card balances are more than 90 days past due—the highest level since 2011. This means that Americans borrow to spend and delay paying their debts. It’s a ticking bomb«says Ozkardeskaya. However, the market continues to rise and Big technology companies seem immune to these events and the increase in energy costs. «The investors They have completely ignored the concerns about circular deals and frustration over huge spending on AI increasingly financed by debt. Rising yields don’t seem to matter either. And that’s curious,» says the Swissquote expert, who highlights that growth expectations seem to outweigh any other fears. For Ozkardeskaya, the markets look at technology companies as during the last monetary tightening cycle of the Federal Reserve (Fed), something that could be repeated at this time. So, the ‘big tech’ companies held on because they had abundant cash flow and very little debtwhich made them relatively insensitive to rate increases. The problem is that the situation has changed drastically in recent years.
«The problem is this: the huge capital spending is reducing their free cash flow and forcing them to financed through… bond markets. That makes technology companies are more vulnerable to interest rates than in previous cycles«, he points out, «Let’s take the Amazon bond with a 1.5% coupon maturing in June 2030. It now yields around 4.40%; It hedges US inflation and still offers some premium, but its price falls as inflation expectations push yields higher. This means that the cost of financing is increasing for these technologies that, together, expected to spend up to $1 trillion on AI infrastructure this year«. And what happens if they reduce spending? What happens if they decide to cut investment? A perfect cocktail for disastersays Ozkardeskaya. Less spending means facing capacity limitations that reduce their income potential, an «unfavorable» scenario for valuations. And given the circular nature of agreements between technology companies, the fall of one can cause a domino effect in the sector. Furthermore, the longer the conflict lasts, the more energy and financing costs increase, which increasingly limits the ability of these companies to continue building their very expensive data centers.» «Large technology companies are today at an important crossroads. Investors have digested everything, but for the rally to continue, the macroeconomic context must also remain favorable. And today, looking at global returns, that macro context is not favorable. This, in my opinion, is a red flag that many tech investors are ignoring, blinded by shiny profits and even brighter expectations. But it is worth remembering that these expectations do not fully reflect the risk of another period of persistent inflation. And this time, Big Tech has less cash available to weather the storm«, sentence.
COMPANIES, MACRO AND OTHER MARKETS
On a business level, ‘CNBC’ reports that SpaceXElon Musk’s aerospace company, could present its IPO prospectus this next week. The company confidentially filed its IPO application in April. According to ‘The Information’, the company aims to raise more than $75 billion in the IPO. If you get it, would far surpass the record of the oil company Saudi Aramcowhich in 2019 raised more than $29 billion in its IPO. The macroeconomic agenda does not have great references this day. However, the markets analyze the arrival of Kevin Warsh to the presidency of a very divided Fed on the direction that monetary policy should follow. In other markets, the euro has devalued against the dollar (-0.40%, $1.1621). He gold has fallen 2.83% ($4,553) and the silver It has sunk 9.94% ($76.87). He 10-year US bond yield has advanced to 4.595% and the bitcoin has fallen to $79,127.
