When the chips are up

• UK equities, which advanced +1.37% as global equity indices fell. UK listed real estate was standout, rising +7.74%
• Government bonds, which cushioned equity market volatility. UK gilts were up +0.92%

• Emerging market equities, which fell -4.22%. Korean equities were amongst the worst hit, dropping -6.10%
• Commodities, with Brent crude oil falling -10.53%, silver down -10.70%, and copper -2.80% (all in US dollar terms)

(All equity data is MSCI; all data in sterling unless stated)

Global financial markets concluded a volatile week on Friday, marked by a sharp sell-off in major technology and artificial intelligence (AI) related stocks. A further bout of investor concern over the sustainability of AI-related capital expenditure swept markets, as investors focus in on whether it will generate sufficiently meaningful returns, and consumers begin to feel the impact of higher prices. Ultimately uncertainty remains over the extent to which AI will revolutionise ways of working and improve productivity. The ultimate scale of end-user demand and speed of AI adoption are also uncertain. And investors are seemingly growing more sceptical of the huge outlays required of hyperscalers looking to build out AI infrastructure.  

There was little fundamental reported to shift investors’ earnings expectations last week. US semiconductor giant, Micron Technology, in fact reported a very positive set of results – showcasing just how significant demand has been. But the huge AI-related spend is sending chip prices significantly higher, which has been evident in the huge margins manufacturers are currently able to make. To showcase the point, Apple announced they would raise product prices by up to 25%, suggesting soaring chip input costs are beginning to challenge other parts of the supply chain. Apple are ultimately having to pass that cost on to customers. Whilst the adoption of AI technology more broadly could well improve productivity and ultimately bring costs down across many sectors, the increasing cost of the hardware could prove an inflationary impulse near-term. As could the energy intensive nature of the infrastructure required to power AI capability.

This apparent dampening of AI-related enthusiasm triggered investors to take profits, including across semiconductor names. The selloff showed up most notably in those benchmarks most heavily weighted towards technology. The heavily chip-orientated Korean KOSPI index fell more than -6% for the week in sterling terms, as outsized constituents like SK Hynix and Samsung dragged the wider index down. However, such moves need to be understood in the context of market returns year-to-date; global equity markets are up more than +10%, emerging markets up more than +25%, and the KOSPI is up more than +125%. 

The concerns also coincided with a more hawkish tone from the Federal Reserve (Fed) the previous week. Interest rates remaining higher for longer could penalise capital-intensive growth businesses, where company valuations are predicated on earnings projections which run well into the future.

The Fed’s preferred measure of US inflation rose to an annual rate of 4.1% in the 12-months through May. The personal consumption expenditures (PCE) price index registered its highest reading since April 2023. Core PCE inflation – excluding more volatile food and energy prices – rose at a 3.4% annual rate, its highest since October 2023, following a 0.3% monthly increase. Overall, the print was broadly in line with expectations. Policymakers will pay close attention to the core measure when considering long-term inflation trends – particularly given the acceleration in energy prices since the onset of the Iran war. Indeed, energy was again the largest source of price gains within the most recent data. Fed officials are keen to monitor the extent to which this might begin to filter into other areas of the economy. Such concerns seemed to be at the forefront of minds at last week’s interest rate decision, with new Fed Chair, Kevin Warsh, keen to make clear his commitment to lowering inflation. However, the dramatic fall in oil prices in recent weeks – last week they dropped below pre-Iran war levels – should ease concerns around inflation becoming more entrenched. And, while inflation remains well above the Fed’s 2% target, the latest PCE data does not indicate a sharper-than-expected acceleration in prices. 

Other data released last week reinforced the view of a resilient US economy. First-quarter GDP growth was revised higher, and despite the energy price shock, consumer spending accelerated ahead of the rate of inflation in May. GDP rose at an annualised pace of 2.1% in the first quarter, up from the prior indication of 1.6%. Additionally, initial jobless claims fell to 215,000 for the week ended 20 June, fewer than expected and down 12,000 from the last reading. Markets continue to price a US rate hike in September, though expectations have lowered slightly. The dollar, which had earlier climbed to its highest level since early 2025, paused its recent rally to weaken slightly towards the end of last week.

Japanese Prime Minister, Sanae Takaichi, unveiled the country’s largest and longest-term investment plan to date. The 14-year 370trn yen (c.$2.3trn) plan will channel both public and private investment across 17 key sectors, including more than $600bn earmarked for AI and semiconductor related spend. The roadmap is the latest step in the prime minister’s growth agenda, but questions remain over the financing. Exactly how costs will be divided between businesses and government is still unclear. While long-term planning has notable benefits, such a timeframe makes it difficult to know how the roadmap will ultimately play out. Japanese Government bond yields rose to multi-decade highs in May in expectation that fiscal expansion would require greater government borrowing. While remaining elevated, yields were relatively subdued in response to the latest announcement, despite the possibility that the stimulus could add to inflationary pressures. After two decades of deflation, Japan is now facing an inflationary environment, although the headline rate remains below the Bank of Japan’s (BoJ) 2% target. Persistently rising prices have dented Takaichi’s approval rating a little, but it remains positive.

At close to 162 to the US dollar, the yen continues to hover around its weakest level since 1986, leading to higher import costs and increasing the prospect that upward price pressures persist. In response, the Japanese government could engage in another round of coordinated foreign exchange intervention, while the BoJ could raise interest rates at their next meeting in July. However, Takaichi’s long-term economic blueprint calls for monetary policy that bolsters private demand, signalling a preference for keeping borrowing costs low. The Bank hiked rates to 1% earlier this month, the highest level since September 1995. The balancing act for the BoJ is challenging. Raising interest rates might help lower inflation, but it also raises borrowing costs for the government and businesses.

• Brexit – Last week marked the 10-year anniversary of the Brexit vote in the UK. Political uncertainty has endured throughout. As Keir Starmer’s premiership comes to an end, Britain is looking to its seventh prime minister in the past decade
• UK retail sales – UK retail sales fell more than expected in June, with the Confederation of British Industry (CBI) reporting volumes fell at an annual rate of -54% in June from -46% in May. Depressed consumer sentiment and climbing cost pressures caused sales were blamed
• US Treasuries – US government bond prices rose as rapidly falling oil prices eased inflation worries. The 10-year Treasury yield dropped below 4.40% for the first time in more than a month, while the 30-year yield reached its lowest level since mid-April
• Eurozone inflation – The European Central Bank’s (ECB) eurozone consumer inflation expectations for the next year cooled to 3.5% in May, down from 4.0% in April
• SpaceX bonds – SpaceX bonds fell after the newly floated company raised a further $25bn in new debt last week. The bonds were among the weakest performers in the investment-grade market on Friday
• Gold – The gold spot price slipped below $4,000 per ounce last week, as the metal headed towards a fourth consecutive monthly decline. Recent weakness largely reflects a stronger dollar and elevated real interest rates weighing on demand. Gold paired some losses towards the end of the week as US inflation data eased concerns about imminent Fed rate hikes

Disclaimer

Past performance is not a reliable indicator of future returns. Nothing herein should be construed as a recommendation to hold, buy or sell any security or encourage any investment decision. The mention of any particular asset class, sub-asset class or company does not imply that it is held, or may ever be held, in any product or service.