From AI euphoria to rate anxiety

Technology and semiconductor stocks led gains early in the week, helping lift global equities. However, sentiment deteriorated on Wednesday when strong US business activity data pushed the yield on the 10-year US Treasury above 5%. This revived concerns that resilient growth and persistent inflation could force the Federal Reserve to keep interest rates higher for longer.

Meanwhile, renewed concerns over Iran and potential disruptions to shipping through the Strait of Hormuz pushed Brent crude back above the USD 100 per barrel. This added to inflation concerns and strengthening expectations that interest rates may remain elevated for longer. Against this backdrop, US equities retreated from recent record highs, with both the S&P 500 and Nasdaq closing lower on Wednesday as rising bond yields weighed on investor sentiment.

Market performance outside the US was mixed. European markets continued to lag, reflecting the region's higher sensitivity to global growth trends and its dependence on imported energy. In contrast, Asian equities proved more resilient. Ongoing strength in the semiconductor sector supported markets in South Korea and Taiwan, while broader emerging Asian markets extended their recent upward momentum.

Sector performance also varied. Within the MSCI World Index, energy benefited from higher oil prices and an improving earnings outlook for producers. Information technology was initially the market leader, supported by continued enthusiasm around artificial intelligence and strong demand for semiconductor-related stocks. However, the sector later gave back some gains as rising government bond yields weighed on long-duration growth valuations.

Financial stocks came under pressure. The sharp increase in yields raised concerns about tighter financial conditions, higher funding costs and the potential impact of prolonged monetary tightening on economic activity. Consumer discretionary and communication services also underperformed, reflecting pressure on rate-sensitive growth stocks and increasing investor scrutiny of business models that could face disruption from the rapid adoption of AI-driven applications and digital assistants.

At the corporate level, there was quite some volatility in the ‘magnificent seven’ stocks. Meta Platforms gained substantially after strong adoption of its Muse AI assistant strengthened expectations for engagement and monetisation. Conversely, Alphabet declined as investors reassessed competitive risks, while Amazon dropped after blocking Muse from its shopping platform, highlighting potential disruption to established digital distribution channels. Travel platforms were among the weakest performers. Expedia, Booking and Airbnb each dropped significantly as investors considered the possibility that AI agents could disintermediate online booking services.