When will reality of energy prices bite markets?
All signs point to higher-for-longer oil prices, with long-term consequences for economic growth
Back in the mists of time (July), Cantillon suggested that a rout in chip stocks and the wider tech sector had administered a small but much-needed dose of reality to markets. Something similar may be happening at the moment.
July’s downturn in tech and semiconductor stocks, specifically, turned out to be fairly short-lived. It manifested as what Cantillon described as a relatively brief but “disorderly scramble to exit positions in US chipmakers such as Micron and Nvidia, which had helped power Wall Street indices to new records earlier in the year”.
No single factor caused the decline. There was, however, a sense that investors were asking more difficult questions about the assumptions behind bets on artificial intelligence (AI) that had powered the recent stock market boom.
All of that predated a rout in global sovereign bonds, which began in August and sent government borrowing costs to multi-decade highs in recent weeks.
Yet, while equities recovered from their midsummer malaise, tech stocks came under significant renewed selling pressure in a volatile session on Friday. Cycling out of tech stocks, investors sought refuge in safe-haven assets such as bonds, helping to arrest some of the jump in bond yields, particularly in the US.
[ International investors give Ireland the thumbs up, ignoring corporate tax warningsOpens in new window ]
Once again, there is no one reason for the sell-off, which may yet prove to be short-lived. Factors also vary by region. In Europe, for example, France’s ongoing political uncertainty is heaping pressure on the country’s stocks.
At a higher level, the surge in global crude oil prices on Friday to their highest level since April is also causing significant anxiety. With the Trump administration threatening to ramp up strikes on Iran after next month’s midterm elections and Saudi Arabia being rattled by Houthi military activity in Yemen, there is a growing sense that energy prices could remain higher for longer, with long-term consequences for economic growth.
[ AI bubble? Nvidia is now bigger than JapanOpens in new window ]
Simply put, as Cantillon said previously, markets have been in fantasy land this year, largely shrugging off the quite obvious question marks hanging over the debt-fuelled AI boom on the one hand, and the Trump administration’s disastrous war in the Gulf and its impact on energy prices on the other. Whether it happens sooner or later, reality will have to bite at some point – and it’s probably going to hurt.
