If you handed a market chart to an alien – any of the big ones, including US, European or tech-heavy Asian indices – they would barely guess that the world is being shaken by intense geopolitical tensions that brought transit at one of the planet’s most critical chokepoints to a near-halt, that the situation has been going on for nearly two months, threatening a man-made energy shortage across the planet, and that there is no light at the end of the tunnel.
They wouldn’t guess either that world leaders now prefer tweeting threats on social media as a new form of diplomacy.
Both the S&P 500 and Nasdaq 100 posted fresh new highs yesterday on news that the ceasefire would be extended without a deadline – although it is being extended because the US and Iran are failing to find common ground. And there is probably too much ego and reputational damage for either party to back down.
Alas, tech investors care increasingly less. VanEck’s semiconductor ETF rallied in 13 of the past 14 sessions on renewed AI optimism. Google gained more than 2% after revealing a new TPU chip designed to make AI computing faster and cheaper. Amazon also gained more than 2% after announcing a $5bn investment in AI’s rising star Anthropic, on top of the $8bn already committed, and said there could be $20bn more – a deal that includes Anthropic spending over $100bn on Amazon Web Services (AWS) over ~10 years. Circular, yes? But investors have now digested the circular nature of these deals, or they simply view them as preferable to war-exposed assets.
A shadow on optimism this morning, TSMC says that ASML’s new machines are too pricey. Alas, that’s the only one to produce these machines.
What is also interesting is that we are seeing pretty much the same sell-off-and-recovery pattern we saw last April – after the so-called Liberation Day. The choice of words still makes me smile a year or so later, especially given the US has just released a web platform to refund taxes that were allegedly collected over months. And while trade uncertainties persisted, major US – and other global – indices kept rallying.
This is what we see today: a dip on initial shock, followed by a rebound to all-time highs. It is almost safe to say that, no matter the news, markets rally. But of course, gains come with the risk of sharp reversals, as an energy crisis is still looming. But that’s just a blip.
Still, US crude was trading above the $100pb psychological mark this morning on extended uncertainties in the Middle East, while Brent crude traded past $106pb – the highest level in more than two weeks. The latter is weighing on appetite for equities as well. US and European futures point to a lower open, while the Japanese Nikkei and Kospi retreat from all-time highs.
One pattern is clear today: tech-heavy indices and energy are outperforming other sectors, as the global economic outlook deteriorates due to higher energy prices. Further upside is possible for crude oil, but gains will likely remain short-lived, as at these levels demand typically slows enough to cap further upside. So far, $120pb has acted as a strong resistance to bullish moves.
Speaking of underlying economies… PMI data today will give an idea of the impact of higher energy prices on global activity. While figures will likely point to slowing growth, rising price pressures will likely keep central bank doves constrained.
Yesterday, the UK announced its latest CPI figures, confirming rising price pressures driven by higher energy costs. Core CPI was slightly lower than expected, but this did not change expectations that inflation in the UK is turning higher again due to this shock, and will not only prevent the Bank of England (BoE) from cutting rates, but may also force it to tighten monetary policy. Alas, this did not help Cable gain ground yesterday, as higher rates into a slowing economic outlook are not necessarily attractive for FX traders.
Globally, the US dollar is gaining ground – but more slowly compared to the first days of the conflict – as some investors hedge higher energy risks via USD exposure. Another wave of upward pressure on oil prices could give the US dollar a short-term boost. But in the longer run, the US economic outlook is also weakening. Happily for investors, the tech story is masking deteriorating fundamentals.
Inside tech, Tesla announced its first-quarter earnings after the bell, and results came in line with expectations. Revenue grew 16% from a year earlier (helped by an easy comparison, as sales were tumbling this time last year), but operating expenses ballooned 37% to nearly $3.8bn. In addition, the company ramped up capex to $25bn this year – to keep up with the AI race – basically three years of combined spending.
The shares first popped in after-hours trading, but then reversed gains. Elon Musk has been incredibly successful in selling his tech dreams to the world, helped by a cash-generating machine that kept investors on board. Today, that cash machine is sputtering. Unless Elon Musk’s new projects start generating meaningful cash flow, investors may start pulling back.
It is very difficult to put a price tag on Tesla. The company currently trades at a P/E ratio of nearly 320. If it traded near a P/E ratio of 30, its share price would be around $36. Of course, this is a very linear calculation and does not take into account growth potential from new technologies.
But when you trade a company like Tesla, it’s critical to understand that one is funding the dream of Elon Musk – one that could change the world, but also carries significant risk.
