A Reuters Open Interest newsletter

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

Oil rose on Monday and the main U.S. equity indices fell as U.S.-Iran tensions re-escalated and the Strait of Hormuz was closed, although the fairly mild market moves suggest investors are hopeful negotiations will resume and yield positive results.

In my column today, I look at how Big Tech's resurgence paradoxically puts the AI risks looming over the sector - including concentration risk and high energy costs - back in the spotlight. 

And before you read on, don't forget to sign up for my upcoming LSEG webinar on April 23, where I will talk about safe havens in uncertain times with my ROI colleague Mike Dolan.

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* Beginning of the end?

Yes, oil prices and equity volatility spiked on Monday, and U.S. stocks fell as hopes of de-escalation in the Middle East and the Strait of Hormuz re-opening were dashed. But market resilience to the war and its fallout is strengthening.

If you said at the start of the war it would last at least eight weeks yet oil would be below $100/bbl, the S&P 500 and Nasdaq would hit record highs, the VIX would be below 20 and the 10-year Treasury yield would be 4.25%, you might have got a few odd looks. But here we are. 

* It's a Warsh

Kevin Warsh, a former Fed governor, will be grilled by U.S. Senators on Tuesday in his confirmation hearing, the next step in his journey to replace Jerome Powell as Chair of the Federal Reserve. He is expected to tell lawmakers that he is "committed to ensuring that the conduct of monetary policy remains strictly independent."

But President Donald Trump, who nominated Warsh, is not so wedded to the idea of Fed independence, and has repeatedly made it clear he wants lower interest rates. Warsh will face tough questions on Tuesday on how he will lead the central bank and resist any pressure from the White House.  

* Tech it to the limit

Last week it was financials, this week it's tech in the U.S. earnings spotlight, as IBM, Intel and Tesla release their latest results. Although the tech-heavy Nasdaq broke a historic 13-day winning streak on Monday, the pullback from Friday's record high was a paltry 0.3%.

Worries over return on capex, concentration risks, soaring energy costs and the Mythos security issues are being parked to one side for now. These three reports this week will be an early signal as to whether the resurgent optimism around artificial intelligence is justified.

'AI or die' - but can Big Tech's profits survive the energy squeeze?

"AI or die."  That was International Monetary Fund Managing Director Kristalina Georgieva last week, telling a panel at the IMF/World Bank spring meetings in Washington how she views the challenges businesses, industries, and economies around the world face given the transformative powers of artificial intelligence. 

Her comments also apply to the stock market.       U.S. Big Tech suffered a substantial wobble and repricing in the first quarter, but has roared back in the last three weeks, with market conviction in the AI productivity boom seemingly stronger than ever.

Concentration risk is suddenly back on the table. And with global energy prices up the most in five years, there are worries that the hyper-bullish earnings outlook for Big Tech – now a highly energy-intensive sector – could sour.