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In markets, the trigger for sudden confidence swoons is often elusive, particularly when looking at periodic rotations out of high-flying U.S. tech stocks. And most signs suggest this week's tech retreat may be more about re-positioning than investors receiving some lightning bolt of news.
Tuesday's tech shakeout led to a 1.5% plunge in the Nasdaq index even as the blue chip Dow Jones Industrials Average hit a record intraday high. But the tech slump dragged the S&P 500 down 0.6%, and U.S. equity futures showed little sign of a bounce early on Wednesday. |
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Reasons for the sudden tech angst tended to be gathered after the event, with some pointing to comments late last week from OpenAI boss Sam Altman on inevitable bubbles in the sector and others pointing to different research papers fretting variously about both the limited returns on blistering AI spending to date and also its growing jobs destruction. The jitters also come ahead of next week's earnings report from chip behemoth Nvidia, some concern about the wider implications of the U.S. government's proposed stake in ailing chip giant Intel and caution ahead of the Federal Reserve's annual Jackson Hole conference this week.
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Even though Fed concerns were cited across markets on Tuesday, there was little shift in Fed futures pricing during the day - and they still show just over an 80% chance of a rate cut next month. With Fed meeting minutes due later today and 20-year bonds under the hammer too, Treasury yields were flat and the dollar firmer. An unexpected pick-up in housing starts in July was reported on Tuesday but this was offset by a drop in building permits to five-year lows.
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Tech-heavy stock indexes overseas were hit by Wall Street's wobble, with Japan's Nikkei losing 1.5% and South Korea's Kospi down 0.7%. Lifted on Tuesday by Ukraine deal hopes, European stocks were flatter today, with euro inflation coming in bang on forecast and a hotter-than-expected UK inflation reading downplayed due to seasonal airfare skews. Chinese stocks outperformed, with the Shanghai main index rallying to 10-year highs, as investors rotated stock holdings and hoped for more government stimulus.
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U.S. and European military planners have begun exploring post-conflict security guarantees for Ukraine, U.S. officials and sources told Reuters on Tuesday, following President Donald Trump's pledge to
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Alongside a massive build-up in conventional military firepower, China has embarked on a rapid and sustained increase in the size and capability of its nuclear forces,
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British inflation hit its highest in 18 months in July when it increased to 3.8% from 3.6% in June, official data showed on Wednesday, once again leaving the country with the
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A glaring mismatch between benchmark oil prices and expectations of a looming supply overhang has created an imbalance that could end badly for traders,
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Trump has faced little opposition in his drive to rip up the global economic rule book. The only exception has been "the market". But now even investors are holding their fire, enabling more risk to build up in the financial system.
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Fed's dilemma between AI and housing |
Tension between the Federal Reserve's jobs and inflation mandates may be less worrisome than a dilemma over whether to focus on the spluttering housing market or rocketing tech infrastructure spending.
By most metrics, the U.S. central bank is still missing its 2% inflation target, and neither market-based nor household inflation expectations express much confidence that it will meet it any time soon. And that's before factoring tariff rises.
The debate about the labor market, meanwhile, is clouded by the modest layoffs and new jobless claims as well as the still low jobless rate, which likely reflects halted immigration and worker shortages.
Intense political pressure aside, none of these standard checklists argue for the Fed to resume cutting interest rates with gusto - or even easing at all. But the central bank's conundrum on what to do next may be best captured by the contrast between the artificial intelligence boom and what increasingly looks like an ailing housing market.
Easing now to support the latter would most likely supercharge the tech capex binge and kill any chance the Fed has of meeting its inflation goal. Yet keeping rates high to manage the excesses of the AI explosion could spell deeper trouble for a housing sector that accounts for well over 10% of GDP. |
Graphics are produced by Reuters. |
HOME TRUTHS
A gauge of U.S. homebuilder sentiment fell this month to its lowest level in more than two-and-a-half years, with more than a third of residential construction firms cutting prices and two-thirds offering some form of incentive to lure buyers put off by still-high mortgage rates. New housing inventory is near levels last seen in late 2007.
Even though housing starts picked up in July, total permit issuance - a guide for future activity - fell 2.8% to a five-year low. One major problem is rooted in homeowner stasis due to the previous period of ultra-low interest rates. While the average rate on a 30-year fixed-rate mortgage has started to fall, hitting a four-month low at 6.67% in the week ended August 8, according to the Mortgage Bankers Association, it remains more than 2.5 percentage points above the average rate of all outstanding mortgages. With no portable mortgages from property to property, homeowners with cheap mortgages have been loath to sell and move given that they would need to obtain substantially pricier financing for any new home purchase. And this situation has helped push the median price on existing home sales above those on new home sales for the first time on record. |
This distortion forms one of the arguments for the Trump administration's push to get interest rates down urgently. |
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