Weekly market commentary

The largest banks in the US kicked off the Q3 earnings season with generally strong results; Investment Banks’ equities business showed standout performance – Goldman Sachs seeing a 72% increase in equities revenue, JPMorgan 49% and Citigroup 14% respectively. Interestingly, revenue from Fixed Income, Currency and Commodities (FICC) missed expectations across companies, as volatile markets created risk opportunities, but without strong enough directionality to bolster client activity. Guidance for Q4 was constructive on core banking activity but struck a more cautious tone on markets revenue and the uncertainty of the macro backdrop. Away from banks, ASML and TSMC, two of the world’s largest semiconductor manufacturers, delivered record results and pointed towards continued strength for the rest of the year, with demand for their products far outweighing supply through at least 2028.

Once again, the leading factor driving market moves over the week has been related to AI and Technology. A significant catalyst has been CoreWeave, the specialist AI cloud computing provider that rents high-powered computing infrastructure to companies building and running AI models. Attention has shifted sharply towards the company’s debt burden, borrowing costs and ability to finance its infrastructure expansion. The company has been defended by its own CEO, who argued that the market was “misunderstanding” the company, as well as Jensen Huang (Nvidia’s CEO), who stated that “CoreWeave’s strength is improving every day”. While those comments did spark a partial recovery in the share price, bond investors are still pricing a c.60% chance of default on CoreWeave’s debt. This cost of financing huge amounts of investment has been a point of contention, with the questions of who will be able to fill the funding gap and at what cost. While AI-linked financing costs aren’t excessive relative to the rest of the credit stack, there are outliers starting to emerge that market participants are focusing on.

Ahead of the US Federal Reserve’s blackout period for comments before their next interest rate decision, a number of their members have struck a more dovish tone which has reduced the expectation for a rate hike in October. The focus from speakers was less on higher inflation expectations and more that higher government bond yields are reflective of economic strength. Fed Chair Warsh spoke with an upbeat tone at the IMF’s conference, discussing the “massive investment surge” and productivity benefits from AI.

Markets rotated out of AI-related names, with Asian tech companies bearing the brunt of the pain while defensive indices outperformed and the UK was given a boost from more resilient growth data. Government bonds have rallied despite hot inflation data creating significant volatility, with government bonds being bought as a haven from equity volatility; their higher yields attracting investors.