Geopolitics drive markets while AI faces new challenges

Welcome to Julia's Bears Moving Markets Podcast. It's Tuesday, the 13th of October. My name is Bernadette Andecco and I'm delighted to be joined by two colleagues this morning to bring you the latest developments in financial markets. Artificial Intelligence continues to be a big topic for investors and in today's podcast and Rico Canelo from our next generation research team will bring us up to date on the AI price war and what the growing opposition to data centers means for the providers. But first I'm looking forward to catching up on the hot topics of the last 24 hours with my colleague, Lucia Chacholovich. Good morning to you, Lucia. Good morning, Bernadette. Why don't we start with a big picture, Lucia? Markets seem to be pulled in different directions yesterday. So what was the dominant theme? Yeah, the clear driver was geopolitics. With the U.S. Treasury market closed for Columbus Day, investors had fewer signals from bonds and focused instead on developments in the Middle East. The weekend brought a series of attacks attributed to Iran-backed hoodies. But at the same time, there were headlines suggesting diplomatic progress elsewhere. President Trump announced a U.S. Russia diesel deal and spoke of an energy ceasefire between Russia and Ukraine. However, reports that Russian strikes hit Ukraine and energy facilities yesterday, reduced optimism. Okay, let's talk about oil. Prices jumped around 2% yesterday on the back of those geopolitical tensions. But what are we seeing this morning? We're seeing a bit of a pause today. Oil is lower for the first time in nearly a week as the U.S. Russia diesel deal has some immediate supply concerns. Even so though, brand futures remain above $105 a barrel while WTI is trading around 92. What's also worth watching is the political reaction. Law makers from both parties in the U.S. are questioning whether Trump's agreement with Russia could conflict with existing restrictions on Russian energy imports. Now, on the demand side, OPEC has become notably more cautious and that's noteworthy too. The group has cut its 2026 oil demand growth forecast to just 400,000 barrels per day down from 1.4 million barrels per day at the start of the year. Okay, we'll have to watch out for that then. Now, you mentioned the U.S. Treasury market was closed, but of course Wall Street was still open for other business. So how did investors react in the equity and currency spaces? Yeah, we saw a clear sector rotation in U.S. equities. The Dow Jones managed a 0.4% gain while the S&P 500 ended just below the zero line and domestic fell 0.4%. Energy stocks led the S&P 500, jumping one and a half percent boosted by the oil rally, conversely tech lacked with the Philadelphia semiconductor index falling 2.7% to a three-week low. There was also a flight to safety with the surging U.S. dollar hitting an 18-month high, rising nearly 0.4% on the dollar index. And in Europe, I see that markets seem even more resilient. I see the stock 600 rose 0.65% for its second consecutive day of gains, led by 1.5% advance in bank stocks. Yeah, that's right. Then the Spain's ibex jumped over 1.3% and the FTSE 100 closed up over 100 points. However, in fixed income, the France, Germany, 10-year yield spread, etched wider again trading at around 140 basis points, but that's still lower than the 160 basis points we saw last week. And central banks clearly also remain in focus. What's the latest on monetary policy leads here? We had some hawkish comments from Cleveland Fed President Beth Hemek, who said the Fed should move relatively quickly to a more restrictive stance. She described inflation as broad-based and raised concerns about an inflationary mindset taking hold. The market is listening. We now see a 22% probability of a Fed hike this month, rising to 71% for a 25 basis point hike in December. And on that note, markets are also pricing in hikes in the Eurozone Japan and the UK before year end. Okay, let's move now to some company specific news. Meta had a big day. What was the story there? Yeah, so Mark Zuckerberg declared that meta has reached the AI frontier and reject the calls for a slowdown. And this coincided with the launch of Meta's Muse Wonder AI models designed for agentic tasks. The market loved it. Meta shares rose more than 3% yesterday, backing the broader tech weakness. And the luxury sector had some tough news, right, with LVMH reporting worse than expected third quarter sales. Yeah, that's right. So organic sales rose only 1% missing expectations. The culprit was weak Chinese demand with sales in Asia falling 5%. And it is a somewhat varying sign for the European luxury industry as a whole, which, by the way, has lost around 330 billion euros in market values since the start of the year. Okay, looking at the overnight session, it seems that tech weakness has accelerated, South Korea's cost be fell more than 6% triggering the temporary trading halt. And Japan's Nikkei was down around 2%. So what was the story there? Yeah, it was a brutal sell-off in Asian tech stocks overnight. This was triggered by reports that China's Changxing's memory technologies is showing rapid progress in closing the semiconductor technology gap with the US as an analyst summarized it. And nobody is starting AI demand. The very is who gets paid for it. Okay, let's see that that tech rat is quite a contrast to the IMF's latest economic outlook. Yeah, exactly. The IMF released its world economic outlook of forecasting 3.1% global growth in 2026 up from 3% in July. And that is largely thanks to AI investments. But the growing divergence is quite stark. Only 32 countries now account for 95% of global growth. And that's down from 54 countries in April. The IMF's adverse scenario, which sees oil at $130 per barrel, would cut 0.5 percentage points from 2027 growth and push inflation to 5.2% and I found that very interesting too. Indeed, yeah, and a lot of moving parts. Looking ahead though, so what should investors be watching that for specifically today? Yeah, so the earning season is kicking off in earnest. Major US banks fired a starting gun with Goldman Sachs, Citigroup, JP Morgan Chase, and Wells Fargo all reporting today. We also have final CPI readings from Germany and US existing home sales for September. Otherwise, the calendar is pretty light. But with US Treasury's back open for trading, investors will be keeping a close eye on yields after the 10-year Treasury and at last week near 24-year high. And finally, Bernadette, stock futures for US markets are currently in the red. So let's see where we go from here. Super, thank you very much for bringing us up to speed this morning, Lutzia. Thanks for having me. Now, let's look a little closer at artificial intelligence. Good morning to you, Enrico. So open-air eyes revenues made headlines last week. What happened, and perhaps you could tell us why the market's cared? So last week, the Financial Times reported that open-air eyes analyzed revenue run rate was about 50 billion dollars at the end of September. And that's roughly 20 billion below the figure that had been circulating in the press before that. So at face value, the gap looks largely due to definitions and accounting rules, because the higher number was meant to be compatible with ontropic, which counts sales through cloud partners like Amazon Web Services and Google Cloud as its own revenue. And on the revised basis, open AI expects to reach 70 billion or more by year end. Obviously, investors still worried that demand for AI might be slowing, and AI-level stocks came under pressure. In our view, these worries are well overblown, because demand remains healthy and continues to accelerate. But the episode shows how sensitive certain parts of the AI trade have become to the revenue of a handful of private labs whose figures are opaque and really are to compare against each other. And at the same time, AI companies are cutting prices, so is this a price war? So it is definitely a growing trend among model providers. At a recent event, open AI launch GPT-6-1 sold, which it says nearly matches its flagship model for many tasks, at up to one fifth of the price. An ontropic answer would close the IQ5.5 up to 90% cheaper than its predecessor with comparable performance. And in this environment, also according to the Wall Street Journal, open AI is regaining ground among corporate users, as companies focus on cost-efficient intelligence versus the best in class models. And this is something we talked about already. Customers are clearly more cost-conscious when it comes to AI, and finance chiefs are tightening controls on broader AI spending. So for investors, now the debate is about pricing power, not demand in our view. Both US from tier labs will soon publish audited figures in their IPO disclosures, which will show ideally how well sales can hold up in a price war, with obviously implication for monetization across the entire body chain. Okay, I also recall the industry itself called for a slowdown of technology advancements recently. So with that as a backdrop, should we be worried? So exactly. So as a reminder, anthropics CEO recently called on the industry to voluntarily slow the pace of the frontier AI development. So that safeguards can catch up and be put in place. And this came after our eyes in reported incidents of AI agents acting outside their own environment, their own instructions, although the consequences have been so far very limited. So we don't read this as a warning that AI doomsday is coming. The motives behind this call are likely mixed. And there are obviously genuine safety concerns for the AI technology, but also the goal of winning regulatory support ahead of the IPOs. And in our view, also the goal is to position American AI as the safer choice against Chinese AI. More importantly, progress at the frontier has already been slowing since early this year. So the call partly describes a trend that was already happening before. For the broader AI infrastructure, the impact should be limited. Most computers now use to run AI rather than to train AI more than 60% now. And that share continues to rise. Okay, that before I let you go, I mentioned earlier, we're going to talk about data centers. There's been growing opposition to data centers. So how big a risk is that? So that's more the physical side of the AI debate. And just to frame the context a bit in the US around 60 to 70% of people now oppose a data center being built near them. And this is up from 40% about a year ago. And the main reason our concerns around electricity bills, water and land usage. More than 300 state bills have been filed so far and New York and Texas have posed new projects all together. Texas in this case is the one that really matters, given its shares of the data center pipeline. And in the political context, I had all the automated terms. This has really become a bipartisan issue. The numbers though tell a more moderate story because US capacity under construction continues to rise by tens of gigawatts every quarter. And the pipeline continues to add new projects. The main risk from this backlash in our view is delays or relocation through off projects which could cool the rush to pay any price for the equipment and willingness to overpay. So we expect headlines to exceed the actual infrastructure impact and we remain constructive on the cloud computing and a high-brother theme. Very interesting as always, Enrico. Thank you very much for the update this morning. Thanks for everything. Well that's it for today. Thank you all for listening. I hope you enjoyed today's podcast. And of course, please do tune in again tomorrow when I will be back with more of our experts to bring you up speed on what's moving markets. So don't miss that. Meanwhile, good luck today and goodbye for now. The information and opinions expressed in this podcast constitute marketing material and are not the result of independent financial or investment research. Please refer to www.JuliusBair.com/legal/podcast for further other important legal information.