Global Tech Sell-Off Slows Amid Market Volatility

Jamie McGeever argues that the AI equity selloff has not reached a crisis point, but financing and credit risks require vigilance. The rout accelerated significantly in Asia on Thursday amid growing fears about opaque, circular financing supporting the AI infrastructure buildout. However, the selloff lost momentum during European and US trading hours. McGeever points to Thursday's rebound in US stocks and bonds as evidence that markets have not reached a crisis point.

South Korea's KOSPI, one of the world's top 10 indexes, has lost 20% of its value in barely a week. Japan's Nikkei fell 5% on Thursday. CoreWeave's 2032 bonds, issued just four months ago, fell below 80 cents on the dollar, typically considered a distressed debt level. The cost of insuring against defaults by major US AI firms has risen to record levels.

McGeever argues that credit markets are likely to lead equities and that a self-reinforcing cycle of selling cannot be ignored. McGeever warns that selling in certain companies can damage perceptions of financially healthier borrowers. McGeever warns that downgrades and losses of investment-grade ratings could force further selling. Cash has already been spent, and capital expenditure is increasingly financed through debt, private credit and off-balance-sheet borrowing.

Safe-haven inflows gave US Treasuries one of their best days in months despite a surprisingly strong rise in US producer inflation. Producer inflation exceeded expectations, as consumer inflation had the day before. WTI crude rose another 3%. Thursday was one of the best days of the year for Treasuries, particularly maturities of 10 years and beyond. Fixed-income markets had faced heavy selling in recent weeks. McGeever argues that Thursday's rally shows that claims about Treasuries losing their safe-haven appeal were greatly exaggerated. McGeever leaves open whether the rally was a brief reaction or whether equity volatility and weak AI-related corporate debt will reinforce demand for Treasuries. McGeever argues that guaranteed nominal yields above 5% appear attractive to investors seeking protection and diversification.

McGeever describes Wall Street's resilience on Thursday as remarkable given Asia's technology selloff and negative sentiment at the US session's opening. Chip stocks fell for a seventh day, the sector's longest losing streak in four years. However, the Nasdaq edged higher. The Dow rose 1% to its highest level in a month.

McGeever expects technology companies to receive particular attention as the US earnings season gathers pace. McGeever argues that high earnings expectations could prompt investors to accelerate shifts into other sectors if technology companies fail to meet expectations. Deutsche Bank says rotations out of technology since mid-2024 have lasted an average of 67 days. Deutsche Bank puts the median duration at 59 days. Deutsche Bank says technology drawdowns during those periods averaged 16.6%. Deutsche Bank puts the median drawdown at 14.6%.