When you think about a bubble

What a time to be a trader. Profitability in the AI sector remains the key driver for the markets this week, chipmakers plunging late as questions mount around returns on out-sized investments. Something of a rotation occurring; the Dow and European indices relatively strong against the tech-heavy markers. Gold choppy, pulled both ways as a safe haven in a high-rate environment, sharply lower on Thursday as the higher rate side of the equation wins out late in the week. Traders reallocating funds to previously beaten down bonds, seeing yields ease from historic highs. USD not seeing the inflows one might expect in such a setup. JPY on the other hand benefitting from the shifts.

Oil pushing higher as supply concerns continue to mount, driven by reports that the US and Israel have firmed up plans for fresh strikes on Iran, to come post-midterms. Aussie dollar rising on the increased probability of a Melbourne Cup Day rate hike. US earnings season in full swing. Netflix dropping after it outlined weaker fourth quarter expectations. SpaceX and Tesla merger talks revving up, investors unconvinced however, SpaceX sliding 10% on the back of its conference call. Cryptos falling in with the risk off flows, sliding in step with the tech sector. Volatility set to continue next week as a slew of mega caps release their quarterly earnings reports, and several central banks hand down their latest decisions on rates.

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Giant technological transformations

“When you think about a bubble, you think about building capacity and then hoping the demand comes,” explained Blackstone Inc. President Jon Gray in relation to the AI boom. His remarks were in contrast to those made a few days earlier by Citadel CEO Ken Griffin, who said that we are "almost certainly" in the middle of a giant bubble. Behind the headlines though, Griffin was actually striking a more optimistic tone on the topic than he has been of late. His key point this time was that, while many will fall by the wayside, the companies still standing on the other side of this period of turbulence will transform the world as we know it. Harking back to the days of the dotcom boom and subsequent crash, he explained how such periods "often coincide with these giant technological transformations".

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For now though, the point outlined by Gray is the key one driving market moves. Will the aforementioned demand come to meet the extraordinary levels of investment and in turn debt poured into building capacity through data centres and related infrastructure? When will the returns required to justify further investment be seen? As we saw last week when CoreWeave stuttered, the interdependence and even circular nature of the sector has left it fragile. A misstep somewhere in the chain quickly reverberates throughout the sector, and now given its size, across all asset classes. For short-term traders, these are the kind of environments we love. Whatever your preferred market, whatever your preferred timeframe, there is a narrative driving moves therein.

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Next week

A massive one on the economic calendar. Tuesday brings a data dump from the US, the Housing Price Index and Consumer Confidence among the numbers to watch for. On Wednesday the RBA Governor's speech will be of interest given another live meeting on the horizon, closely followed by the AU CPI release. Also on Wednesday we get three central bank decisions: New Zealand, Canada and the US. Thursday sees the ECB release their call, preceded by Core PCE figures from the US. Lastly the BoJ meets on Friday.

The next two weeks are the apex of Q3 US earnings season. Among the many reporting, highlights include Alphabet and Microsoft in the after-market session on Wednesday, and Amazon and Intel in the after-market session on Thursday.

Be aware too that European Daylight Saving Time ends this weekend. Go well out there.