On Tuesday, global stock markets declined, led by technology shares, as concerns resurfaced regarding the return on investment in artificial intelligence. Simultaneously, the Strait of Hormuz remained closed, pushing Brent crude oil above $110 per barrel.
US stock futures were mostly lower, with S&P 500 futures down 0.7%. Futures for the tech-heavy Nasdaq 100 index saw the steepest decline, falling 1.3%. Technology stocks faced pressure following reports that OpenAI recently failed to meet its new user and sales targets. SoftBank Group, a major shareholder in OpenAI's parent company, slumped 9.9% in Tokyo trading. Key OpenAI partners Oracle, Advanced Micro Devices, and CoreWeave also declined in US pre-market trading.
European stocks opened lower but the pan-European STOXX 600 index later traded largely flat. Earnings reports from a number of blue-chip companies, including Coca-Cola, General Motors, and Starbucks, were released pre-market.
Technology stocks paused after a strong rally. A 18-session winning streak for chip stocks had propelled the S&P 500 to a near 10% gain for April. The primary driver was a resurgence in AI optimism, while other market sectors lagged due to rising oil prices. Earnings reports from four major cloud service providers on Wednesday will present another key test for the tech rally's sustainability.
This week, investor focus will be on earnings from major tech giants, including Microsoft, Alphabet, Amazon.com, Meta Platforms, and Apple. These results will test whether the strong AI-fueled advance can continue.
"The most important single metric isn't revenue, nor is it profit margins, it's capital expenditure," said Amanda Lyons, Head of IT Sector and Research at Energy Group Capital. "Any sign of a slowdown in spending would be seen as negative for the entire ecosystem; however, a significant increase in capex could also raise questions about investment returns."
"Earnings season has helped the market look past supply disruptions for now, but the longer key oil shipments are constrained, the greater the risk that rising energy costs start to erode the economy and corporate performance," said Matt Britzman, Senior Equity Analyst at Hargreaves Lansdown.
**Oil Prices Surpass $110** Brent crude surged 2.7% to $111.20 per barrel, hitting a three-week high and marking its seventh consecutive day of gains. US crude oil rose 2.9% to $99.10 per barrel. The White House stated that the US President would respond "soon" to an Iranian proposal to reopen the Strait of Hormuz.
Analysts at Citigroup suggested that if oil supply through the Strait of Hormuz remains disrupted by the end of June, Brent crude could average $130 per barrel in the second quarter.
**European Bonds Lead Global Debt Market Declines** European bonds led declines in global debt markets. Investors worry that rising oil prices will push inflation higher, prompting central banks to tighten monetary policy. A European Central Bank survey showed consumers in the euro zone expect prices to rise 4% over the next 12 months, up from 2.5% in February.
**Dollar Strengthens** The US dollar advanced alongside global bond yields. According to Tradeweb, the yield on the 10-year US Treasury note rose 2.2 basis points to 4.357%.
"US Treasury yields and the dollar are rising with oil prices," said Abdelaziz Albogdady of FXEM in a report. Concerns over the lack of progress in diplomatic efforts between the US and Iran bolstered safe-haven demand. The Market Research and Fintech Strategy Manager noted that while negotiations continue, reports indicating the US President's dissatisfaction with Iran's latest proposal have dampened expectations for a near-term solution, keeping markets on edge. He stated that the ongoing disruption in the Strait of Hormuz is pushing oil prices higher, exacerbating inflation concerns.
The US dollar has been one of the few safe-haven assets during the Iran conflict, although it has given back most of its gains since March in recent weeks. "The back-and-forth on US-Iran peace talks continues to buffet markets," said Nick Rees, Head of Macro Research at Monex Europe, noting that market skepticism about progress in peace talks is boosting the dollar.
Francesco Pesole of ING said in a report that the equity market rebound and month-end portfolio rebalancing have limited the dollar's gains following the oil price surge due to the war in Iran. He suggested that a significant stock market downturn remains the missing ingredient for sustained dollar strength. He added that, like many other dollar exchange rates, EUR/USD is currently more correlated with global equities than with oil prices or interest rate differentials. Furthermore, "given the relatively better performance of US stocks in April, month-end flows should weigh on the dollar."
**Bank of Japan Holds Steady, Focus Turns to Fed** Meanwhile, the Bank of Japan kept its short-term interest rate unchanged at 0.75% on Tuesday. This was the first of several central bank meetings this week that could provide clues for assessing the conflict's impact. However, the yen gave up earlier gains after BoJ Governor Ueda failed to give clear signals on the timing of future rate hikes.
"A 6-3 voting split and more hawkish wording on future policy adjustments suggest the bar for further rate hikes may be lowering," said Charu Chanana, Chief Investment Strategist at Saxo.
The yen initially strengthened but then turned slightly lower, last trading at 159.53, near the 160 level. A breach of this level raises concerns that Tokyo might intervene to support the currency.
Spot gold fell 1.45% to $4,614, after earlier touching $4,604, its lowest level since April 7th. "The continued disruption to oil, gas, and refined product shipments through the Strait of Hormuz has intensified global inflation worries and raised market expectations that major central banks, including the Fed and ECB, may maintain high interest rates for longer," said Soojin Kim, an analyst at Mitsubishi UFJ Financial Group.
She added, "This outlook continues to pressure non-yielding gold. Since the conflict began, gold prices have fallen approximately 11%."
Ahead of policy decisions from the Federal Reserve, European Central Bank, and Bank of England this week, traders expect these central banks to hold rates steady. However, the outlook for subsequent meetings is more uncertain, depending entirely on the duration of the Middle East conflict. Money markets are pricing in potential rate hikes from the ECB and BoE as early as June, while expectations are for the Fed to hold rates steady for the remainder of the year.
"Rising oil prices are starting to show up in macro data, such as higher inflation prints, while forward-looking indicators like consumer confidence have already begun to decline," said Anna Macdonald of Hargreaves Lansdown. "The longer the crisis lasts, the more severe the impact and the more likely it is to dominate investor attention."
**Bridgewater's Dalio Warns US is in Stagflation** Billionaire investor and Bridgewater founder Ray Dalio warned that the US is clearly in a stagflationary phase, and policymakers should proceed cautiously rather than rushing to ease monetary policy.
He indicated that cutting rates in the current environment could not only undermine market confidence in the Fed's ability to control inflation but also damage the central bank's credibility at a critical moment.
Market participants believe Dalio's view highlights that the focus of current policy discussion has shifted from "when to cut rates" to "whether high rates should be maintained for longer." Given sticky inflation, fiscal stimulus, and the ongoing AI investment boom, doubts remain about premature policy easing.
**Earnings Season Test Looms, Morgan Stanley Highlights Key Focus for Tech Giants** As major technology companies prepare to report earnings this week, a senior internet analyst at Morgan Stanley pointed out that investors should pay close attention to revenue growth, calling it the clearest metric for measuring the return on massive capital investments.
"The primary signal for measuring the return on all this capital expenditure is revenue performance," the analyst said. "Investors need to see signs of accelerating revenue growth from the key performance indicators of each company."
The analyst expressed confidence in the relevant tech companies' ability to complete their data center expansion plans this year but noted greater uncertainty regarding the outlook for 2027 and 2028. He also cautioned that inflation in components like DRAM memory could create cost pressures.
**Goldman Sachs Warns: AI Disruption Concerns Spread, US Stock Valuations May Face Re-rating** Analysts at Goldman Sachs stated that growing market concern that artificial intelligence could erode long-term corporate profits in the US has led investors to refocus on a core question: to what extent do stock valuations depend on profit expectations a decade into the future, particularly in sectors like software.
The bank noted that profit expectations beyond 10 years often referred to as terminal value currently account for about 75% of the market capitalization of S&P 500 constituents, near the highest level in 25 years.
"The current proportion of terminal value in overall valuations is at historically high levels, highly similar to phases like the dot-com bubble era, when market expectations for long-term growth were also extremely optimistic," Goldman Sachs said.
The bank expects debates around AI's disruptive impact, and the resulting uncertainty about the terminal value of many companies, to persist for at least several quarters.
**Key Stock Moves** Stocks related to OpenAI, including Oracle, Advanced Micro Devices, and CoreWeave, fell sharply pre-market following reports that OpenAI missed both user and revenue targets. SoftBank dropped as much as 11% in Tokyo, while CoreWeave, Oracle, and Advanced Micro Devices fell around 3% in pre-market trading.
Arm declined over 6% pre-market, after falling 8% in the previous session. This followed comments from an analyst at Tianfeng International Securities that Qualcomm is collaborating with OpenAI to develop a dedicated smartphone chip, raising investor concerns that the new chip might not use ARM architecture.
Corning plunged over 10% pre-market; the company reported first-quarter core sales of $43.5 billion, compared to an estimate of $43 billion.
General Motors rose over 5% pre-market after reporting Q1 adjusted EPS above expectations. Nucor gained 4.7% pre-market as both Q1 revenue and earnings per share exceeded forecasts. BP advanced 3.3% pre-market after Q1 adjusted net profit surged 132% year-on-year, far surpassing expectations. Barclays fell 3% pre-market; while overall Q1 results met targets, increased bad loan provisions overshadowed strong trading performance. Spotify dropped over 8% pre-market after issuing Q2 operating profit guidance that fell short of expectations. Novartis declined over 2% pre-market after reporting its first year-on-year drop in net sales in two years for Q1. GE Vernova fell a further 1% pre-market; analysts at BNP Paribas cited locked-in gas turbine capacity as a constraint on future growth.
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