Weekly market update: AI investors consider the downside as diverging interest rates weigh on sterling

This week a big shift in investor behaviour saw markets identify some of the potential losers from the AI revolution. So far investors have focused on finding the AI winners, so this is a big shift in mindset. AI should drive significant productivity improvements, but the benefits are likely to be spread unevenly and there is likely to be further disruption as the technology evolves and its adoption increases.

Meanwhile, the Bank of England and European Central Bank chose to leave rates unchanged. With inflation in the Eurozone down to 1.7%, there is little expectation for a shift in ECB policy. However, with four votes in favour of a rate cut and a forecast of slowing inflation, rising unemployment and weak growth, the pace of rate cuts from the BoE is projected to increase. In the US, the nomination of Kevin Warsh as the next Fed chair has tempered expectations of rapid US interest rate cuts and this saw sterling fall against a generally strengthening dollar. The biggest shift in global equity markets was in Japan where the forecast of a landslide victory of prime minister Sanae Takaichi’s Liberal Democratic Party this weekend helped Japanese stocks resume their upward momentum.

AI: new anthropic tools scuttle advertising, data, publishing shares

An update to AI-firm Anthropic's Cowork platform for business users triggered a sharp selloff across software, data analytics and publishing sectors. The AI firm's tools, which automate tasks like contract reviews and marketing workflows without requiring technical skills, raise fears that many businesses will be able build their own solutions rather than purchase specialized software. In London, Relx plunged 16%, wiping over £6 billion from its value, while rival data providers Thomson Reuters and LSEG fell 14% and 21% respectively. US analytics firms including S&P Global, Gartner and Moody's dropped between 9% and 28%. Global advertising groups WPP and Publicis also suffered.

This is the first time investors have singled out losers from the AI revolution. The severity of this week’s rout reflects mounting investor anxiety about AI disrupting industries once prized for stable recurring revenues. Yet the market response may overstate near-term risks. Businesses remain cautious adopting AI where regulatory or security concerns exist, and census data shows enterprise AI adoption has actually declined recently among larger firms. Companies like Relx have successfully reinvented themselves before, transforming from print publishers to data analytics leaders.

Commodities: easing global tensions spark volatility

A sharp fall in the price of silver has erased almost all of its rapid gains since the start of the year. Signs that tension between the US and Iran are easing saw demand for haven assets fall. The price of gold has also fallen significantly from its high point on 29 January, although it slightly recovered this week. The nomination of Kevin Warsh as the next head of the Federal Reserve has reduced expectations of rapid interest rate cuts and caused the US dollar to strengthen and this has reduced the attraction of precious metals. Easing geopolitical tensions also reduced the attraction of very defensive assets.

Other commodities have also experienced volatility. The price of oil was driven up by tension between the US and Iran before falling back as both sides agreed to talks. The price of natural gas also fluctuated as low reserves of natural gas in the UK and Europe pushed up prices due to concerns that cold weather in the US would restrict exports. However, warmer weather has eased concerns.

Equities: markets seem more sceptical of AI growth story

Several disappointing stock market updates have fuelled a more pessimistic view of AI tech companies. After positive updates from Meta and Apple last week, investors appeared reassured that US tech firms are able to sustain the rapid growth needed to justify very high valuations. However, disappointing updates from chipmakers AMD and Qualcomm saw their shares fall 17% and 9%, respectively, as rising revenues and sales forecasts fell short of expectations. An underwhelming update from chip designer Arm added to the negative sentiment due to concerns that smartphone sales are slowing as dozens of tech stocks were dragged down.

Google-owner Alphabet delivered strong earnings growth but its shares also decline as it massively increased its forecast for capital expenditure. Alphabet remains one of the best performing US stocks this year but many other tech firms, including some of the other Magnificent Seven tech giants, have fallen in value in recent months. Despite the more critical view of tech stocks the broad US index has held its value in recent months as small- and mid- caps and value stocks have outperformed.

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