Tech under scrutiny ahead of earnings

00:00:00: Market sentiment remains fragile after hotter US inflation, mixed bank earnings and mounting concerns over AI financing reticle investors.

00:00:09: Last week, investors are seeking shelter in US treasuries and they're also rotating toward the non-technology pockets of the market right now as this week's technology earnings led by Meta will put appetite for the sector to another test.

00:00:35: But before we do and as always, please keep in mind that opinions are my own.

00:00:40: And this is not financial advice!

00:00:47: The

00:00:50: last week was a pretty good one to be away –to be honest–as things got worryingly ugly on the ecomic data... Earnings and AI France.

00:00:57: Mixed Bank earnings in the US were overshadow by a hotter than expected CPI report that filled the hawkish Fed expectations, pushing October rate hike back to roughly fifty percent before Kevin Warsh helped bringing them back below thirteen per cent level.

00:01:11: This is where we are this morning.

00:01:13: while U.S.

00:01:13: Korea rose above one hundred dollar per barrel level And despite the controversial US decision to ease sanctions on Russian diesel To ease price pressures there Meanwhile a sharp sell-off.

00:01:25: Nvidia backed new cloud provider, Coviz shares and bonds last week.

00:01:29: And that was one of the biggest stories off last week.

00:01:32: I'm sure you follow now funnily or discreetingly The Thunderstruck.

00:01:37: as co-founder of this company Brandon McBee discussed securing investment grade ratings to access what he described as excess to unlimited endless capital.

00:01:49: That's not necessarily what investors wanted to hear apparently from a company pouring cash into AI infrastructure and has announced a negative cash flow in its latest quarterly results.

00:02:00: They would probably prefer some kind of reassurance that those investments will generate returns before being told how much more money could be borrowed at endlessly.

00:02:11: As a result, these famous last words proved costly for Corvive last week.

00:02:15: the cost of insuring Corvy is against default search to nearly twelve hundred basis points with pricing implying a more than sixty percent probability of a default within the next five years under the model's assumptions even though Jensen Huang said that The company is doing fine while investors didn't really hear it tank nearly twenty-four percent last week and more importantly the nerve spread well beyond Kobe, Rattling other new club providers.

00:02:44: And the brother Aoi trade aswell.

00:02:46: in this context Philadelphia's smile conductor index dropped more than ten per cent during Why?

00:02:54: Well first, Corby may sound like a little drop in the ocean.

00:02:57: Maybe you never heard about this company but it's ties to companies including NVIDIA and Microsoft that you certainly heard of make part.

00:03:07: Higher financing costs here raise a hurdle for future projects and refinancing.

00:03:12: Existing fixed rate debt doesn't suddenly become more expensive, obviously but the next round of borrowing certainly could And there is no doubt whatsoever that given massive build-out in AI & lower free cash flow In these companies from big and smaller names while borrowing must finance AI spending From now on worse.

00:03:34: So in this configuration, obviously if they can't make stop adding up.

00:03:38: If returns can exceed bargain costs sufficiently spending must slow and the consequences could reach suppliers customers shareholders and lenders.

00:03:48: yes that's where circular financing could go wrong.

00:03:51: right because one company is spending supports another revenue which helps justify Another round of investment And it financing becomes harder to secure.

00:03:59: all that support will start traveling in reverse.

00:04:02: That's the biggest risk.

00:04:03: Second, there is a broader concern about timing.

00:04:07: The timing of these returns when they will arrive because big technology spending heavily on infrastructure today while the revenue generated by businesses adopting AI take longer to catch up.

00:04:19: that's reality and that gap needs financing as well.

00:04:23: And As we saw last week investors are becoming less and less enthusiastic About funding the weight and funding endlessly.

00:04:31: As such, technology is coming under a growing pressure while investors seek shelter.

00:04:36: Good news for US treasuries that they offered that shelter last week pulling the U.S ten-year yield to around five percent level from nearly five point.

00:04:46: forty percent reached earlier this month escalating tensions in France and Broder was for.

00:04:51: the Broder Euro area bonds also certainly help support longer term US papers as gold.

00:04:58: four thousand dollars per ounce level on easing long term yields which make the opportunity cost of holding non-interest bearing gold lower.

00:05:09: This flight to safety could continue this week as well as further rotation toward the non-technology pockets aftermarket because indeed, S&P five hundred's equal weighted index performed better than market cap weighted and technology heavy version last week.

00:05:24: Nasdaq one hundred was hit heavier then major US peers.

00:05:27: The Dow Jones industrial Index for example ended a chaotic week with a point sixty percent rise over the week And stock six hundred rose more that two percent last week by a similar percentage and swell in contrast with what's going on the French streets.

00:05:43: But rotating away from technology may not solve brother problems, mind you because technology has been major engine of earnings growth investment Market optimism despite higher energy prices and higher bargain costs.

00:05:58: If that engine slows, the rest of the market won't compensate automatically.

00:06:03: On the contrary a financing slowdown in AI could delay projects.

00:06:08: We can suppliers order books And cool investment in hiring all together while falling share prices on The other hand could dent household wealth and spending as losses among lenders Could make credit harder to obtain though this is fundamentally bad for economic growth and growth prospects.

00:06:25: Then persistently above target inflation, then prospects of interest rate hikes with further dent growth expectations as without the AI spending's precious support, a climate graph would look much less shiny than it did over in past few years.

00:06:39: Remember around fifty percent of US GDP growth was thanks to AI spending.

00:06:44: Now note that none of this requires AI demand to disappear overnight, strong results from TSMC and ASML confirmed last week that AI spending remains robust.

00:06:56: And now it will take years to match the demand for these companies.

00:07:00: but returns on AI investments simply arriving later than expected could be enough to cause trouble when financing gets expensive.

00:07:09: That's the issue.

00:07:09: But anyway, having said all this well this week starts in a slightly better mood.

00:07:15: Chinese growth numbers came in better than expected.

00:07:17: today though they're mostly fueled by exports rather then domestic consumption In China.

00:07:22: at times trade tensions with the European Union are rising too.

00:07:27: South Korea's cost index which dropped more than fourteen percent during the course of last week on tech turmoil is up by around point eighty five percent At that time.

00:07:36: I'm talking here This morning, hinting that the technology sell-off may slow down this week and in coming hours at least ahead of the technology earnings.

00:07:46: But SoftBank which is a bellwether of AI trade kicks off the weekdown by more than three and half percent still suggesting that dark clothes haven't cleared just yet.

00:07:56: so this week Technology Earnings will put that fragile mood, that fragile appetite to the test.

00:08:02: Meta will be taking the center stage on Wednesday alongside Tesla IBM LAM research and Texas Instruments, and Western Digital that are due to announce their earnings this week as well.

00:08:14: Investors will want a hue more than another ambitious spending plan!

00:08:18: They'll want evidence that AI is helping generate enough revenue & profit to justify the bill.

00:08:25: And as per Spending it remains delicate balance.

00:08:28: On one hand, strong AI spending plans reassure investors that demand for AI infrastructure remains intact and letter helps keep appetite for AI enablers starting with chip makers and data center providers.

00:08:43: obviously well-intact but too much spending feels concerned about financing leverage financing and circular financing as well And they also feel concerns about returns in when these returns will arrive.

00:08:56: On the other hand, more cautious spending could ease those financing and return concerns while pulling the rug from under-the-companies counting on that money like chip makers and data center providers.

00:09:08: So what investors really need right now is stronger monetization.

00:09:13: Proof that the revenues generated with AI can catch up to this spending on these tools because after last week, another promise to spend billions of US dollars may not sit well in investors' stomachs!

00:09:26: So let's see how it goes.

00:09:27: but all for Monday.

00:09:29: I'm Yipega Oskar Deshkoya and thank you so much for joining me today.

00:09:35: I hope this episode has been helpful and insightful to you so please do not hesitate to leave your comments, reactions and questions below as usual.

00:09:48: Follow us on Instagram, on X or LinkedIn but also on WhatsApp, Threads, Telegram & Blue Sky for regular market updates.

00:09:56: Subscribe our YouTube channel daily!

00:10:00: Please don't forget to hit the like button in these videos to let me know that.

00:10:09: Good day

00:10:24: trading.