This Halloween: AI’s big spending scare

00:00:00: Big technologies, AI spending is overshadowing strong cloud growth with Google.

00:00:05: Amazon and Microsoft struggling to reassure investors this week.

00:00:09: The pressure on free cash flow levels raises questions about financing, profitability and also the future returns on AI investment while credit stress adds to concerns.

00:00:20: Meanwhile central banks around the world remain cautious regarding inflation and poses from the Fed, European Central Bank & Bank of Japan leave further hikes possible still whilst Canada raised rates next week.

00:00:34: So in summary, financial conditions are tightening and with valuations this high markets are feeling the pressure.

00:00:40: so welcome to Swissco's daily market talk is Friday thirtieth of October.

00:00:46: I'm Yipega Skardeshke here today.

00:00:47: we will talk about this weeks big technology earnings essential bank decisions and how do two play each other.

00:00:54: but before we do as always please keep in mind that opinions on my own.

00:01:08: So the AI boat has taken more water on Thursday as Google wiped nearly half a trillion US dollars after revealing insufficient growth for its search and advertisement revenue while spending huge massive amounts.

00:01:23: The one hundred and three percent growth of Google Cloud won totally unheard this earnings season, while Microsoft on its hands reversed the post-earnings gains and finished yesterday's trading session with a slight loss despite his twenty five billion US dollar bond sale extracting one hundred fifteen billion US dollars off orders.

00:01:43: That's more than four times over subscribed.

00:01:46: Amazon and Intel joined the company, disappointing their investors after the bell yesterday.

00:01:51: Intel tumbled more then twenty percent in the after hours trading as demand for its PC processors and supply chain disruptions weighed on sales forecasts while amazon fell more forty two point.

00:02:06: four billion us dollars in the twelve months that ended in september.

00:02:15: thirteenth from nearly fifteen billion u.s.

00:02:18: dollar.

00:02:18: positive free cash flow, at the same time a year ago!

00:02:22: The aws revenue grew thirty nine percent.

00:02:24: That's a strong number but that number is dwarfed by the massive investment for delivering it In numbers.

00:02:31: amazon is expected to spend around two hundred billion US dollars and k-packs this year And another two hundred twenty billion US Dollars next Year not helping.

00:02:40: As Google, Amazon's at revenue growth underwhelmed yesterday they are revenue grew twelve percent only compared to a twenty six per cent year over year growth in the previous quarter.

00:02:51: and there is now talk that AI agents could take a slice of amazon e-commerce cake because instead of going straight to amazon to shop shoppers could ask an AI assistant to find your product compare prices and buy it wherever the deal is best.

00:03:07: That can mean fewer sales for Amazon, but not only it could also mean less advertising revenue if people stop browsing its pages and seeing sponsored products.

00:03:18: So It's easy to see why Amazon was so quick to block Meta's Muse AI agent because he wants the keep shoppers and money they bring on his platform.

00:03:28: But the AI agents will be growing And that might become a headache For Amazon.

00:03:33: If we summarize the big technology results The cloud growth was strong, but the companies spent huge amounts to deliver that growth.

00:03:40: Together Amazon Google Microsoft and Meta spend more than two hundred billion US dollars on capital investment in the third quarter alone.

00:03:48: That brings a bill just over five hundred billion U.S.

00:03:52: dollars.

00:03:53: Half trillion U.s.

00:03:54: dollars In first nine months of this year With full year spending expected to reach around seven hundred thirty-five billion for three thousand twenty six getting very, very expensive indeed.

00:04:07: As a result the free cash flow levels are falling and deeply negative territory for Google and Amazon suggesting that to future investments will be relying on equity in debt sales.

00:04:20: Now good news is that latest equity in debts sales from Meta Microsoft reassured investors at demand remains very strong.

00:04:27: Indeed The bad news Is that unease grows especially in credit markets.

00:04:32: Now I will open a little parenthesis here and talk about credit, the amount of leverage loans trading below eight cents on the dollar has doubled since last year according to the latest data signaling growing concerns about heavily indebted borrowers ability to repay their debt.

00:04:50: now these discounts reflect the credit risk base or number of metrics including weaker earnings excessive debt and refinancing difficulties.

00:04:58: The rising borrowing costs certainly don't help, particularly as leveraged loans generally carry floating rates, so that means their interest payments increase alongside the benchmark rates.

00:05:09: That's a big problem when the interest rates are rising around the world.

00:05:13: coming back to technology and AI history!

00:05:15: That is an increasingly uncomfortable backdrop for the increasingly debt-financed AI buildout because AI infrastructure requires enormous upfront investment.

00:05:26: even though there is evidence demand remains strong Very strong indeed, it doesn't automatically guarantee attractive returns.

00:05:34: So moving forward the risk is that higher financing costs will absorb more of the cash generated hence leaving less to fund expansion and repay debt And prospects offer their policy.

00:05:46: rate hikes add to that pressure while investors are still waiting for those enormous investments.

00:05:52: Now speaking of rates and borrowing costs, as expected – similar to the Federal Reserve on Wednesday.

00:05:58: The European Central Bank left its interest rate unchanged at this week's meeting keeping it's deposit rate at a two-and-a half percent level but the ECB still pointed out high energy prices and hence left possibility for another rate hike in December.

00:06:14: Today, the Bank of Japan did the same.

00:06:16: It kept its interest rates unchanged at a one point twenty-five percent level as expected but raised inflation forecasts and signalled that further rate hikes remain on the table.

00:06:27: And now that we're talking about race, the Reserve Bank of New Zealand also kept its rates unchanged this week.

00:06:32: Unexpectedly.

00:06:33: here however citing global uncertainty is weighing on domestic demand while The Bank Of Canada hiked by twenty-five basis points and in Australia a hotter than expected inflation print this week revived the hawkish reserve bank of australia expectations where a rate hike is relatively expected next week with a more than eighty percent chance given to it, twenty-five basis point height.

00:06:58: To tame the inflation pressures there.

00:07:00: now The hawkish stands from major central banks narrowed the divergence With the federal reserve that decided to maintain its race unchanged into Next week's US midterm elections.

00:07:10: year dollar for example found support near the one eleven level yesterday after strong u.s data hit the ground But the paired recovered during christian lagars presser later in today.

00:07:21: her decision to leave the ECB on the other hand, gain an outsize attention in my opinion as European Central Bank is pretty independent and it should be.

00:07:30: And its pretty focused on data and fundamentals so that change of leadership shouldn't matter.

00:07:38: Globally monetary policy outlook remains hawkish.

00:07:41: this week's poses-to-rate hikes don't mean the tightening cycle is over!

00:07:46: On the contrary, elevated energy prices continue to cloud global inflation outlook.

00:07:51: The bond market is doing some of the tightening for policy makers as especially true higher sovereign yields across the globe feed through to borrowing costs for businesses and households.

00:08:05: And the latter is waiting on activity, potentially limiting this spread of energy inflation into broader prices.

00:08:13: And last but not least, rates are less discrediting where growth is strong than when economic activities under pressure from high-energy rising barring costs.

00:08:22: As I mentioned a bit earlier in this episode, the data showed yesterday that US GDP grew by stronger than expected at three point four percent in third quarter of this year up from two-point-two percent printed earlier!

00:08:35: And if most major central banks turn to rate hikes in the coming months, chances are that strong US growth will give the US seller an edge over a major appears thanks for relatively stronger growth story.

00:08:47: If of course AI build out and AI spending remains at current pace!

00:08:53: So this is all for today's episode.

00:08:55: I'm Ipeko Skardyske.

00:08:56: Thanks for joining me and thank you for your beautiful and supportive comments.

00:09:02: This episode of Market Talk has been helpful and it's been insightful to you, so please do not hesitate to leave your comments.

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00:09:30: So I will meet you again next week.

00:09:33: And until then, good day trading and have a lovely

00:09:51: weekend!