AI Jitters and Inflation Fears Drive Tech Sell-Off; Crypto Also Under Pressure

Global markets opened Thursday on a cautious note, as persistent inflation concerns and a growing sense of unease within the artificial intelligence (AI) sector weighed heavily on investor sentiment. Major U.S. equity benchmarks closed lower on Wednesday, with technology stocks bearing the brunt of the sell-off. The crypto market also saw significant declines, reflecting broader risk-off attitudes.

Reports of slowing revenue growth for AI firm Anthropic, coupled with a sharp drop in the bonds of AI infrastructure provider CoreWeave, fueled worries that the high-flying AI trade might be facing headwinds. These developments come as central banks globally continue to grapple with elevated inflation, raising questions about the sustainability of growth-oriented investments amid potentially higher borrowing costs.

Stocks and bonds

U.S. equities experienced a notable pullback, with the Nasdaq leading losses, down 1.88% to 26,692.87. The S&P 500 also declined by 1.11% to 7,718.94, while the Dow Jones Industrial Average saw a marginal dip of 0.09% to 51,621.48. This broad-based decline in U.S. markets was largely attributed to inflation fears and specific concerns within the AI sector, as investors questioned if increased borrowing costs could derail the massive AI buildout. Small-cap stocks, in particular, have unraveled quickly, hitting a market milestone they would rather avoid, with some analysts suggesting many investors are overly exposed to equities.

The bond market saw some movement, with the yield on the benchmark US 10-year Treasury note falling by 0.52% to 5.19%. This suggests a slight flight to safety or perhaps a recalibration of interest rate expectations, even as inflation remains a 'fact of life' in the U.S. Corporate bonds in the AI space faced scrutiny, as CoreWeave's bonds, issued just months ago, tumbled to 81 cents on the dollar, now yielding over 15%, signaling potential distress in a key corner of the AI market. Across the Atlantic, the FTSE 100 bucked the trend, rising 0.70% to 10,724.86.

African traditional markets presented a mixed picture. The Nigerian equities market rebounded on Wednesday, with investor wealth expanding by N103.9 billion. This recovery was driven by gains in oil and banking stocks. Meanwhile, the Nigerian National Petroleum Company Limited (NNPC Ltd.) is advancing its initial public offering (IPO) plans, addressing governance and financial reporting gaps. In East Africa, the Bank of Uganda aggressively raised its benchmark interest rate by 225 basis points to 12%, tightening monetary policy to combat the Ugandan shilling’s depreciation and rising inflation.

Currencies and commodities

Currency markets saw slight movements against the U.S. dollar. The Dollar Index, which measures the greenback against a basket of major currencies, edged down 0.23% to 101.95. This minor weakening of the dollar was reflected in EUR/USD, which gained 0.21% to 1.1228, while GBP/USD saw a modest dip of 0.07% to 1.3248.

In commodities, both gold and crude oil saw fractional declines. Gold was down 0.27% to 4,165.90, while Crude Oil slipped 0.11% to 94.04. These movements suggest a relatively stable environment for commodities, albeit with a slight downward bias, despite the broader market jitters.

Crypto

The cryptocurrency market experienced a broad-based sell-off, largely influenced by the broader risk-off sentiment in traditional finance and renewed uncertainty surrounding Federal Reserve interest rate hikes. Bitcoin fell 2.70% to $80,853.79, dropping back below the $81,000 mark as bets on an October Fed rate hike briefly spiked. Other major cryptocurrencies also saw significant declines: Ether was down 5.45% to $2,360.66, Solana fell 3.65% to $102.83, XRP dropped 4.30% to $1.306, and BNB was down 3.41% to $715.79.

Bitcoin miners, often seen as a proxy for the broader crypto market's health, plunged up to 13% in what was described as Wall Street’s worst selloff for the sector since July. This decline was linked to hotter inflation hitting AI infrastructure companies, highlighting the interconnectedness of infrastructure plays in both traditional and digital asset markets. Regulatory developments also continued, with VanEck seeking to withdraw its application for a Lido staked Ether ETF, while Russia's biggest bank, Sberbank, gained approval to trade Bitcoin, Ethereum, and USDT.

What to watch

• The ongoing impact of inflation data on central bank policy decisions, particularly from the Federal Reserve and other major central banks.
• Further developments in the AI sector, specifically how slowing growth at key companies and tumbling bond prices might affect broader tech valuations.
• Any shifts in investor sentiment towards risk assets, which could influence both traditional equities and cryptocurrency markets.
• Regulatory updates in the crypto space, especially regarding stablecoins like Circle’s USDC, which the EU authority has classified as 'significant' under MiCA.