AI: transformative technology, equity bubble or both?

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STOXX Europe 600 up 0.05%

Spanish inflation cools in May

Impact of US debt deal questioned

Nasdaq futures up 1.4%

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Artificial Intelligence has gone mainstream and financial markets are taking note.

First quarter earnings from Nvidia last week sent shares surging almost 25% on Thursday alone, taking the company close to a market cap of $1 trillion. Nvidia makes the processors that train AI systems.

Nvidia's jump sparked a huge rally in other stocks related to AI, and investors look ready to ride the wave.

"The tide of enthusiasm for AI is lifting all boats near it," write analysts at Man Group.

"Such a disruptive force will inevitably create winners and losers over the coming years, but in our view it is too early to fight the optimism," they say.

In time, though, Man Group says that technology companies may become victims of the AI revolution through the productivity improvements they deliver.

"Many have significant enterprise businesses whose revenues depend on the number of user licences taken by their subscription clients," Man says.

"If AI applications create a white-collar job recession, which would be highly deflationary due to lower demand for high wage labour, these clients simply won't need so many licences."

So, is AI a truly transformative technology, an equity bubble, or a combination of both?

Man Group says it's too soon to say, but reminds investors not to forget fundamentals, "especially where weakness could cause multiple compression".

"For some tech names, the positive effects of AI (from new business lines, efficiencies and/or market leadership) will outweigh any negative impacts," Man writes.

"For others, the disaggregation of AI victors and vanquished currently bundled in some AI indices or strategies – while still likely some way off – may not leave much of a future."

(Samuel Indyk)



What should investors make of Spanish Prime Minister Sanchez's surprise move to call a general election in July following a heavy defeat for his left-wing coalition during local elections?

Market reaction suggests they shouldn't be overly worried. The summer vote is likely to bring the PP back to power for the first time since 2018 and while a coalition with far-right Vox seems most likely, a PP-only government is also a possibility.

Under either scenario, analysts expect fiscal discipline in the euro zone country will unlikely to be at risk.

"We do not expect any major deviations from Spain's cautious fiscal stance, although the priorities on its composition could be very different (less tax hikes, more spending cuts)," writes Giada Giani at Citi. "NGEU spending could take a pause as the new administration settles in and decides on its priorities."

Eurasia Group analyst Federico Santi expects a more business-friendly economic policy underPP moderate leader Feijóo and agrees that fiscal discipline isn't at stake.

"While Feijóo will be under pressure to reduce the tax burden, he will likely steer a cautious course for fiscal policy and continue to pursue a gradual fiscal consolidation" he says.

Meantime, as data showed inflation in Spain cooled further in May, the IBEX .IBEX in Madrid rose 0.5% and Spain's 10-year bond yields ES10YT=RR fell around 4 basis points, showing no sign of stress.

(Danilo Masoni)



The recent sell-off in copper has created an improving risk-reward, analysts say, after a decline that has seen the red metal fall 11% since mid-April and more than 15% from its year-to-date high.

Morgan Stanley notes there have been several bearish factors behind the decline: slowing growth in China, weak euro area PMIs and risks related to the debt ceiling.

"We can argue there has been good reason for the sell-off in copper, even if it played out sooner than we expected," Morgan Stanley analysts write.

"A lot of the price action from here probably depends on the macro, but if the US debt ceiling is resolved, and China stimulus comes through as our economists expect over summer, the risk-reward for copper could start to look better on any pullbacks."

UBS analysts share that view.

"Following a detailed review of supply & demand, we believe the copper market is closer to a fundamental inflection point," UBS says.

The Swiss bank says that prices could test theoretic support levels in the near-term - at ~$3.20/lb for CME copper HGc1 and $7,000/t for LME copper CMCU3 - if weak physical signals deteriorate further as supply lifts, or risk aversion increases.

However, they do not see a protracted period of oversupply driving prices into the cost curve for an extended period.

"Near-term physical market signals are weak and spec positioning has shifted from net long to neutral/short," UBS writes.

"We see a modest surplus in 2023 but expect a tighter market in 2024 and believe the prospect of copper moving into a more protracted deficit from 2025 increases the risk of violent price upside in the next 2-3 years."

But with little conviction that the bottom of the cycle has been reached yet, UBS remains generally cautious on copper equities.

The Swiss bank has 'buy' ratings on Zijin 2899.HK and CMOC 603993.SS, 'neutral' ratings on Freeport-McMoRan FCX, Antofagasta ANTO.L, Lundin Mining LUN.TO, Boliden BOL.ST, KGHM Polska Miedz KGH.WA and Sandfire Resources SFR.AX, and a 'sell' rating on Southern Copper SCCO.K.

(Samuel Indyk)



There was not huge conviction at the European open on Tuesday as investors awaited for the U.S. debt ceiling deal to make its way through Congress, just as caution grew that ensuing U.S. debt issuance would suck liquidity from the market.

The STOXX Europe 600 .STOXX was last little changed as gains across financials and the IT sectors offset weakness in consumer staples and energy. Spain's IBEX .IBEX stood out, up 0.5%, after snap elections were called on Monday and inflation slowed to 3.2% in May.

Here's your snapshot with sectoral weights on the STOXX.

(Danilo Masoni)



European shares looked set to open cautiously higher on Tuesday as investors awaited Congress approval of a deal that will avoid a U.S. default but will also likely lead to hundreds of billions in bond issuance, draining liquidity out of markets.

EuroSTOXX50 futures rose 0.2% and FTSE futures steadied, as investors in Britain and America return to their desks after a long weekend. Futures on the S&P 500 benchmark added 0.3%.

On the corporate front, newsflow was thin so far.

India has filed a graft case against Britain's BAE Systems BAES.L and Rolls-Royce RR.L for "criminal conspiracy" in the procurement and manufacturing of 123 advanced jet trainers, a federal police document showed.

In Italy, eyes were on Monte dei Paschi BMPS.MI after its CEO said the lender "can and must" join forces with domestic peers to build a "third pole" in the country's banking sector.

Real estate firm Aroundtown AT1.DE and baked goods group Aryzta ARYN.S were in focus following results. Finally in M&A, machine tools makers Tornos TOHN.S and Starrag STGN.S said they were looking into a possible merger deal.

(Danilo Masoni)



U.S. and UK markets return from their long weekend on Tuesday with a touch of ambivalence, happy that the weekend resulted in a U.S. debt ceiling agreement and yet anxious about how the deal will fare in congress.

More detail and clarity are expected around the tentative agreement in Washington to suspend the $31.4 trillion federal debt ceiling until January 2025 in exchange for caps on spending and cuts in government programmes. Even before celebrations could begin, a handful of hard-right Republican lawmakers have said they will oppose it.

That means the bipartisan 99-page bill, still subject to approval in both houses of congress, could face a rocky path before the U.S. runs out of money next week.

Meanwhile, Spanish Prime Minister Pedro Sanchez surprised everyone, even people within his own government, by taking "personal responsibility" for Sunday's crippling defeat in a regional election and calling for a snap election next week.

It seemed to be an attempt to wrong-foot his conservative opponents and give his flagging Socialist party the best chance of retaining power before its support weakens further.

In the first trades in U.S. debt markets since the debt ceiling deal, longer-term Treasuries rallied in Asia, driving benchmark 10-year yields US10YT=RR down 6 basis points to 3.76%.

But bid-offer spreads were wide in Asia, as investors balanced their nerves over the deal's passage, the prospect of Treasury potentially issuing more than $1 trillion in bills in the coming months to replenish its coffers, and suspicion that the Fed will have to raise rates further.

Asian stocks are up, and futures EScv1 indicate mild gains for stocks in Europe and the United States, too. The dollar is staying firm around its strongest level in more than two months against a basket of major currencies =USD.

Besides the debt deal, there is little else on investors' minds. Spain kicks off a week of European inflation readings, all of which should show some moderation in prices and yet not enough to change expectations for more policy tightening.

Key developments that could influence markets on Tuesday:

Speakers: Richmond Fed President Barkin (FOMC non-voter), Representatives from SWFs and the SWF industry gather in London for the Global Wealth Conference.

Data: U.S. Conference Board Consumer Confidence Index, EU Consumer Confidence, U.S. House Price Indices, Dallas Fed Manufacturing Activity (May), Sweden Q1 GDP, Switzerland Q1 GDP.

Earnings : Manchester United, Hewlett-Packard

(Vidya Ranganathan)


Rates and inflation Rates and inflation

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