US midterms and the AI trade
Financial markets continue to gyrate at a rapid rate. Over the week, the most significant news was the outcome of the US midterm elections, which resulted in the largest swing to the Democrats in over 50 years. The precipitous decline in previously viewed Republican strongholds in states such as Texas and South Carolina highlighted the pivotal impact of the election outcome. It also resulted in both US Houses shifting control. On the back of the swing to the Democrats, financial markets, and principally the AI trade, came under significant pressure, as many Democratic representatives campaigned on slowing the AI infrastructure spend. With the technology and semiconductor sectors representing more than 50% of the US S&P 500 Index, the selloff in AI impacted all parts of the market.
The AI outlook and the ASX
However, while the Democrats may introduce new bills to ‘slow’ the AI build-out, it will not stop its longer-term development and impact. That said, the review of any hyperscalers’ AI spending (the large technology companies investing most heavily) will be felt across all regions globally, given the interconnectivity of the global AI build-out. Locally, the ASX 200 Index, which has a lower exposure to the AI theme, was able to buck the trend and move higher, with the small-to-mid cap and resources sectors leading the way. This was despite the RBA increasing the cash rate by a further 0.25% (to 4.85%).
The RBA and the domestic outlook
While the RBA indicated it is now set for a prolonged pause, we believe the potential for one further rate hike remains, given inflation is forecast to remain above 3.0% until the fourth quarter of 2027. This week sees the release of both consumer and business sentiment, which are expected to remain weak given the current backdrop. Overall, we expect further moderation in the domestic economic backdrop.
Offshore: the US and China
In the US, the release of PPI (producer prices, a measure of input costs) and jobs data, alongside the ongoing political machinations, will drive markets. In China, CPI (forecast 0.8% year on year), PPI (forecast 5.3% year on year) and industrial production data will be the key releases for the week.
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