Selling in AI-related stocks, US long-term interest rates fall despite inflation upside | Weekly Market Summary Oct 12-16
In this article, we will look back at this week’s stock market while organizing the key points.
I am reviewing this in an easy-to-understand way as a memorandum, so please take a look.
First, here are the points for this week.
・TOPIX was -0.95%, Nikkei 225 was -5.37%; the decline in AI and semiconductor-related stocks significantly pushed down the Nikkei 225.・Japan’s corporate goods prices showed high growth year-on-year, and the Bank of Japan maintained its policy of additional interest rate hikes.・The global stock index VT was -1.88%. ETFs for US stocks, developed market stocks excluding the US, and emerging market stocks also fell.・While US price indicators exceeded expectations, long-term interest rates fell over the week. US Treasury bonds were bought due to concerns over the funding of AI companies and comments from Fed officials.・Due to the escalating situation in the Middle East, concerns over the supply of crude oil and fuel continue.・MSCI is considering the possibility of excluding Indonesia from its emerging markets index, citing concerns over market transparency.
Let’s start by looking at the price movements of domestic stocks.
Domestic stock price movements
When looking at Japanese stocks, the difference between TOPIX and the Nikkei 225 was important this week.
・TOPIX: 4,104.81 → 4,066.00 (-0.95%)・Nikkei 225: 69,030.92 yen → 65,324.29 yen (-5.37%)
Both are comparisons of closing prices from October 9th to the 16th.
The Nikkei 225 is easily influenced by high-priced stocks, and the decline in AI and semiconductor-related stocks was a burden this week. The difference in the rate of decline compared to TOPIX also reflects differences in index composition and calculation methods.
Major domestic news
The main domestic news is as follows.
① Corporate goods prices fell from the previous month. However, import costs remain high.② The Bank of Japan maintains its policy of additional interest rate hikes.
Corporate goods prices fell from the previous month but remain at a high level, and import costs are also high.
The domestic corporate goods price index for September was +6.8% year-on-year and -0.3% month-on-month. Import prices on a yen basis were +24.5% year-on-year and -0.2% month-on-month.
Although they have settled down from the previous month, procurement costs remain at a higher level than the previous year. If price pass-through progresses, the burden on households may also increase.
For investment targets, I want to focus on whether they can maintain and grow profits while suppressing the decline in sales volume due to price increases.
The Bank of Japan maintains its policy of additional interest rate hikes.
In the remarks by Governor Ueda released on the 16th, the intention to continue raising policy interest rates in accordance with economic, price, and financial conditions was indicated. The remarks were read by Deputy Governor Uchida.
While the underlying inflation rate is approaching 2%, he also mentioned the risk of further upward deviation.
If the economy and prices move in line with the Bank of Japan’s outlook, our main scenario is that additional interest rate hikes will proceed.
If additional rate hikes proceed, repayment burdens for variable-rate mortgages and the like may increase. On the other hand, rising deposit interest rates will lead to an increase in interest income.
For companies, concerns include increased borrowing costs and a slowdown in consumption. I would like to consider preparations for rising interest rates for both household finances and investment targets.
Global stock price movements
The following four ETFs are used to compare global stocks.
・VT (Global stocks): 159.83 → 156.82 USD / -1.88%
・VTI (US stocks): 381.94 → 374.07 USD / -2.06%
・VEA (Developed market stocks excluding US): 70.35 → 69.49 USD / -1.22%
・VWO (Emerging market stocks): 59.76 → 58.03 USD / -2.89%
All figures are the US dollar-denominated price change rates from October 9 to 16, and do not include the reinvestment of dividends. None of the four ETFs had dividend payouts during this period.
US AI-related stocks were sold off due to concerns over the profitability of AI investments, causing global stocks to fall as well. Meanwhile, in Europe, strong corporate earnings supported stock prices. In emerging markets, Indian stocks also rose, making it a week where fortunes varied by country and sector.
Major global news
This week’s global news is as follows.
1. Sell-off in AI-related stocks, concerns over whether profits can keep up with growth expectations
2. US inflation exceeds expectations, interest rates fall over the week
3. Crude oil rises due to supply concerns
4. Indonesia, possibility of exclusion from MSCI Emerging Markets Index
Sell-off in AI-related stocks, concerns over whether profits can keep up with growth expectations
This week, AI-related stocks such as semiconductors and data centers were sold off due to concerns over the profitability of AI investments and capital expenditures that rely on borrowing. CoreWeave, Broadcom, and others declined.
Because future growth expectations are priced into AI-related stocks, simply increasing sales and profits may not always lead to a rise in stock prices.
Can they generate profits commensurate with the massive investments? And will the AI market grow beyond current expectations? I want to pay attention not only to demand growth but also to profits and cash flow.
Source: Reuters – US Stock Market Conditions
US inflation exceeds expectations, but interest rates fall over the week
US price indicators exceeded expectations, but the US 10-year yield fell over the week from 5.24% on October 9 to 5.09% on the 16th.
The background to this was a move to buy US Treasuries in search of safety due to anxiety over the profitability and cash flow of AI-related companies. When government bonds are bought and prices rise, yields fall.
The decline in interest rates was also supported by the easing of vigilance regarding immediate additional rate hikes following remarks by Federal Reserve officials.
Source: US Treasury Daily Interest Rates, Reuters: Buying of US Treasuries, Reuters: Retreat in rate hike expectations
Crude oil rises due to supply concerns
In the Middle East, the risk of attacks on export hubs has increased, and in Russia, some refinery equipment has been shut down. Concerns over the stable supply of crude oil and fuel have intensified.
Brent crude oil futures on the 16th settled at $109.86, the highest level since May 19.
Source: Reuters: Crude Oil Market Conditions
Indonesia may be excluded from the MSCI Emerging Markets Index
MSCI is concerned about the lack of transparency in the shareholding structure of the Indonesian market and suspicions of collusive trading by related parties. It has frozen new inclusions and increases in weighting for the index, and is considering excluding it from the emerging markets index.
Even if growth is expected, whether stock prices are formed fairly and whether one can trade with peace of mind is a separate issue. I feel the difficulty of investing in emerging countries lies in the fact that one needs to investigate not only the country’s growth potential but also the market mechanisms.
With All Country World Index (ACWI) funds, such market issues are reflected in the review of investment targets through the linked index. Reducing the burden of making those judgments for each country myself is one of the reasons I choose ACWI funds.
Source: MSCI: Announcement regarding the review of Indonesia’s market classification
Summary
This week, AI-related stocks were sold off due to concerns over the profitability and cash flow of AI investments, causing the Nikkei Stock Average and global stocks to fall. On the other hand, US Treasuries saw buying, and US long-term interest rates fell over the week.
Concerns over prices and the supply of crude oil and fuel remain. Regarding investment targets, I want to focus not only on growth expectations but also on whether they can secure profits even if costs increase, and whether they can continue operations with sustainable cash flow.
The news about Indonesia also showed that investment decisions cannot be made based on a country’s growth potential alone. I felt once again that the ability to reduce the burden of investigating market transparency myself is a reason to make ACWI funds the core of my asset formation.