Equity Markets Decline Amid Cooling AI Investment Hype

The S&P 500 Index ($SPX) (SPY) today is down -1.04%, the Dow Jones Industrial Average ($DOWI) (DIA) is up +0.01%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -2.67%. September E-mini S&P futures (ESU26) are down -1.00%, and September E-mini Nasdaq futures (NQU26) are down -2.66%. Stock indexes are falling sharply today, with the S&P 500 posting a 1.5-week low and the Dow Jones Industrial Average and the Nasdaq 100 posting 1-week lows. Concerns over the high valuations of chipmakers and memory stocks, among the biggest beneficiaries of the artificial-intelligence trade, have led to global selling in those sectors today as investors question whether future returns can justify current spending on AI. Today’s +5% jump in International Business machines is limiting losses in the Dow Jones Industrials.

Today’s stock slump began in Asia, with Japan’s Nikkei Stock Average falling by more than -3%. Also, South Korea’s Kospi index closed down more than -10%, as foreign investors offloaded more than $2.5 billion of Kospi shares. South Korea’s SK Hynix and Samsung Electronics closed down by more than -12%, sparking forced liquidation that hit retail investors trading on margin, compounded by a wave of selling tied to leveraged exchange-traded funds (ETFs) tracking the two chip giants.

Stock indexes recovered from their worst levels today on signs of strength in the US economy, after the Jun S&P manufacturing PMI unexpectedly rose by +0.6 to 55.7, stronger than expectations of a decline to 54.6 and the strongest figure in 4 years.

On the negative side, the US Jun Richmond Fed manufacturing survey current conditions fell -9 to 4, weaker than expectations of 8.

The markets are discounting a 36% chance of a +25 bp rate hike at the next FOMC meeting on July 28-29.

Overseas stock markets are sharply lower today. The Euro Stoxx 50 fell to a 1-week low and is down -0.93%. China’s Shanghai Composite fell from a 1-month high and closed down -1.37%. Japan’s Nikkei-225 Stock Average closed down -3.55%.

September 10-year T-notes (ZNU6) today are up +7 ticks, and the 10-year T-note yield is down -2.4 bp to 4.485%. T-notes are climbing as today’s sharp selloff in global equity markets has fueled safe-haven demand for government debt securities. Easing inflation expectations are supportive of T-notes, as the 10-year breakeven inflation rate fell to a 6-month low of 2.210% today.

Gains in T-notes are limited after the Jun S&P manufacturing PMI unexpectedly expanded at the strongest pace in four years, a hawkish factor for Fed policy. Also, supply pressures are negative for T-notes as the Treasury will auction $69 billion of 2-year T-notes later today.

European government bond yields are moving lower today. The 10-year German bund yield dropped to a 2.5-month low of 2.904% and is down -4.2 bp to 2.910%. The 10-year UK gilt yield is down -5.6 bp to 4.752%.

The Eurozone Jun S&P manufacturing PMI fell -0.3 to 51.3, weaker than expectations of no change at 51.6. However, the Jun S&P composite PMI rose +1.0 to 49.5, stronger than expectations of 49.2.

Eurozone May new car registrations rose +3.2% y/y to 955,000 units, the fourth consecutive monthly increase.

ECB Chief Economist Philip Lane said ECB Officials face the risk that inflation

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