Nerves rising about frothy valuations

Despite a headline beat and decent revenue forecast, the poor reaction to the update from AI and data analytics darling Palantir - whose stock has more than doubled this year on AI excitement and government and business demand - tapped a nerve in markets about excessive valuations and the increasingly high bar required to impress.

Even the suggestion of slowing revenue growth can be jarring for a stock trading at a whopping 12-month-forward price-to-earnings ratio of 246 - many times even that of AI behemoth Nvidia's 33 times. What's more, chief executives of Morgan Stanley and Goldman Sachs cautioned that global equity markets could be heading towards a correction. 

With Fed officials turning equivocal about another rate cut this year even as U.S. manufacturing activity remained in contractionary territory last month, Fed lending data showed business loan demand from large and mid-sized firms strengthened by the most in about three years in the third quarter - questioning the case for more rate cuts.

That added to earnings and valuation jitters to sweep across world markets. 

Wall Street index futures were down more than 1% ahead of Tuesday's open and global bourses were in the red too. AMD, Super Micro, Amgen and Pfizer top today's diary. 

Perhaps also partly related to Palantir, crypto tokens were also hit by the 'risk off' tone and Bitcoin skidded to its lowest in more than four months. 

Hit by the stock swoon and Monday's ISM survey, Treasury yields retreated - but the dollar was knocked about in different directions.

Japan's yen jumped sharply after the country's new finance minister Satsuki Katayama warned against excessive yen weakness and said the government was monitoring the situation with "a high level of urgency". 

But Britain's pound slid to its lowest in more than six months on the dollar as an unusual pre-budget speech by UK finance minister Rachel Reeves trailed tighter fiscal policy and higher taxes later this month, encouraging bets on offsetting interest rate cuts from the Bank of England - which meets this week.

The Australian dollar fell after the Reserve Bank of Australia left its cash rate steady as expected and cautioned about further easing. 

Tuesday's sudden bout of market doubts and burst of volatility, which have lifted the VIX gauge back above long-term averages around 20, came after another effervescent day of dealmaking and AI investment spending on Wall Street on Monday. 

Amazon's shares jumped 4% after it announced a $38 billion deal with OpenAI to allow the ChatGPT maker to run and scale its AI workloads on Amazon Web Services' cloud infrastructure. And Kimberly-Clark shares slid 15% after the consumer goods firm moved to buy Tylenol-maker Kenvue for more than $40 billion. Kenvue jumped 12%.

Worldwide mergers and acquisitions totaled $3.5 trillion during the first ten months of 2025 - a 38% increase from year-ago levels and the second-biggest year-to-date tally on record, according to LSEG data. It was the most active October since 2016.

A distant prospect just a couple of weeks ago, a yearend cut in British interest rates is now more likely than not and only this month's critical government budget will stop a split Bank of England moving as soon as this week. 

But there may be market fireworks either way as forecasters appear as split on the timing as the BoE's monetary council seems. And another quarter-point easing this year is still not even fully priced.

The gloomy mood around UK inflation and the interest rate horizon was punctured on October 22. Even though the headline consumer price gains for September held steady at a punchy annual 3.8% rate for the third month running, it defied expectations for a return to 4.0%. 

Crucially, higher services inflation also held below consensus and later wage readings confirmed an easing of pressure. And economists now expect inflation to drop to 2.5% on average next year and to a whisker of the BoE's target in 2027.

Despite the uncertainty around fiscal repair and the annual government budget statement to be announced on November 26, the inflation report sent rate cut bets racing and shot through UK markets. Long-term government borrowing rates lurched lower, with the benchmark 10-year gilt yield hitting a low for the year at one point, and sterling plunged.

Graphics are produced by Reuters.

U.S. manufacturing contracted for an eighth straight month in October as new orders remained subdued, and suppliers were taking longer to deliver materials to factories against the backdrop of tariffs on imported goods. Still, the PMI remained above 42.3, a level that the ISM said over time was consistent with an expansion of the overall economy, and the survey's prices paid measure eased to a still-high 58.0 from 61.9 in the prior month.

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