Selling begets selling

The week's full tableau suggests investors no longer see AI development and disruption as automatically positive for broad index investors. The technology's threat to existing businesses has wiped almost $1 trillion off the value of the software sector in just one week.

And when anxiety is high, selling sometimes begets selling. Heavy losses for AMD and Wall Street chipmaker indexes yesterday ripped through Asia markets overnight, and even South Korea's high-flying Kospi recoiled almost 4%.

This wild volatility extended beyond equity markets, with bitcoin lunging close to $70,000 for the first time since the 2024 U.S. election, leaving it down more than 40% from last October's peaks.

Precious metals also continued to swing violently, with silver falling up to 17% at one point overnight and still down 10% on the day.

The mood in the equities market seems a little calmer heading into Thursday's bell, however, with Nasdaq and S&P 500 futures flat so far today. Investors will get Amazon's earnings after the close.

Looking beyond the specific software jitters, tech stock volatility this week speaks to this year's unfolding sectoral rotation. The S&P 500 value index gained for a fifth straight session on Wednesday, while the S&P 500 growth index dropped.

The equal-weighted S&P 500 index was up 0.8%.

Some of that reflects a return to more cyclical stocks amid upbeat economic signals for January from both ISM services and manufacturing surveys. Subdued hiring remains an ongoing feature, however, as ADP's private sector payrolls rose less than forecast for last month.

Currency and bond markets were relatively stable, meantime, with the yen weakening slightly again ahead of the weekend's Japanese election and European traders keeping a close eye on today's first policy decisions of the year from the European Central Bank and Bank of England.

Neither is expected to move interest rates this week, but recent euro strength and below-target eurozone inflation will keep markets on alert for dovish ECB noises. Edgy UK markets were paying more attention to domestic politics and renewed pressure on Prime Minister Keir Starmer.    

The main reason political pressure on the Federal Reserve has not caused markets to price in deeper interest rate cuts is perhaps the simplest: U.S. inflation is just too high to justify it, and there are signs it may be picking up again.

The Fed's favored measure of inflation - core personal consumption expenditures (PCE) inflation, which excludes volatile food and energy prices - is creeping higher again, and several alternative gauges of retail prices also show some heat building as 2026 is getting underway.

Even though the December PCE report is not due out for another two weeks, Fed Chair Jerome Powell, opens new tab made clear last week that the central bank now assumes that core PCE inflation ran at 3% in the final month of last year.

Not only is 3% core inflation a full point above the Fed's inflation target, but it's going in the wrong direction. It would be the fastest rate in over two years, more than 40 basis points higher than it was running last April.

That's cause for a pause, no doubt.

Graphics are produced by Reuters.

Graphics are produced by Reuters.

Alphabet said on Wednesday that its capital expenditure could as much as double this year - another aggressive spending push by the Google parent as it tries to allay constraints on compute capacity and push ahead in the AI race.

Markets seemed unimpressed, however, and Alphabet's stock fell 2% out of hours overnight. Not for the first time, investors appear to be unnerved by the sheer scale of the AI investment plans among so-called hyperscalers and remain anxious about whether it will all pay off. 

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