Growth fears snowball

A Reuters Open Interest newsletter

Growth fears snowball

By Jamie McGeever, Markets Columnist 

The S&P 500 and Nasdaq hit seven-month lows and bond yields fell on Monday as the Iran war entered its fifth week, with investors increasingly spooked by growth fears over inflation concerns even though oil prices rose further above $100 a barrel. 

In my column today I look at why the spike in market-based borrowing costs since the Iran war broke out could not have come at a worse time for 'Big Tech', which is increasingly turning to debt to finance its unprecedented AI investment binge.

I'd love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* No quarter given

The first quarter draws to a close on Tuesday, and it has been a wild ride. Brent crude oil is up 85%, its biggest rise since 1990; the U.S. 'Magnificent 7' megacaps are down 17%, meaning they've lost almost 20% from the October high and are now close to a bear market; gold is still up despite March being its second worst month in over 40 years.

In some ways, markets have been remarkably calm in light of the damage done to the global energy complex. 17% of Qatar's gas capacity is offline; 20% of global oil and gas flows is choked off by the closure of the Strait of Hormuz; Several Middle East countries, including Saudi Arabia, have shut energy production fields or refineries. Maybe markets have been too calm.

* A "good place"?

Where is monetary policy, the economy, labor market or bilateral trade relations if not in a "good place"? It seems to be officials' favorite phrase, with European Central Bank President Christine Lagarde virtually turning it into a policy communications signal last year. 

On Monday, Fed Chair Jerome Powell said U.S. policy is in a "good place", and officials can "wait and see" how the energy and supply shocks affect both sides of the bank's dual mandate. Powell was one of the first officials to coin the phrase in January last year, a time when some might argue the economy actually was in a "good place".

* The art of the deal

Despite rising borrowing costs, heightened uncertainty and increased market volatility sparked by the Iran war, the flow of multi-billion dollar deals and M&A activity has not stopped. On Monday, Sysco said it would buy catering supplier Jetro Restaurant Depot in a $29  billion deal.

Unilever is in talks to sell its foods business to McCormick & Company in a deal that would be worth over $30 billion, and earlier this month a consortium led by BlackRock's Global Infrastructure Partners and Sweden's EQT AB bought U.S. power company AES Corp for $33.4 billion. Deals are still being done.

No borrower will escape the surge in market-based interest rates unleashed by the Middle East war and resulting energy supply shock. But for U.S. tech firms planning to spend over $600 billion this year in the artificial intelligence arms race, spiking borrowing costs could not have come at a worse time.

The AI capex surge is unprecedented. The expected $630 billion in capital expenditure from Big Tech this year, mostly on AI data centers, chips, and cloud computing, is worth more than 2% of GDP. The projected spend of more than $800 billion next year is closer to 3% of GDP. 

Big Tech historically used cash to fund expansion. And they still have lots of it: some estimates put the big five hyperscalers' combined cash and equivalent holdings at over $350 billion. That's partly why Apple and Microsoft still enjoy credit ratings higher than those of the U.S. government. 

But they're burning through it, so are needing to borrow more. 

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