The big investment news was the volatility and downturn in tech led by SpaceX, closely followed by the sharply lower oil price. In the UK, most financial markets shrugged in spite of entrenched political uncertainty.
Let’s get the UK out of the way first.
Despite the rolling uncertainty, there has been little significant change across UK financial markets. As Rachel Reeves was the single biggest factor in the downward slide of Keir Starmer, the choice of the next Chancellor will be fascinating.
It would have been interesting if Al Carns challenged for the leadership. He is an impressive individual but relatively unknown to the general public. He would likely make Andy Burnham look stupid and lightweight in a leadership election. If Burnham has any sense he will already have offered him a decent ministerial post – keep your enemies close.
The FTSE 100 was up 1.2%, beating the US, again. After a bit of a wobble in the last couple of months, the view is again taking hold that UK inflation is under control, and there is clear scope to cut interest rates, in contrast to much of the developed world.
Most other world stock markets were down by 0.5%-1% over the week. Exceptions were Brazil and Japan up 2%, with Japan being particularly volatile, up and down 4% from one day to the next.
This picture of relative calm has been encouraged by the oil price being back to where it was before the Strait Of Hormuz was closed. This might be a tad optimistic with the Netanyahu joker card still in play, but Trump knows he is in very big trouble if he doesn’t sort out this mess of his making. On this we must all cheer him on.
Along with the oil price, gold has also slipped lower, with some funds down 10% over the week. Yet again this coincided with the dollar rising, as anticipated. The dollar looks set to rise further – not a huge amount, but enough to keep the gold price under pressure.
Back on 5th June I explained why we had taken substantial profits in funds heavily invested into Korea. “It will end in tears for many. But nobody knows when.” This week we got a glimpse of that end, with their stock market down 10% in one day.
The trigger was the beginning of a re-think on AI in general, on which the Korean market is heavily dependent, and the SpaceX valuation in particular. The latter shares have fallen 35% from their peak, and are back to where they started with their share launch (IPO). In 3 days they lost $600 billion in value – that value destruction is equivalent to nuking the whole of Norway or Thailand.
The backlash against AI is multi-facetted, raising investor uncertainty and societal fear.
AI anxiety is no longer just about expensive technology stocks. It is becoming a wider social concern. The central fear is that AI’s gains will be captured by a small number of companies, while the costs (e.g. job insecurity, surveillance, energy use) are carried by everyone else.
The jobs issue is broader than unemployment. Even where AI helps productivity, workers may feel monitored, deskilled or replaceable. That is powerful stuff, and will feed even more political agitation and rabble rousers who will seek to exploit it, on the right and left.
Regulation pulls in opposite directions. One instinct is to slow AI down, to protect jobs and safeguard privacy. The other is limit regulation to allow national champions to evolve. This tension makes national and global regulation difficult, because AI is simultaneously a consumer issue, labour issue, security issue, trade issue and defence issue.
On investment implications, the main AI players cannot all succeed because they are chasing the same prize, to be the dominant global player. The implication is that there will be some huge losers, which will put a bomb under the US stock market in particular, but also some Asian markets, as you saw earlier.
Several players are also cannibalising their own businesses and have no real choice but to do so. Answers from Google’s AI reduces clicks on adverts – revenue from such adverts is more than half the turnover of Google’s parent, Alphabet. The alternative is ceding AI search to rivals, which ends worse. Amazon, Microsoft and Google benefit from cloud demand, yet AI infrastructure is expensive to build and may compress margins. Meta’s open-source strategy may help adoption but reduce scarcity.
The financial issue is whether prospective revenues can justify today’s vast spending. If customers like AI but resist paying enough for it, today’s capital expenditure could become difficult to earn back.
China intensifies the pressure. DeepSeek and other Chinese models suggest that “good enough” AI may be delivered far more cheaply than Western frontier models. If lower-cost models work for many tasks, premium pricing becomes harder to defend, expensive Western infrastructure plans look vulnerable, and the investment bubble bursts.
Finally, the real winners may not yet be obvious. The bubble-like risk is that too many companies are spending as if they will become the global champion – by necessity, most must therefore fail. The nature of AI is that a new champion could appear from almost nowhere.
Next week I must consider the contribution of the recently departed Alan Greenspan to the crazy US bubble which now appears close to bursting.