Global markets experienced considerable volatility last week as the outcome of the US midterm elections added a fresh layer of uncertainty to an already challenging backdrop. Investors were forced to weigh a range of competing considerations, from the potential implications for geopolitical tensions to what a more interventionist regulatory approach towards the artificial intelligence (AI) industry might mean for future growth expectations. While markets initially responded positively to the Democrats securing control of both the House of Representatives and Senate, that optimism proved short-lived as selling pressure intensified across the technology sector.
Much of the weakness was concentrated within businesses most closely associated with the AI build-out. Concerns around the pace of data centre expansion and the future outlook for AI-related capital expenditure weighed heavily on sentiment, with semiconductor stocks bearing the brunt of the decline. The technology-heavy Nasdaq fell -3.4% (in dollar terms), while the broader S&P 500 declined -2.7%. The move was not confined to the US. In Japan, the Nikkei 225 dropped -9.5% (in yen terms), reflecting its significant exposure to semiconductor manufacturers and other AI-linked businesses. The decline pushed the index into bear market territory, leaving it more than -20.0% below the record high reached in June and highlighting the extent to which investor sentiment towards the AI theme has deteriorated in recent weeks.
With risk appetite deteriorating, investors rotated back into more defensive areas of the market, prompting a strong rally in government bonds. Treasury yields moved lower across the curve (bond yields move inversely to prices), with similar moves seen in Japan as investors sought the relative safety of fixed income assets. Returning to equities, European markets proved comparatively resilient. The MSCI Europe ex UK Index gained +0.5% (in euro terms), while the FTSE 100 slipped just -0.5%. The region's relatively limited exposure to the AI value chain worked in its favour, with banks, defensive sectors and other value-orientated areas generally outperforming.
One market that managed to buck the broader weakness in technology was China. The Shanghai Composite rose +1.4% (in renminbi terms), outperforming most major global indices despite ongoing challenges within the technology sector. It is worth remembering, however, that many Chinese AI and semiconductor-related companies have already endured a prolonged period of weakness. As a result, the Shanghai Composite remains down more than -8.0% year-to-date, a stark contrast to many other major equity markets which, despite recent volatility, remain comfortably in positive territory for the year.
Macro Data
| Country | Indicator | Period | Actual | Forecast | Previous |
|---|---|---|---|---|---|
| UK | Bank of England Monetary Policy Committee Meeting | November | – | – | – |
| Final Composite Purchasing Manager Index | October | 52.90 | 53.10 | 53.10 | |
| US | Average Wages YoY | October | 3.10% | 2.90% | 3.00% |
| Final Composite Purchasing Manager Index | October | 55.90 | – | 57.60 | |
| Non-Farm Payrolls | October | 165K | 65K | 29K | |
| Unemployment Rate | October | 4.10% | 4.20% | 4.20% | |
| Europe | Final Composite Purchasing Manager Index | October | 51.70 | 51.90 | 51.90 |
| Flash Consumer Price Index Inflation YoY | October | 4.00% | 4.00% | 3.80% | |
| Producer Price Index Inflation YoY | September | 11.10% | 10.90% | 8.20% | |
| Retail Sales YoY | September | 0.40% | 0.60% | 0.80% | |
| Japan | Final Composite Purchasing Manager Index | October | 52.10 | – | 52.30 |
| China | Caixin Manufacturing Purchasing Manager Index | October | 52.00 | 51.60 | 52.10 |
| Caixin Services Purchasing Manager Index | October | 50.80 | – | 50.80 | |
| Source: Refinitiv Workspace | |||||