European shares pull back sharply after AI-induced rally; dollar gains
TOKYO & LONDON :European stock markets slipped on Tuesday as traders paused for breath after the recent tech-fuelled rally that sent markets to fresh record highs, while risk-off sentiment lifted the dollar to a three-month peak.
The pan-European STOXX 600 fell 1.6 per cent, with Asian shares also tumbling from all-time highs as investors booked profits following strong tech-led gains over recent weeks.
Overnight, a surge in U.S. tech shares had initially buoyed both the U.S. S&P 500 and Nasdaq, but futures last pointed sharply lower on Tuesday, down 1.2 per cent and 1.5 per cent respectively.
SIGNS OF AI CAUTION
Michael Brown, senior research strategist at Pepperstone, said some market participants saw a slide in Palantir shares post-earnings as indicative of a greater degree of scepticism over the AI theme.
"I'm not entirely sure I buy into that, but that's the story that's going round," said Brown.
He also pointed to technical factors on the S&P 500 that could have exacerbated selling pressures.
"Ultimately I think this is a pause in the broader rally, rather than the tide sort of definitively turning against the bulls," he said.
Palantir Technologies fell almost 6 per cent in early Frankfurt trading on Tuesday after earnings released on Monday.
The stock trades at an eye-watering 12-month-forward price-to-earnings ratio of 246.2, compared with Wall Street darling Nvidia's NVDA.O 33.3, according to LSEG data.
The catalyst for the latest leg up in stocks was Amazon's $38 billion cloud services deal with ChatGPT creator OpenAI.
"People are turning cautious about these circular transactions around AI, with Nvidia at the centre of everything," said Tony Sycamore, an analyst at IG.
"It's concern about all the capex that's been spent, without knowing where the revenue is going to come from."
UK, U.S. ECONOMIES IN FOCUS
Britain was in focus after a speech from British finance minister Rachel Reeves that paved the way for broad tax rises, weighing on UK gilts.
Broader sentiment was also weighed down by weakness in U.S. economic data, while a divergence in views from Federal Reserve officials clouded the outlook for a December interest rate cut.
The U.S. dollar rose to a nearly nine-month peak versus the yen, as well as a three-month high against the euro.
The U.S. dollar was supported by reduced bets for near-term Fed easing, edging up to 154.8 yen for the first time since February 13, and to $1.149 per euro for the first time since August 1.
The U.S. dollar index, which measures the currency against the euro, yen and four other peers, topped 100 for the first time in three months.
However, those advances evaporated as traders bought the yen and euro for their haven appeal as stock markets slid.
The polarised views on policy among Fed officials have also become a source of worry for the market, particularly with official economic data still suspended due to the federal government shutdown, leaving investors groping in the dark for clues on U.S. economic health.
Accounts from manufacturers in the private Institute for Supply Management survey on Monday painted a dire picture of the factory sector, showing U.S. manufacturing contracted for an eighth straight month in October as new orders remained subdued.
Fed Governor Stephen Miran on Monday restated the case for deep rate cuts, while Chicago Fed President Austan Goolsbee said he was leery of further reductions while inflation remained significantly above the central bank's 2 per cent target.
The Fed lowered rates last week but Chair Jerome Powell suggested that might have been the last cut of the year.
Traders are now pricing in a 67.3 per cent chance of a rate cut in December, compared with 90.5 per cent a week earlier, CME FedWatch showed.
Gold failed to benefit from haven flows, as it continued to find its footing following a sharp retreat from a record high in mid-September. Bullion was last down 0.2 per cent at around $3,995 per ounce.
Crude oil prices slipped as markets read OPEC+'s decision to pause output hikes in the first quarter as a signal of oversupply in the market.
Brent crude futures edged down 1.4 per cent to $64.01 a barrel and U.S. West Texas Intermediate crude was off 1.5 per cent at $60.14 a barrel.
