Stocks slump as AI rout resumes, supporting havens - Newsquawk US Market Wrap

MARKET WRAP

Stocks slumped on Thursday amid a broad risk-off environment, with the Nasdaq falling over 6% as AI-related chip, memory and neocloud names tumbled to multi-month lows. The sell-off appeared to reflect fears of an AI slowdown following the Democratic sweep in the midterms, adding to existing concerns surrounding AI spending and funding. Meanwhile, Qualcomm (QCOM) earnings disappointed following weak smartphone chip sales. There was also considerable chatter regarding potential hedge fund liquidations, with unverified social media reports suggesting significant losses across several hedge fund trading pods.

Treasuries rallied across the curve, particularly at the front end, resulting in bull steepening amid flight-to-quality demand. Fed commentary had little impact despite Hammack reiterating the need for restrictive policy and Barkin advocating gradual rate adjustments. There was further corporate issuance, with Apple (AAPL) looking to raise USD 7bln in a seven-part deal, which attracted USD 31bln of demand.

Crude prices settled firmer, recovering some of Wednesday's sharp losses amid mixed reporting on geopolitics. Israel's N12 reported a high probability of renewed war, while IRIB, citing the IRGC, reported that further oil tankers had struck mines near the Strait of Hormuz. However, the NYT reported that Iran was reviewing concrete nuclear proposals, while Reuters reported that Tehran had submitted a proposal through Qatar but would only discuss it once Washington met its seven demands.

In FX, the dollar was broadly firmer, while the Yen outperformed on haven demand and the risk-sensitive Aussie lagged. GBP briefly strengthened after the BoE hiked rates by 25bps as expected, with all members supporting a hike but Mann favouring 50bps. MXN was briefly pressured by a surprise rate cut, although policymakers signalled a pause ahead. Gold was choppy but ultimately finished firmer, while silver dropped.

Attention turns to Friday's US NFP report after mixed labour indicators. Revelio Labs' employment estimate slowed to 26k from 67k, while the Chicago Fed Unemployment Rate indicator eased to 4.14% from 4.18%. Initial Jobless Claims declined to 189k, although Continuing Claims rose slightly more than expected, suggesting layoffs remain contained despite signs of softer hiring. Productivity data beat expectations, while unit labour costs saw a surprise decline.

DATA

JOBLESS CLAIMS: Initial jobless claims (w/e Oct 31st) dipped to 189k from 195k, below the expected 196k, remaining under the 200k mark and continuing to highlight the low-hire, low-fire economy; this meant the 4-week average ticked marginally lower to 194.75k from 196.75k. Continuing claims (w/e Oct 24th) rose to 1.718mln from 1.701mln, marginally above the forecasted 1.710mln. For the headline, the unadjusted figure was 177k, -1.6% W/W, with seasonal factors having expected a 0.7% fall. Looking at the breakdown of the unadjusted numbers, the largest decreases came in Texas (-1,765), New York (-1,203) and Florida (-680), with the greatest rises in Oregon (+798), Illinois (+791) and California (+645).

FIXED INCOME

T-NOTE FUTURES (Z6) SETTLED 14+ TICKS HIGHER AT 107-10+

Yields were lower across the curve on Thursday, particularly at the front end, leading to a bull steepening. At settlement, 2-year -11.9bps at 4.464%, 3-year -10.3bps at 4.531%, 5-year -8.1bps at 4.603%, 7-year -7.3bps at 4.700%, 10-year -5.7bps at 4.833%, 20-year -2.1bps at 5.278%, 30-year -2.2bps at 5.254%.

THE DAY: The move was predominantly driven by a flight-to-quality trade amid the bearish risk environment, with equities slumping and the Nasdaq falling as much as 6% at one point. Many AI-related chip, memory and neocloud stocks plummeted to multi-month lows, seemingly driven by fears of an AI slowdown amid the recent Democratic sweep in the midterm elections, adding to existing concerns surrounding AI spending and funding. There has also been considerable chatter across social media and in market commentary about potential fund liquidations given the magnitude of the equity sell-off. Reports noted that hedge fund Walleye is to return part of its capital to investors, according to a client letter, while Bloomberg reported that Greg Coffey's hedge fund suffered its worst-ever month, breaking its previous streak, although this was reportedly driven by the Brazil election. Meanwhile, the X account @SpecialSitsNews claimed to be hearing of several hedge fund pods suffering significant losses, including two credit pods at Millennium earlier in the week and numerous equity pods, although these claims remain unverified.

Elsewhere, oil prices climbed, paring some of the extreme losses seen on Wednesday, amid vague reports from N12 and Sabereen News suggesting a high probability of renewed conflict with Iran and potential US military strikes on targets in the country. However, much of the upside likely reflected a reversal of Wednesday's sharp sell-off.

Fed's Hammack spoke for the first time since her dissent, noting that gradual rate hikes are less disruptive to the economy and financial system, but stressing that policy needs to move to restrictive levels. Barkin stated that the policy path is straightforward, but the issue now is the pace, noting that a gradual approach makes sense. He also described rates as somewhere around neutral. Neither set of Fed remarks had much impact on Treasuries, with the main driver of price action being FTQ demand amid the weakness in equities.

The BoE hiked rates by 25bps, as expected, but with hawkish elements. The vote split was 8-1, with all members voting to hike, although Mann opted for a larger 50bps increase. Bailey also said further hikes are likely if the Iran war does not come to an end, although he stressed that the decision should not be seen as the first in an inevitable long sequence of increases.

Attention turns to Friday's NFP report. Thursday's labour metrics saw a slowdown in job growth in the Revelio Labs NFP estimate to 26k from 67k, while the Chicago Fed Unemployment Rate indicator eased slightly to 4.14% from 4.18%. Challenger job cuts were little changed M/M but recorded their lowest October reading since 2023. Initial Jobless Claims declined further to 189k from 195k, below the 196k forecast, although Continuing Claims rose slightly more than expected.

Supply

Notes/Bonds

• US to sell USD 100bln of 6-wk bills, USD 95bln of 13-wk bills and USD 82bln of 26-wk bills on November 9th; all to settle on November 12th
• US to sell USD 58bln of 3-year notes on November 9th, USD 42bln of 10-year notes on November 10th and USD 25bln of 30-year bonds on November 12th.

Bills

• US sells 4-week bills at a high rate of 3.890%; B/C 2.46; sells 8-week bills at a high rate of 3.975%; B/C 2.68

STIRS / OPERATIONS

• Fed Hike Pricing via CME FedWatch: Dec 16.9bps (prev. 20.3bps), Mar 29.1bps (prev. 40.8bps).
• EFFR at 3.88% (prev. 3.88%), volumes at USD 115bln (prev. USD 113bln) on November 4th
• SOFR at 3.94% (prev. 3.97%), volumes at USD 3.207tln (prev. USD 3.26tln) on November 4th
• NY Fed RRP op demand at 0.23bln (prev. 0.43bln) across 1 counterparty (prev. 3) on November 4th

CRUDE

WTI (Z6) SETTLED USD 2.40 HIGHER AT 90.52/BBL; BRENT (F7) SETTLED USD 3.67 HIGHER AT USD 98.29/BBL

The crude complex settled firmer on Thursday, paring some of the sharp downside seen on Wednesday. Crude remains notably lower on the week given the reduced likelihood of a prolonged US/Iran war following the Democratic sweep in the midterms. However, some reports suggest further military action from US President Trump cannot be ruled out. The crude complex saw gains in the early part of the US session as N12 reported that senior US officials see a high probability of war with Iran. It is worth noting that this came from an Israeli news source, while commentary from the US side has been more constructive this week. Nonetheless, CNN reported that the risk of renewed war with Iran has eased following the Republicans' midterm defeat, although escalation remains probable, according to a regional source. Meanwhile, the NYT reported that Iran is reviewing concrete proposals regarding its nuclear programme, although this was later disputed by Iranian journalist Mohammad Ghaderi. Further upside was seen on reports from IRIB, citing the IRGC, that two more oil tankers had struck naval mines east of the Strait of Hormuz and caught fire, following reports that another two tankers had hit mines in the Strait overnight.

EQUITIES

CLOSES: SPX -4.32% at 7,356, NDX -6.36% at 26,630, DJI -3.44% at 51,521, RUT -4.48% at 2,729

SECTORS: Technology -7.3%, Industrials -4.12%, Consumer discretionary -3.74%, Energy -2.81%, Financials -2.74%, Materials -2.69%, Health -2.5%, Communication services -1.86%, Real estate -1.82%, Utilities -0.71%, Consumer staples -0.67%.

EUROPEAN CLOSES: Euro Stoxx 50 -0.29% at 6,248, Dax 40 -0.41% at 26,330, FTSE 100 -0.43% at 10,783, CAC 40 +0.34% at 8,205, FTSE MIB -1.03% at 50,506, IBEX 35 +0.41% at 19,451, PSI +0.98% at 9,483, SMI -0.37% at 14,968, AEX -0.62% at 1,129

STOCK SPECIFICS:

• Qualcomm (QCOM): Weak smartphone chip sales, driven by sluggish handset demand.
• Arm Holdings (ARM): Royalty rev. light, partly pressured by memory-related smartphone market weakness.
• Coherent (COHR): Quarterly profit missed.
• Sony Group (SONY): Results impressed & lifted FY op. profit view.
• Micron Technology (MU): Suspended construction of planned $4.5bln memory chip facility in Taoyuan, Taiwan.
• Nvidia (NVDA): c. 600k H200 AI chips accumulated in Hong Kong await shipment to mainland China.
• Snap (SNAP): Rev. & DAUs missed.
• AppLovin (APP): Headline metrics topped as did next Q guidance & expanded share buyback prog.
• Tapestry (TPR): EPS, rev. & op. income beat.
• Rockwell Automation (ROK): Top line fell short of Wall St. exp.
• Cigna Group (CI): Strong Q metrics & FY EPS view.
• Amcor (AMCR): Profit light & cut FY outlook.
• Zillow Group (Z): Headline metrics short & CEO noted one of the most challenging housing environments in a generation.
• Microsoft (MSFT) spent $5bln less on Q3 capex than projected due to delays in 3rd party data centre capacity, incl. facilities operated by IREN (IREN).
• Microsoft (MSFT) will reportedly not expand Texas data centre deal with UK's Nscale.
• Bloomberg reported that an unknown seller is looking to offload USD 500mln in data centre loans.
• Apple (AAPL) attracts USD 31bln of orders for its high-grade bond sale (sought USD 7bln), Bloomberg reports.
• Hedge Fund Walleye to return part of its capital, according to a client letter.
• SpaceX’s (SPCX) 5yr CDS widen to a new peak, up 24.5bps to 286.56bps, according to Markit data.
• Engineers Gate lays off most of Synthesis’ equities team.

FX

USD was broadly firmer, supported by its haven nature alongside a bid in bonds as AI fears reached new heights, spilling into a broad sell-off across sectors. AI profitability concerns have persisted despite the initial midterm relief rally, as markets continue to weigh how far newly elected Democratic officials will go in slowing or pausing the AI data centre build-out. Despite the lower yield environment, the equity weakness extended across the international space, allowing the USD to find support amid the global risk-off. Elsewhere, claims data was little changed W/W, showing a continued low-hire, low-fire labour environment, while Q3 Nonfarm Productivity rose 3.6% (exp. 2.8%). From the Fed, Hammack discussed her hawkish dissent (in favour of a hike) at the last meeting, reiterating that inflation is moving in the wrong direction and arguing that policy needs to become restrictive in a gradual manner. Friday's NFP report is expected to show employment growth of 65k, accelerating from September's 29k, with the unemployment rate forecast to remain at 4.2%.

The BoE delivered a 25bps hike to 4.00%, with the vote a unanimous 9-0 in favour of tightening (exp. 7-2) and Mann pushing for a larger 50bps move. Cable briefly jumped to around 1.3480 on the announcement, but the gains faded after Governor Bailey cautioned that the hike does not necessarily mark the beginning of a tightening cycle, although he did suggest another hike is likely if the US/Iran war does not subside. GBP/USD ultimately ended marginally lower. EUR/GBP is slightly firmer at pixel time.

JPY was the preferred haven in today's AI sell-off, with USD/JPY falling below 158.00 to lows of 157.54 amid a supportive lower US yield backdrop. Japanese PM Takaichi said she will continue to cooperate with US President Trump to strengthen US-Japan ties.

AUD was the worst performer in G10 FX as souring risk appetite weighed on the high-beta currency. Meanwhile, EUR/NOK was little changed after the Norges Bank held rates as expected. The central bank noted that "it will likely be necessary to keep the policy rate elevated for a time, and we are prepared to raise the policy rate if needed".

MXN saw brief pressure in response to the Banxico rate decision, given the surprise 25bps cut to 6.25% despite expectations for a hold. There were two dissenters, where Borja and Heath voted to maintain rates. The MXN weakness pared swiftly however as the guidance implies rates on hold for the foreseeable future. "The Governing Board considers that maintaining the reference rate at the attained level for an extended period will support the convergence of inflation to its target and will be adequate to face the challenges posed by the external macroeconomic environment."