Wall Street slumps on AI spending fears; oil back above US$100/bbl

Stocks on Wall Street slumped as Tesla and Alphabet’s big spending plans on artificial intelligence infrastructure cast a pall across tech companies as investors remained nervous about whether that investment would eventually pay off.

Meanwhile, oil prices surged after Houthi militants attacked two Saudi tankers in the Red Sea and US President Donald Trump threatened to step up strikes on Iran as the Middle East conflict widened.

The European Central Bank kept its key rates unchanged, with president Christine Lagarde signalling a hike was possible in September, while the rising fuel costs revived speculation the Federal Reserve might need to tighten monetary policy.

And US Trade Representative Jamieson Greer was scheduled to make an announcement on the White House’s tariff plans as the administration’s latest import levies are set to expire this week.

Familiar fears

Investor risk sentiment soured overnight, with stock markets weaker on both sides of the Atlantic as AI capital expenditure plans were back to the fore. Electric vehicle maker Tesla sank 14% in late trading after it reported negative free cash flow in the second quarter on its AI investment, while Alphabet dropped 6.8% as it raised its annual capital spending forecast to as much as US$205 billion.

Separately, Alphabet’s Google was fined €890 million for breaching the European Union’s digital rules, by giving its own services preferential treatment and preventing app developers from interacting with customers in distribution channels of their choice. Still, the regulators said Google had made good progress in trying to comply with the legislation.

Meanwhile, Texas Instruments declined despite the chipmaker’s strong sales forecast, and Paris-listed STMicroelectronics sank 19% as its outlook fell short of expectations.

Intel’s earnings after the bell are the next test for the AI trade, with the tech-heavy Nasdaq Composite sliding 2.4% in late trading. The S&P 500 was down 1.4% and the Dow Jones Industrial Average fell 1%, with Alphabet, Amazon and Salesforce leading the blue-chip index lower.

Energy woes

Surging oil prices added to the downbeat mood, with Brent crude oil futures up 6.9% at US$100.59 at 7am in Auckland as Houthi militants attacked two tankers on the Red Sea, widening the conflict in the Middle East. US President Trump said he’d hold Iran responsible for any attacks by the Houthis, and told Axios that he was close to making a decision on a major attack.

Dubai-based DP World said it would develop two new terminals on the east coast of the United Arab Emirates, expanding its logistics network and reducing the nation’s reliance on the Strait of Hormuz. Construction was expected to take 24-to-30 months.

The yield on US 10-year treasuries rose 4 basis points to 4.71% and bond traders have fully priced in a rate hike by the Fed at its September meeting. The US central bank reviews monetary policy next week.

“Risk sentiment is weaker amid escalating tensions in the Middle East, which are driving inflation fears, pushing bond yields higher, weighing on equity markets, and supporting the US dollar,” Bank of New Zealand senior markets strategist Jason Wong said in a note. “Concerns about the scale of capex in the AI sector have added to the drag on US equities.”

Across the Atlantic, the ECB kept its deposit rate at 2.25%, with president Lagarde saying the latest energy shock posed upside inflation risks, although underlying inflation was contained for now.

The UK’s FTSE 100 fell 0.7%, while Germany’s DAX and France’s CAC 40 were both down 1.6%.

Greg Boland, market strategy consultant at Moomoo, said rising oil prices and the slump on Wall Street pointed to a soft start for New Zealand’s market when trading opens.

“Attention now turns to next week's Federal Reserve decision, with markets increasingly debating whether another rate increase could be required if the oil shock persists,” he said in a note. “For now, the key question is whether the technology sell-off remains concentrated in expensive AI-related stocks or begins to broaden into the wider market.”

Australian futures are pointing to a 0.7% decline for the S&P/ASX 200 index when trading opens across the Tasman, while the kiwi dollar dropped to 57.71 US cents at 7am from 58.18 cents yesterday.

Reporting by Paul McBeth. Image from Brecht Corbeel on Unsplash.