AI Boom

AI Boom

In the last couple of months, the Artificial Intelligence perspective of the market has been magnified by the induction of agentic AI which has caused a rise in price of semiconductor and memory providers. Adding this effect, along with a concrete set of earnings for the last quarter, equates to a bullish equity narrative which chooses to ignore any geopolitical risk.

As far as the Middle East war is concerned, we are currently facing confirmation of an extension of ceasefire. The US and Iran have reached a preliminary deal to extend a ceasefire by 60 days and discuss the future of Iran’s nuclear program, pending Trump’s approval. Both counterparties seem to be negotiating in good faith as there are still a lot of unanswered questions concerning vital matters such as the fate of the Strait of Hormuz. The market expects some kind of resolution by this weekend, which hopefully will clear any short-term uncertainty and lower even further the probability of an escalation. The US equity market is pricing most of this outcome and along with the AI bias, it is becoming the best performing asset so far, away from a subsector of commodities. What remains to be seen, is if there is a playbook of “buy the rumor, sell the fact” taking place post any type of resolution. My view is that this statement has become a big consensus and there has been a lot of deleveraging the last month, so I am not convinced we get a correction, ceteris paribus. In other words, the pain in trade is for this strength to continue as investors both on the institutional and retail side become even less invested. According to market data, there are over 7.75 trillion assets sitting on money market funds, a number which has been increasingly higher in the last 2 years. If I also consider the wealth effect given the equity run, by default as time passes someone becomes under invested, if more cash stays sidelined.

On the data side, we have seen inflation figures coming slightly lower than expected but still higher versus the beginning of the year. Fears about prolonged inflation issues have started to abate with more central bankers trying to manage inflation expectations. On the ECB side, there is a 91.8% probability of a 25bps hike on the 11^th of June. The market is still pricing 55bps of hikes by year end. (see below table)

In terms of market moves, US equity markets are trading 1.5-2.5% higher WoW with European equivalent indices underperforming, 0.5-1% higher on the week. On the rates side, we have seen a 10-15bps move tighter as inflation fears have started to alleviate given the positive momentum we are seeing on the geopolitical side. Moreover, gold is unchanged with crude oil suffering an 10% drawdown week to date, as the prospect of reopening the Strait of Hormuz has become more imminent. EURUSD keeps trading in a tight range around the 1.165-1.175 context.

Looking ahead…
Obviously this weekend will be key in terms of geopolitical risk as the market awaits a firm answer in terms of what President Trump thinks of the preliminary agreement. Moreover, the market is keen to see the exact details of the draft agreement as there are still unsolved matters which may derail this risk on mood. In the next couple of weeks, we will see even further data on the inflation side, which will provide a good setup for the central bank meetings. It will be very interesting to see the language used by Kevin Warsh, the new FED chair, as the market wants to understand the committee’s forward views on the rate cycle. Have a good weekend.

Written by: Michael Konstantinou, Senior Portfolio Manager