Stocks are set to start the week in volatile fashion as a combination of stark warnings over risks around artificial intelligence and the Iran-US war shake investor confidence.
Expectations of a deliberate slowdown in the rate of AI progress due to fears of rogue models ultimately going out of control and killing off humanity have cast fresh doubt over the AI trade.
With former employees at leading AI firms and others raising the alarm over the rapid rate of progress being made, investors are weighing up whether this will genuinely undermine the investment case for AI stocks, or is an overly-alarmist rhetorical exercise which will ultimately blow over. These kind of warnings are nothing new of course, as anyone who has seen the Terminator movies can attest.
Futures prices suggest stocks will broadly sink into negative territory when US trading begins, but are not indicating a severe sell-off. Nasdaq futures are down around 1.5% and the S&P 500 is slipping 0.7%. The FTSE 100, with little direct exposure to AI, is up 0.6% to 10,720 points.
There appears no end in sight to hostilities between the US and Iran conflict, and its implications for the Strait of Hormuz. Oil has spiked well north of the $100 mark, with Brent touching $107 per barrel and WTI at $103.
Added to the mix is a Federal Reserve meeting this week, which may well result in a rate hike due to the persistent inflationary pressure the oil price is generating.
Russ Mould, investment director at AJ Bell, said: “Expectations of near-term interest rate rises can also be bad news for equity markets, as higher rates tend to put pressure on valuations.
“This is particularly true for companies whose value is heavily dependent on strong future earnings growth, rather than profits generated today. Many technology companies fall into this category, which is why tech stocks often struggle when interest rates are expected to move higher.
“Brent crude rose 2.9% to $107.62 per barrel amid ongoing fighting in the Middle East, with new strikes on ships and oil infrastructure. It adds to existing inflation fears which were stoked last week by the latest US consumer price index data remaining at elevated levels.
“Markets now expect an 87% chance of a US rate hike this week and a 49% probability of another one in December,” Mould continued.
“Also weighing on the tech sector are growing fears about AI becoming too powerful. Previously a hot investment area with investors clambering to own any stock linked to the AI boom, now it looks like AI’s strengths could backfire.
“There are growing fears that AI is advancing at an extraordinary pace and there need to be greater safeguards and controls in place.”
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Chris Beauchamp, chief market analyst at IG said: “Suddenly the headlong rush to develop AI seems to have stopped in its tracks. With both Altman and Amodei warning of the risks of uncontrolled development, the mood music appears to be shifting.
“For markets this raises the possibility of a slowdown in data centre rollout, or a throttling of demand for chips, both of which would undermine the foundations of the investment thesis in many big-name stocks.
“The news has sent a chill through markets in Asia and Nasdaq futures are lower too. This seems very much a knee-jerk reaction; AI use is still expected to explode, driving data centre construction even if the wilder experiments are rolled back, but it has hit a market already on edge ahead of the Fed decision this week.”
Anthony Willis, senior economist at Columbia Threadneedle, added: “This week will see not only the Fed meeting but also the Bank of Japan, where a 25 basis point rate hike is fully priced in by markets.
“But there has been some chatter about a larger hike, to keep on top of inflationary pressures but also to support the Japanese Yen, which continues to be particularly weak.
“US Treasury and Bank of Japan intervention has for now halted the slide in the currency but if the Bank of Japan is able to normalise rates towards the levels seen in other developed markets, the pressure should ease further.
“Whatever happens this week, the intensity around central bank policies is set to persist given that inflationary concerns are on the rise once again,” he continued. “As has been the case for some time, a resolution to the issues in the Middle East still appears to be the dividing line between a benign outcome for inflation and rates trajectories and a more sobering outlook.”
