S&P 500 Pauses as AI Spending Doubts Weigh on Markets

Summary

The S&P 500 was set for a cautious open after a record quarter, as investors questioned whether AI-related spending can be sustained following reports that Meta may sell excess AI computing capacity. The FTSE 100 was expected to open little changed, while Asian markets declined, led by sharp losses in South Korean chipmakers that also weighed on Japan's Nikkei. The US dollar remained firm, keeping the yen near a four-decade low despite stronger intervention warnings from Japanese officials. Oil fell to another four-month low, easing inflation concerns and reducing expectations of further ECB rate hikes.

Equities

The FTSE 100 closed 0.2% lower on Wednesday as renewed uncertainty over US-Iran negotiations weighed on investor sentiment. The FTSE 250 outperformed, rising 1.4% to a one-week high and extending its strong run after recording its biggest quarterly gain in five quarters. UK manufacturing data also showed activity slowed in June, although stockpiling ahead of expected price increases and supply chain concerns continued to provide some support.

Healthcare stocks led the decline in London trading. AstraZeneca closed 1.7% lower and GSK fell 2.5%, while weaker oil prices pushed BP and Shell down by more than 2% each. National Grid also closed 3% lower after announcing a $1.75 billion investment for a 35% stake in US energy platform Joulent, which is developing power infrastructure for data centres.

Defence companies continued to attract buyers after Prime Minister Keir Starmer pledged an additional £15 billion of defence spending earlier in the week. BAE Systems, Rolls-Royce and Babcock closed between 1.1% and 5.2% higher on Wednesday. Consumer stocks were weaker, with Primark owner Associated British Foods falling 3.1% after warning annual profit would come in below last year's level, while Greggs lost 3% after announcing long-serving chief financial officer Richard Hutton would step down.

US markets also finished lower on Wednesday, although losses were relatively modest after a strong second quarter. The S&P 500 closed 0.2% lower, the Nasdaq fell 0.7% and the Dow Jones Industrial Average edged down 0.03%, with semiconductor shares dragging on the broader market ahead of Thursday's closely watched US employment report.

Technology stocks remained under pressure, with the semiconductor index dropping 6.3%. However, Meta Platforms closed 8.8% higher after reports that it is developing a cloud computing business that would sell excess artificial intelligence computing capacity to external customers.

Alcoa shares finished 8.9% lower after Australia's South32 agreed to sell most of its aluminium assets to the company. Investors also reacted to comments from Federal Reserve Chair Kevin Warsh, who said inflation risks had eased but reiterated his commitment to the central bank's 2% inflation target, signalling that interest rates would remain driven by economic data rather than political pressure.

Forex & Commodities

The US dollar held steady early on Thursday as investors waited for the latest US nonfarm payrolls data. The dollar index eased slightly to 101.3, while the euro traded at $1.135 and sterling rose to $1.329 against the dollar.

The Japanese yen firmed to 162.2 per dollar early on Thursday, after falling overnight to a 40-year low of 162.8. Traders remain alert to possible Japanese intervention, particularly with thinner liquidity expected around Friday’s US public holiday. Japanese officials are also shifting away from signalling specific intervention levels, aiming instead to keep speculative yen sellers guessing.

The US payrolls report is expected to show 110,000 jobs were added in June, with unemployment steady at 4.3%. Softer private payroll figures earlier in the week showed employment rising by 98,000, below expectations of 118,000. Federal Reserve Chair Kevin Warsh said inflation expectations and price risks had eased recently, while repeating that the Fed remains committed to its 2% inflation target.

Gold rose early on Thursday, supported by weaker US jobs data and lower oil prices. Spot gold climbed 0.9% to $4,066 an ounce, after rebounding from a more than seven-month low to close higher at $4,030 on Wednesday. Silver rose to $60.20, platinum gained to $1,613 and palladium increased to $1,228.

Oil fell for a third straight day early on Thursday after Qatar said US-Iran talks in Doha had made progress on issues linked to the Strait of Hormuz, although no lasting peace agreement was reached. Brent crude dropped 1.1% to $70.80 a barrel, while US WTI fell 1.2% to $67.74. Both benchmarks had fallen more than 1% on Wednesday to four-month lows.