The Overnight Report: AI-phoria Now AI-phobia

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This story features NIB HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: NHF
The company is included in ASX200, ASX300 and ALL-ORDS

As the AI-disrupion whack-a-mole trade rolled on, Nasdaq led US markets lower with broad based selling across all indices, as well as precious metals and crypto markets.

After another positive day on the ASX200 yesterday, futures are pointing to a down day for the final session of the week.

Good Morning,

The Australian market rose for a second straight session on Thursday, trading near record highs, before some weakness moved in.

The ASX200 closed up 28 points or 0.3% to 9044 at the close. Only four of eleven sectors advanced, led by utilities and strong gains in banks, with tech and healthcare lagging.

Results released this morning include Cochlear ((COH)) missing forecasts and Westpac ((WBC)) continuing the positive trend started by CommBank and ANZ Bank.

As far as AI-phobia is concerned, overnight the global whack-a-mole was targeting transport and logistics which might have a bearing on WiseTech Global ((WTC)) and Brambles ((BXB)) locally.

https://fnarena.com/index.php/reporting_season/

What happened overnight, NAB Markets Today extract

The US technology had driven a broader decline in major equity indices with networking company Cisco  down -12% and selling of potential AI-disruption rotating to commercial real estate stocks.

Data flow saw US initial jobless claims fall by -5k to 227k last week, a slightly smaller fall than expected. The data confirm a genuine pick up in the last four weeks, but from what looked to be artificially depressed levels in prior weeks.

This does cast a little more doubt on the veracity of strong January payroll gain reported on Wednesday. Overall, though, this still looks like a low-hire, low-fire US labour market.

US Existing home sales fell -8.4% m/m in January, much weaker than the 4.6% consensus expectation, although forewarned by the -9.3% plunge in pending sales previously reported for December. A cold winter snap was a likely factor in dragging sales lower, and the large fall went against the flat trend in mortgage rates, so most are not reading too much into the data at this stage.

UK GDP rose 0.1% q/q in Q4, below the 0.2% expected. Weaker business investment (-2.7% q/q against -0.5% expected) and a bigger than expected drag from net exports drove the forecast miss, with private consumption up 0.2% as expected. Sterling temporarily fell following the data but overall, there has been little market reaction, implied odds on a March -25bps BoE rate cut lifting to 73% from 70%.

Yesterday afternoon’s speech by RBA chief economist Sarah Hunter titled ‘Defining Full Employment and its Intertwined Relationship with Inflation’ expanded on the labour market assessment described in this month’s SoMP.

In the speech Hunter’s assessment is that “Overall, our judgement is that the labour market remains a bit tight” but that “The most recent data from the last 3–6 months suggests that conditions in the labour market have stabilised”.

The conclusion here is the RBA do not see recent elevated inflation as inconsistent with labour market tightness and other indicators in the economy – as such downplaying the significance of temporary or transitory factors (viz “our full employment and inflation objectives are entwined, and the data is painting a complementary picture with a bit too much pressure on both sides”).

Hunter, as her boss preceding her last week and again at Senate Estimates yesterday, offers nothing by way of forward guidance on monetary policy, though nothing being said by either of them –-or deputy Governor Hauser on Wednesday-– pushes back against the notion of the need for more tightening, and as implied by the SoMP forecasts contingent on policy following the market implied path.

In markets, weakness in all major US equity indices masks some significantly different performances across sectors, with IT leading the charge lower but, within the S&P500, the defense health care, real estate, consumer staples and utilities all showing good gains such that an equal waiting S&P500 index is slightly higher heading into the close.

US index weakness weighed on European stocks in their afternoon, to finish down, but only after many markets earlier reached new intra-day record highs, including the EuroStoxx 600, FTSE100, MSCI Asia Pacific and Japan’s Topix.

In Treasuries, the yield curve has bull-flattened, with 2s down about 5bps, 10s 7bps and the 30-year -8bps, the latter falling from 4.77% to 4.73% following a well received 30-year auction which cleared 2bps through its when-issued yield.

Earlier European 10-year benchmarks ending down slightly in yield terms, gilts by 2.4bps post UK GDP numbers and Bunds -1.3bp.

Sell the “Dead Cat” Bounce, The Bear Market Risks Are Rising, Damir Tokic, Seeking Alpha extract

 (Commodity Trading Adviser (CTA), member of National Futures Association. Professor of Finance, research on Global-macro issues)

Here is what’s going on: hedge funds have been making massive short bets against tech, specifically against the software stocks.

In fact, Bloomberg reports Goldman Sachs data shows this is the record short bet against tech by hedge funds.

Last week’s notional shorting of single stocks reached the highest level since 2016. The bank’s prime brokerage team said short sales outpaced purchases by roughly two-to-one from January 30 to February 5.

This is a fundamentally based trade. Software stocks are viewed as major collateral damage from the AI advancement, and this “AI disruption” theme has a long duration, meaning the selloff will likely continue.

In a sense, the selloff in software stocks is a part of the broader AI bubble burst theme. 

Currently, investors are picking the winners and the losers, and it seems like there will be lots of losers in the tech sectors, and we can’t tell yet who the winner will be. 

Is Alphabet (GOOG) the winner? If yes, “the winner” needs to issue century bonds to “finance the victory” – and that’s not a good sign.

The point is the AI bubble burst is likely unfolding, and hedge funds are betting accordingly.

Why the bounce? The bounce was likely a short-covering rally, given the massive short positions.

Note the action in iShares Expanded Tech-Software Sector ETF (IGV): massive volume at the selloff bottom last week and then a bounce also on heavy volume. 

The short-covering bounce was likely triggered by an upgrade in Oracle (ORCL), and Oracle is the third-largest holding of IGV, almost 8% of the weight.

Thus, it seems like the technical bounce to the resistance was a “dead cat” bounce, meaning a short-covering rally, likely to end soon as the fundamentally driven selloff continues.

The fundamentals, the AI adoption, is actually negative for the economy and the tech sector.

-AI adoption is the disruptor to many tech sectors, and currently this is unfolding in the software sector.
-AI adoption is negative for the labour market, and it could cause a recession due to the related job losses.

Some would argue that AI adoption is positive for productivity, and this could be partially true. However, in aggregate, the negatives are likely to well outweigh the possible positives.

There is apparently a rotation from tech to cyclicals. Meaning, investors are selling tech but buying stocks in cyclical industries, mainly represented in the Dow Jones Industrial Average (DIA). So, the Dow Jones just crossed the 50,000 mark, and it’s at all-time highs.

The truth is the Dow Jones is a price-weighted index consisting of 30 stocks, where only a handful of stocks affect the index, and only two stocks account for 20% of the index, Goldman Sachs (GS) and Caterpillar (CAT).

The Caterpillar share price chart is up 30% year-to-date and 105% over the last 12 months. Caterpillar is trading at a P/E ratio near 40, with revenue growing 4.2% over the last 12 months. I would say this is a bubble.

Note, other Dow stocks like Sherwin-Williams (SHW) also trade at bubble-like valuations. SHW has a P/E of 35 with revenue growth of 2% over last year.

The Goldman Sachs share price chart is up by 45% over the last 12 months and 7% year-to-date. It’s difficult to value financials based on P/E ratios, but technically, the chart looks like a bubble.

The rotation into cyclicals like the Dow Jones and economically sensitive small caps (IWM) would make sense if economic growth improves and, thus, the rally broadens from the narrowly driven AI trade to a broader cyclical trade.

Obviously, the cyclical rotation would offset the effects of a gradual AI bubble burst, which is what has been happening over the last few months.

However, if economic growth falters, the cyclical trade will likely fall apart, and the AI bubble burst will likely accelerate. This would be a recessionary bear market with the bubble burst and a -50%-plus drawdown comparable to the 2000 and 2008 bear markets.

It looks like economic growth is faltering, and thus the risk of a recession is rising.

First, the recent data shows the labour market has been weakening. However, GDP growth has been reported as solid, partially due to the still-strong consumption.

So, this is the conundrum. How can consumption remain strong in a weakening labour market? Explanation: the wealth effect. People who invested in stocks and real estate are still consuming.

Yet the most recent data shows that consumption is not as strong as expected, in fact consumption is turning negative. Specifically, retail sales for December (that’s during the holidays) were unchanged at 0%, while the control group used to compute GDP is actually negative at -0.1%.

What’s going on? First, the housing market is slowing. Second, the Nasdaq100 and the S&P500 (SPY) have been flat over the last four months. It means the wealth effect is already slowing and possibly reversing, thus even the “paper” rich are feeling less confident.

Thus, the risk of an imminent recession is increasing. Whether the BBB tax refunds will delay the recession remains to be seen.

In my opinion, the recent selloff in the tech stocks is likely to continue as the short-covering rally fades. Thus, the selloff in the cap-weighted S&P500 (SP500) is also likely to continue.

Further, given the deteriorating economic data, the rotation trade into cyclicals is likely to falter as well.

Thus, in my opinion, investors are facing a recessionary bear market with the bubble burst, which could only be delayed if the BBB stimulus boosts the economy over the near term. In this case, investors are facing a volatile market at best over the next few months.

Damir Tokic: Commodity Trading Adviser (CTA), member of National Futures Association. Professor of Finance, research on Global-macro issues

Corporate news in Australia

-nib Holdings ((NHF)) has sold its international travel business to US-listed SiriusPoint for around $100m

-Macquarie Group ((MQG)) exits Star Entertainment debt, WH Soul Pattinson ((SOL)) is reported as having paid 94c-95c in the dollar to increase its position to circa 50% of the debt

-Anglo American revives Queensland coal sale for $5bn as the $76bn Teck merger nears

-EQT Holdings ((EQT)) is considering selling super trustee unit or take drastic action after the ASIC fallout on the collapse of First Guardian

-Cibus Capital places almond producer Amaretto Almonds up for sale

-Macquarie Group ((MQG)) is eying a 50% stake in Victorian land titles registry for -$4bn

-Barbeques Galore enters receivership with 500 jobs at risk

-Future Fund retains a $103m stake in Palantir despite ethical concerns

-Prospect Resources ((PSC)) is aiming to raise $40m in equity

On the calendar today:

-NZ Business Manu PMI

-US Jan CPI

-AVITA MEDICAL INC ((AVH)) 1h26 earnings report

-BWP TRUST ((BWP)) 1H26 Earnings

-COAST ENTERTAINMENT HOLDINGS LIMITED ((CEH)) 1H26 Earnings

-COCHLEAR LIMITED ((COH)) 1H26 Earnings

-CIVMEC LIMITED ((CVL)) earnings report

-DUSK GROUP LIMITED ((DSK)) 1H26 Earnings

-FIREFLY METALS LIMITED ((FFM)) earnings report

-GQG PARTNERS INC ((GQG)) FY25 Earnings

-MAGNETIC RESOURCES NL ((MAU)) earnings report

-NICK SCALI LIMITED ((NCK)) 1H26 Earnings

-PATRIOT RESOURCES LIMITED ((PAT)) General Meeting

-TAMBORAN RESOURCES CORPORATION ((TBN)) earnings report

-WESTPAC BANKING CORPORATION ((WBC)) 1Q26 Update

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

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