Trading Day: AI wave lifts all boats

By Jamie McGeever

ORLANDO, Florida, Oct 27 (Reuters) - Investors continue to ride the wave of AI optimism that has emerged from last week’s gloom, with another tech-led rally lifting US stocks on Tuesday. Lower oil prices and a steady bond market helped too, as attention now switches to the Federal Reserve’s policy decision on Wednesday.

In my column today, I look at Brazilian President Lula’s remarkable re-election victory in the context of the US-China battle for global supremacy in everything from the AI arms race to resource and energy security. Brazil straddles many of these key areas.

Today’s Key Reads

• AI investment boom drives US core capital goods orders, shipments higher in September

• AI tremor exposes market’s volatility fault lines: Mike Dolan

• Bond investors are thinking less about the Fed and more about AI, deficits

• UK budget risks leaving investors in the dark: Mike Peacock

• EXCLUSIVE-US, Canada working on deal to ease steel, auto tariffs, sources say

• Today’s Key Market Moves STOCKS: South Korea +3%, Japan +1.7%, China -1.3%. Europe +0.5%, UK -0.8%. Brazil -0.5%. Nasdaq +1.2%, S&P 500 +0.6%, Dow flat.SECTORS/SHARES: Six sectors on the S&P 500 rise, five fall. Tech +1.5%, energy -2%. ’SOX’ chip index +3.6%. Dell, Super Micro Computer both +7.5%. Boeing -11%, Robinhood -6% after the bell.FX: US dollar up for third day. Brazilian real rebounds ~1%. Bitcoin climbs back above $80,000.BONDS: US 5-year auction is decent - bid/cover 2.33 in line with average of last 12 auctions, soft foreign demand offset by strong domestic demand. Brazil 10y yield -50 bps.COMMODITIES/METALS: Oil down ~1.7%, WTI below $100.

Today’s Talking Points:

Hyperscalers report

Three of the US hyperscalers report third-quarter earnings this week - Microsoft and Google (Alphabet) after the market close on Wednesday, and Amazon after the bell on Thursday. All eyes are on their outlook for cloud growth, and how quickly the enormous capex spend will turn into profit. The market price action over the last 48 hours suggests investors are in a reasonably bullish mood.

These three companies — with nearly $1.7 trillion in combined backlog — plan to spend ​as much as $600 billion this year. But investors’ tolerance for spending that raises the risk of shrinking free cash flow, even more than already priced, does seem to be waning. Look at Meta’s results last week — encouraging revenue growth and an upbeat outlook, yet increased spending ​plans pushed the share price lower.

Fed

Interest rate futures traders are putting a 90% probability on the Fed concluding its two-day meeting on Wednesday by leaving rates on hold. Bank of America economists stand alone with their call for a hike, but as their colleagues in the BofA rates strategy team point out, it would be unprecedented — since 2009, the Fed has never raised rates with market pricing for a hike this low so close to the meeting.

A more interesting debate is whether the Fed should be hiking much at all. Real US interest rates are currently among the highest in the developed world, and a further 75 basis points of tightening is expected over the next year. GDP growth this year is generally expected to settle just above 2% before softening, and there are signs that AI is beginning to trigger sizeable job losses. The flattening yield curve suggests this is one to keep an eye on.

Brazil, Day 2

Anyone hoping for a decent rebound in Brazilian financial markets after Monday’s carnage will be sorely disappointed. Even after plunging 14% in one of its biggest one-day falls on record, the Bovespa stock index still closed in the red on Tuesday. The real, bruised by one of its biggest declines since it was launched in 1994, managed to rebound only 1%. Citi closed its Brazilian risk trades, and Morgan Stanley downgraded Brazil to equal-weight.

Yet as historic as the market moves were on Monday — a 10% currency collapse and 14% stock market crash — it’s remarkable how little spillover there was into global markets. Yes, LatAm stocks also tumbled on Monday, but MSCI’s global emerging markets index on Monday lost only 1% and recouped most of that on Tuesday. Meanwhile, MSCI’s emerging Asia index rose 1% on Tuesday. There was virtually no discernible impact on developed markets at all. Brazil is among the world’s top 10 economies, but relatively closed. That may be why the rest of the world was largely spared.

What could move markets tomorrow?

• New Zealand interest rate decision

• Australian inflation (September)

• Canadian interest rate decision

• US interest rate decision

• US corporate earnings, including Alphabet and Microsoft

Want to receive Trading Day in your inbox every weekday morning? Sign up for my newsletter here. Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.