Chip index falls 6.72%. CoreWeave drops 10%. Meta falls 7%. Micron Technology loses 6.26%. Western Digital tumbles 6.43%, with further declines after the market closes. Optical communications Coherent fall by over 12%. Yields on 2-year to 10-year U.S. Treasuries drop by more than 15 basis points. The spread between French and German bonds briefly widened to 175 basis points, the highest since the European debt crisis in 2011. Gold falls nearly 3%, hitting a new low since August 3. Silver drops 6%. Brent oil rises 4%. Bitcoin loses 3%.
Meta Financial reports spark concerns about AI capital expenditures; the tech sector in the U.S. stock market tumbles, with a risk-aversion sentiment driving a surge in U.S. Treasury bonds. Meanwhile, crude oil prices soar amid escalating tensions in the Middle East.
Meta Third-quarter revenue exceeded expectations, but due to continued increases in capital expenditures and future spending commitments rising to $825 billion, free cash flow turned negative, resulting in a record high for five-year credit default swap quotes. Financing concerns have spread along the AI supply chain.
On Thursday, the S&P 500 index closed at 7,662.54 points, down 1.22%, ending a three-day rally; the Nasdaq Composite Index fell 2.60%; the Dow Jones Industrial Average rose 0.02%; the Russell 2000 Index gained 0.11%; and the Philadelphia Semiconductor Index declined 6.72%.
On the market, U.S. stocks in daily consumer goods, healthcare, and utilities led the gains, while semiconductors, memory chips, and optical communications led the losses.
Panic quickly spread to the interest rate market, with a rush to buy U.S. Treasury bonds. The yield on 10-year U.S. Treasuries plummeted by more than 15 basis points in a single day, falling below 5.00% for the first time in a month. The European bond market crisis triggered by political instability in France, along with a large-scale short squeeze against CTA, both contributed to the significant increase in U.S. Treasury bond prices.
Saudi energy facilities were attacked, and it has been reported that the United States and Israel have developed plans to strike Iran after the mid-term elections. Brent crude oil prices soared to a five-month high, with WTI crude reaching a five-month high, approaching $100 per barrel. The US dollar weakened slightly, while gold and Bitcoin both saw selling pressure.
AI Financing chain cracks are spreading, Meta Spending commitments rise to $825 billion
On Thursday, the S&P 500 index fell by 1.5%, while the equal-weight S&P 500 index (a measure of market breadth) recorded its best single-day performance since July 2024 compared to the S&P 500 index.
Selling pressure was concentrated on tech giants, with the performance of the seven major tech companies far inferior to that of the S&P index. Amazon ( AMZN.US ) fell by 4.57%, NVIDIA ( NVDA.US ) fell by 4.40%, and Google fell by 3.15%.
The company has raised its future leasing and contractual expenditure commitments from nearly $700 billion disclosed in July to approximately $825 billion, with the majority of this amount allocated to AI computing power and infrastructure. This funding covers multi-year payment commitments and far exceeds annual capital expenditures.
Investors' attention then shifted to the financing side. Data from the Intercontinental Exchange in the United States shows that the five-year credit default swap quote for Meta once rose by 8.9 basis points to 119.3 basis points during trading, setting a new intraday high since the contract began trading, and corporate bonds weakened in tandem with U.S. Treasury bonds.
Therefore, despite the revenue and profits of Meta Platforms ( META.US ) in the third quarter exceeding expectations, the stock price still fell by 6.98%.
CoreWeave ( CRWV.US ) is the most direct reference. The stock price of this new cloud service provider has fallen by 10.06%, and the yield on its bonds maturing in 2030 with a coupon rate of 9% has returned above 15%. The credit default swap quotes have remained above 1000 basis points. The market's pricing of the debt related to AI infrastructure has begun to diverge from equity pricing.
Semiconductor devices and optical communications led the decline, with storage stocks experiencing a continued expansion in their pullback.
Fanlin Group fell by 11.76%, making it one of the largest technology stocks with the biggest decline of the day. The company's guidance fell short of market expectations, and supply chain restrictions raised concerns among investors about the pace of growth realization for equipment companies. Kolei fell by 9.55%, and Application Materials (AMAT.US) fell by 8.16%, with the semiconductor equipment sector also under pressure accordingly.
The decline in the optical communication sector was even more significant. Coherent ( COHR.US ) fell by 12.51%, and Lumentum ( LITE.US ) fell by 11.54%. Once the pace of data center construction slows down, these two companies will be among the first to see their orders cut.
Optical communications, Agentic AI and AI data centers led the decline, while the S&P 500 still recorded gains after excluding AI enabling stocks.
Storage chips were not spared either. Micron Technology (MU.US) fell by 6.26%, Seagate Technology (STX.US) fell by 7.86%. Western Digital (WDC.US) fell by 6.43%, and continued to decline by more than 5% after the market closed and earnings were released.
Statistics from research institution Bespoke show that the pullback of storage stocks has reached 41.6%, while the semiconductor industry ETF has fallen by 16% since October 5th, representing a 20.3% decline from its historical high in June.
NVIDIA CEO Jensen Huang On that day, it was indicated that the market's demand for new cloud service providers was higher than imagined, but insufficient capital supply was restricting industry growth. Traders at Wells Fargo mentioned in their report that these remarks caused unease in the market, once again triggering concerns among investors about the credit market's capacity to absorb such demand.
The Barclays trading team believes that the recent rebound in semiconductor stocks is more akin to a normal mean reversion following an eight-day decline. The overall participation in the AI sector is weak, especially in the areas of new cloud and storage, indicating that investors have not yet widely returned to this market and are still closely monitoring the credit market.
Funds shift to the defensive sector, with a rare divergence between breadth and price.
Funds are shifting towards defensive sectors. Procter & Gamble ( PG.US ) rose by 5.58%, Hershey's rose by 4.67%, Home Depot ( HD.US ) rose by 4.33%, Johnson & Johnson ( JNJ.US ) rose by 3.81%, Coca-Cola ( KO.US ) rose by 2.88%, McDonald's ( MCD.US ) rose by 2.59%, and Nike rose by 2.10%.
Apple ( AAPL.US ) rose by 1.23%, being the only one among the seven giants to post a gain. Its abundant free cash flow and relatively restrained investment in infrastructure have enabled it to attract buyers in this round of capital reallocation.
Melanoma vaccine data was leaked ahead of time, and the results fell short of expectations. Moderna (MRNA.US) tumbled by 26% at one point.
FBB Capital Partners Research Director Michael Bailey stated that what occurred in the market on that day was a rotation that has appeared multiple times this year, only this time it was more intense. The performance of Meta gave the bears the upper hand, triggering investors to sell off recent AI winners and shift their focus to defensive sectors such as healthcare, consumer goods, and utilities.
Bloomberg macro strategist Michael Ball believes that as financing costs rise, free cash flow will become an even more important indicator to distinguish between tech stocks. Alphabet, SpaceX, Anthropic, and OpenAI are all competing for huge amounts of capital at the same time, and credit investors have become more selective regarding project returns. Marginal AI projects need to provide a clearer path to returns.
Tech stocks provide support as U.S. Treasury yields fall below 5%, with the dollar slightly weakening
The inflow of safe-haven funds brought about by the European bond crisis, coupled with market concerns about the growth prospects of artificial intelligence in U.S. stocks, led to a significant rise in U.S. Treasury bonds on Thursday.
The yield on 10-year U.S. Treasury bonds closed at 4.95%, down about 19 basis points for the day, falling below 5% for the first time since September 2 and reaching its lowest level in nearly a month.
The 5-year yield decreased by about 21 basis points to 4.76%, and the 30-year yield decreased by about 15 basis points to 5.29%, with the shorter-term yields outperforming the longer-term ones.
As the financial reports of several tech giants have raised doubts about the sustainability of AI's capital expenditures in the market, U.S. Treasury yields have fallen significantly across the board. Goldman Sachs Rich Privorotsky believes that every reduction in AI's capital expenditures means a potential decrease in bond supply, thereby directly alleviating pressure on the bond market.
In the view of Privorotsky, when the scale of debt issuance by ultra-large-scale cloud computing companies can be compared to that of U.S. Treasury bonds, any reduction in AI capital expenditure is essentially equivalent to reducing the potential supply pressure on the bond market, with an effect similar to that of a quantitative easing measure.
The ongoing escalation of France's sovereign debt crisis has also provided additional support for U.S. bonds. The yield on France's 10-year government bonds rose to 5.076%, the highest level since June 2002. The spread between French and German bonds once widened to 175 basis points, the highest since the European debt crisis in 2011.
French five-year credit default swap quotes rose above 100 basis points to 103.195, for the first time since October 2012.
French government bonds are 49.9 basis points more expensive than Italian government bonds of the same maturity, a level that has never been seen before.
For the first time on that day, the yield on 10-year French bonds exceeded that of 10-year US bonds, with the last occurrence being in 2013.
Royal Bank of Canada’s capital markets strategists Blake Gwinn and Izaac Brook believe that a portion of the buying interest in U.S. Treasuries is stemming from judgments regarding the mid-term elections. The increased probability of the Democrats winning both houses of Congress means a higher likelihood of AI regulation, which could accelerate the shift of funds towards safer assets.
The US Dollar Index fell by 0.17%, closing at 101.608 in the New York foreign exchange market at the end of the session, and once touched a three-week low during the day. The Japanese yen was one of the strongest performing currencies of the day, with the US dollar falling from 158.29 to 156.78 against the yen.
Oil prices rise to a five-month high, while gold, silver, and Bitcoin fall in tandem.
Brent crude oil settled at $113.17 per barrel, up 4.00%, with a single-day increase of $4.35; WTI settled at $99.47 per barrel, up 2.39%. WTI touched $100.17 during the day but failed to hold above the round figure, with a low of $97.72 during the session.
The reasons for the rise in oil prices are concentrated in the Middle East. The Houthi rebels in Yemen claimed to have attacked the port of Yanbu in Saudi Arabia over the past 48 hours, and Saudi Aramco's Sabah oil field was hit by drones, resulting in two deaths. There were also casualties at King Fahd International Airport in Dammam.
The Islamic Revolutionary Guards of Iran claimed to have hit four oil tankers involved in the incident in the northern Persian Gulf, and there were reports of ships hitting mines near the Strait of Hormuz. The United States has ordered the evacuation of some personnel and their families from its embassy in Saudi Arabia.
Arne Lohmann Rasmussen, the chief analyst at Global Risk Management, believes that the escalation of tensions in the Middle East is all pointing towards the mid-term elections in two weeks. Iran has no interest in reaching a peace agreement with Trump before the elections, as maintaining high oil prices, gasoline, and diesel prices is a bargaining chip in their hands.
The New York Times, citing reports from U.S. officials, stated that the United States and Israel have devised plans to launch a new round of strikes against Iran after the mid-term elections. The price difference between Brent crude oil in spot and near-month futures has widened to $10.83, with the spot price for Brent crude oil at $123.885. The tension on the spot market is higher than what the futures prices indicate.
The supply of petroleum products in the Gulf region has been disrupted, and coupled with the escalating attacks by Ukraine on Russian refineries, this has led to a further increase in the prices of refined oil products, with diesel prices seeing a particularly significant rise.
Gold did not rise due to risk aversion. Spot gold traded at $4,021.80 per ounce, down 2.88%, hitting a new low since August 3. Spot silver fell 5.87% to $54.42 per ounce.
Bitcoin fell 3.30% to $81,250, wiping out all of the gains from the previous trading day.
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