Sharp Tech-Selloff

MACRO FRAME

Investors are rotating out of tech as a Q3 earnings reflect sharp drops in free cash flow. This week’s price action suggests that hyperscalers, not the Fed, are the dominant force in markets during earnings season.

STOCK INDEX FUTURES

Equity index futures are mostly lower, with the Nasdaq down over 2.55%. Big tech earnings are to blame: Amazon, Microsoft and Alphabet delivered accelerating cloud growth, but sharply different cash-flow outcomes which are driving an increasingly selective AI trade. Microsoft demonstrated that substantial infrastructure investment can coexist with strong cash generation. Amazon and Alphabet, by contrast, showed that spending can overwhelm operating performance despite cloud revenue that exceeds expectations. Amazon’s quarterly results yesterday revealed capex of $77.26 billion, approximately $20 billion above estimates, and negative TTM free cash flow of $42.4 billion. Amazon also maintained its capex guidance for 2026, while indicating that it would spend even more next year. While the three tech companies results do not point to any sort of drawdown in cloud demand, investors are becoming less willing to put up with spending commitments without a credible path to cash generation. Microsoft provides the clearest example of a success story in this narrative, while Amazon and Alphabet highlight investor angst. Outside of hyperscalers, Intel is down sharply after the chipmaker reported softer-than-expect sales and lackluster guidance. Broadly, AI demand remains robust, though are selectively punishing companies who do not post near-perfect results.

CURRENCIES

US DOLLAR: The USD index is down 0.3% to 101.73. Despite the raft of data that came on Thursday, the most evident driver of the dollar was the movement in the Nasdaq. While a slowdown in the entire tech sector is unlikely, investors have frequently sought US Treasury’s in recent days, a move that has suppressed yields and removed near-term support for the dollar. This dynamic has lead DXY to mirror movements in the Nasdaq.

On the macroeconomic front, above-forecast GDP growth continues to support the US growth outlook, particularly in regard to the tech-CAPEX boom, which continues to act as a structural force on prices. As a whole, September’s PCE reading remains too firm to suggest that the Fed’s work is complete. December rate hike odds are priced at 73%, suggesting that for the dollar to continue an advance higher, those odds must move in tandem.

EURO: The euro is little changed at $1.1175. The ECB’s hawkish hold and forward guidance has all but guaranteed a rate hike at the bank’s meeting in December. However, the near-term path for the euro will be dictated by farther-out rate hike expectations. The euro’s upside, thus may be contained by the prospect that December’s rate hike will be followed by a pause. ECB estimates circulated ahead of the meeting suggested that higher bond yields would cumulatively lower growth by 1% and inflation by 0.9% over 2027–28 relative to September’s baseline projections. The implication for the euro is that additional tightening beyond a December hike raises downside risks to the medium-term growth outlook. Additionally, higher yields across the currency-bloc have already tightened financial conditions, reducing the need for additional tightening from the ECB. French fiscal and bond market stress will also continue to act as a headwind ahead of the French presidential election. Money market expectations are pricing a 65% chance of a hike in December and 64 bps of tightening over the next 12 months.

BRITISH POUND: Sterling is 0.22% higher at $1.3400, drawing support from the government’s recent budget announcement. Healey’s spending plans provided no surprises, which investors welcomed as it should not materially alter a change in direction to gilt yields or the currency. This dynamic should leave the pound more reflective of BoE expectations and the Sterling’s relative strength over the euro. The BoE is largely expected to hike rates next week, though focus will center around the amount of future tightening expected from the bank. Currently, money markets are priced for 100 bps of tightening over the next 12 months, which in our opinion is overdone. This leaves the pound vulnerable to a pullback if BoE forward guidance fails to match market expectation of the pace of tightening. While the UK economy has shown resilience over recent months, the bank will likely remain cautious against future rate hikes to avoid slowing its fragile growth backdrop.

JAPANESE YEN: The yen gained 0.34% to 158.06 yen per dollar. The BOJ held rates steady as expected but revised inflation forecasts higher. Governor Ueda said that underlying inflation has hit levels consistent with the bank’s 2% price target. That should open the door to future rate hikes from the BOJ. Money markets are fully priced for a rate hike in January and see 64 bps of tightening over the next 12 months. With the bank now cautious about overshooting its inflation target, it could potentially speed up the rate of hike from roughly every six months to every three months, leaving the door open for a hike at the December meeting. The BOJ characterized financial conditions as accommodative, though the pace of future hikes ultimately depends on upcoming data.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.7022. Market expectations that the Reserve Bank of Australia will have to raise rates next week in response to Q3 inflation data this week have been supportive of the currency despite the ongoing risk-off tone in markets. However, given that the currency is a broad-gauge for risk sentiment, a further downturn in AI sentiment and in the equity space leaves it vulnerable to a further pullback. Money markets are pricing an 85% chance the RBA raises rates in November and priced for a hike come December.

TREASURY FUTURES

Yields are lower across the curve as investors flock to Treasury’s amid the sharp tech selloff. September’s PCE report modestly tempered the strong quarterly consumption reading, as households spent more on energy without increasing the volume of goods and services consumed. Real spending was unchanged, real disposable income fell 0.3%, while the saving rate slipped to 3.8%, highlighting pressure on households’ purchasing power. Headline PCE at 3.6% y/y and core prices increasing 0.3% on the month to land at 3.1% annually argue against the narrative that the Fed can remain on hold.

The Fed’s language in its policy statement reflected a more positive tone about the US economy, saying economic activity was increasing at a “strong” pace, compared to its September policy statement that said economic activity was growing at a “solid” pace. Additionally, with two members voting for a hike, its evident that raising rates was discussed at the meeting. Warsh did imply a hesitancy to raising rates higher, saying “the goal isn’t to throw sand in the gears of the economy and throw people out of work,” implying the Fed does not want to raise rates enough to actually slow the economy. This may reflect a slower pace of future tightening than what the market has/had priced in. However, upcoming data will ultimately be the factor that shapes the trajectory of Fed policy.

If growth and inflation continue to grow, while labor conditions remain steady the Fed will likely need to raise rates by 50 bps over the coming 12 months. However, if the data proves accommodative, the market could experience a curve-steepening, reflected by a drop in short-term rates. Near-term risks to the Fed raising rates are in the form of a divided government post-midterms that results in a debt-ceiling gridlock, while the geopolitical risk of renewed US-Iran strikes complicates the oil trajectory. These conditions would add to volatility in the market that may result in the Fed want to remain on hold to avoid adding further stress to the market.

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