The perfect storm on the stock markets

Oil, public debt and artificial intelligence. Three distinct fears are driving investors to flee from risk. European stock markets closed deep in the red, whilst the markets were affected by the renewed escalation in the Middle East, doubts over the sustainability of investments in AI and fears of a new sovereign debt crisis. Milan fell by 2.54 per cent, the worst-performing market on the continent, with Paris down 1.4 per cent and Frankfurt 1 per cent. The geopolitical trigger is oil, with Brent crude returning to the $112 per barrel mark following fresh attacks in Saudi Arabia attributed to Houthi militias and reports in the Wall Street Journal about US plans to strike Iran.

There is a risk of a new surge in energy prices fuelling inflation, just as bond yields are rising again, making it harder to envisage a rapid reduction in the cost of borrowing by central banks. On Wall Street, the technology sector is once again under pressure: Meta has fallen by over 7 per cent after announcing further billion-dollar investments in AI. The market is beginning to question whether the rush into data centres, chips and infrastructure can guarantee returns commensurate with the enormous resources deployed. Nvidia and Intel have also come under selling pressure. On the bond front, the German Bund remains a safe haven for investors. The trend is particularly painful for France and Italy. The BTP-Bund spread rises to 126 basis points, with the Italian 10-year yield at 4.64 per cent. The French yield hits a new record, exceeding 5.1 per cent, whilst the spread surpasses 170 basis points. For Paris, political fragility is compounded by public finances under pressure; for Rome, the risk is that the contagion will bring the cost of debt back into the spotlight just as the government seeks to defend the credibility of its budget. The combination is treacherous: more expensive energy, costlier government bonds and big tech firms under pressure. It is not necessarily the start of a systemic crisis, but the period of calm is over.