Despite geopolitical uncertainties, rising global inflation, rising global yields and softening economic activity, major global equity indices kept climbing to all-time highs, fuelled by companies involved in technology and AI. Earnings and guidance were strong enough to justify the rally and, to some extent, allow investors to ignore the Middle East war.

The Middle East war, on the other hand, benefited from being priced as a temporary event, with US crude coming down at the fastest pace since Covid. But oil prices have eased from very high and uncomfortable levels, and they remain high enough to threaten economic activity.

US crude is settling near $90pb this morning as the weekend was marked by ‘self-defence’ strikes from the US – whatever that means – and unclear progress on peace negotiations.

So the first trading day of the new month starts on an excellent note – for tech stocks. The Nikkei is up 1%, led higher by tech stocks. SoftBank rallies more than 10% to a fresh ATH. Worries regarding its concentrated AI portfolio around OpenAI, debt-financed massive AI infrastructure ambitions and rising yields are all forgotten.

Meanwhile, for those who still care, the Japanese 10-year yield consolidates around a full percentage point above the 1.75% mark, the level that was supposed to bring Japanese institutional money back to Japan.

But world liquidity remains ample enough for investors to close their eyes to yields.

Other hot indices are strongly up as well. The Taiex – where TSMC accounts for more than 40% of the total market cap – is up around 1.60% to a fresh ATH, and the Kospi rallies another 4.50% to a fresh ATH as well.

Stress of missing out

Interestingly, the Kospi’s VIX – the volatility index of the Kospi – stands near 75 today. This is an exceptionally high level. Historically, you would expect this index to hover around the 20 mark. It has spiked to 40 a few times before the beginning of the memory-chip-shortage-led rally. And now it stands at 75.

Now, this is weird, because the VIX measures the level of market stress. Normally, when equity prices go up, the VIX remains at low levels because investors buy when they are not too stressed, and they build their positions slowly.

The VIX usually spikes during periods of heavy selloffs because investors sell in panic, all at the same time. But the spike in the VIX, alongside the Kospi’s historic rally, shows that investors today are rather buying in panic, scared to miss out on something big. Yet conviction is also weakening as prices move higher and market breadth narrows.

Tech and the rest

Speaking of that, indices with less tech exposure, like the Stoxx 600 and the UK’s FTSE 100, have lagged well behind the tech-heavy S&P 500 since mid-April. There, rising inflation and rising yields, amid expectations of potential – and probable – rate hikes, are weighing on investor sentiment in the absence of sufficient tech exposure.

Last week’s US GDP update came in a bit softer than expected, while Canadian GDP printed a second consecutive monthly decline, suggesting that Canada has stepped into a technical recession.

China’s latest PMI data, on the other hand, came in mixed. The official PMI figures hinted that manufacturing activity had fallen back to 50 – the threshold that distinguishes expansion from contraction – yet the Caixin PMI suggested that the slowdown in manufacturing expansion was less severe than analysts had expected.

What’s next?

It depends. Global oil reserves are falling fast, and markets are not pricing an extended closure of the Strait of Hormuz, meaning that upside risks to oil prices loom. It is said that the fact that China is using its vast oil reserves to keep running has been one of the major reasons keeping oil prices in check throughout the conflict.

No one knows when China will start running out of energy reserves, but we know that the situation in the rest of the world becomes tenser by the day. Exxon’s Senior Vice President warned that we are ‘approaching unheard-of inventory levels’ and that oil prices could spike to the $150–160pb range in the next two to three weeks.

They wouldn’t stay there, obviously, as oil is not like the Kospi index: when prices rise too high, demand weakens and helps cap the upside. But betting on peace when the related news flow remains unhelpful carries risks.

So, coming back to what’s next?

If the dust in the Middle East settles in the next few weeks, global yields could ease, and that could support capital flows from tech to non-tech pockets of the market. If yields keep rising, a correction – even in tech – will be inevitable.

The jobs week

This week, the focus will shift to US jobs data. The US economy is expected to add around 95K nonfarm jobs, with wage growth easing slightly to 3.5%. That’s still above the Federal Reserve’s (Fed) 2% inflation target, but Americans’ squeezed purchasing power and rising debt levels will help Fed watchers look past the actual number and focus on whether the figure comes in softer/stronger than expected.

The US dollar index remains seated above its 50-DMA this morning, as US crude rebounds 2% on meagre progress in US-Iran talks. US futures are in positive territory, while non-tech European indices hint at a slow start, confirming that if you strip tech away, the rest of the world’s industries look pretty bleak.