The memory-chip bubble there had already burst around June, with investors heading towards the exit all at the same time, as everyone wondered when the AI frenzy would come to an end. It is possible that we have reached boiling point in Nasdaq too, and now value has started evaporating.

I hear hopes about Anthropic’s upcoming IPO, which could be delayed, by the way, if things get worse from here. The Nasdaq 100 is now in correction territory, having slid more than 10% from its October peak. The S&P 500 would join it if the selloff extends towards the 7’050 mark.

Of course, the selloff in companies that have so long whetted investors’ appetite could create buying opportunities at a discount. A selective approach favouring companies with healthy balance sheets could be a safer play.

For macro investors, though, that will become harder to achieve through technology-heavy indices, given massive spending and ballooning debt. Diversification into high-quality sovereign bonds and indices with greater exposure to value stocks, such as the FTSE 100 or MSCI World Value, could help reduce dependence on the AI trade. But these assets also remain vulnerable to broader selling pressure if financial conditions tighten.

Financial conditions tighten

The Bank of England (BoE) raised its policy rate by 25bp yesterday, as expected, and the decision was more hawkish than expected: all MPC members favoured a hike, with eight voting for 25bp and one for 50bp, versus expectations that two members would favour no change. That comes as no surprise given the rising cost of living and no near-term light at the end of the high-energy-price tunnel.

Today, the US will reveal its latest jobs figures after data released earlier in the week showed higher-than-expected job openings and a stronger-than-expected ADP report. According to the latest Bloomberg survey, the US economy may have added around 65K new nonfarm jobs last month. That’s quite a weak number and could support the softening US jobs market story.

A softer-than-expected set of jobs data could strengthen the Federal Reserve (Fed) doves’ hand, but inflation will have the last word regarding the Fed’s next policy move. White House pressure for lower rates could also ease...

Gold?

We spent the week talking about how the midterm elections change market dynamics. We talked about the negative impact on AI, the potentially easing effect on energy prices – this space will very soon go back to moving with Middle East headlines – improved appetite for US Treasuries, as Treasury yields retreat from multi-decade highs, and a weaker US dollar. The latter two – lower real yields and softer US dollar – could fundamentally improve the short- to medium-term outlook for gold.

Gold, remember, has been under pressure since January. The yellow metal spent most of the year retracing its multi-year gains after flirting with the $5’600 level on January 29. The bulls were washed out by a selloff that initially hit technology stocks, right after Microsoft’s earnings announcement, as investors covered their tech losses by taking profits on their gold positions.

For most of this year, gradually rising US yields — and real yields, as inflation expectations remained mostly anchored near the Fed’s 2% policy target — prevented gold from turning the tables in its favour. But now, that upward trend in US yields may have peaked, and that could mark an interesting turning point for gold.

In fact, one of the factors pushing US real yields higher was strong growth expectations for the US economy. Strong growth prospects were supported by surging government spending and an explosive AI buildout, which also led to record bond issuance from hyperscalers that may have added upward pressure to sovereign yields.

With this month’s Democratic sweep, both come under pressure. Democrats are expected to question the pace of the AI buildout and could eventually take steps to slow it. On the fiscal side, they may try to rein in the US government’s widening deficit, whether by opposing an expanding military budget or tax cuts that don’t please everyone. Whatever the reason, slower AI investment and a smaller fiscal impulse could temper US growth expectations.

In this context, the October 5 high in the US 10-year real yield could prove to be a near-term peak, with further downside potentially supporting gold into next year. Looking at the chart, gold has rebounded more than 5% following the US midterms, moving back above $4’050, the major 38.2% Fibonacci retracement of the preceding rally.

This is a key support level for gold’s long-term bullish trend and could serve as a basis for its next bull run. If the bullish case gathers momentum — if real yields ease further — we could see gold recover towards the $4’800–5’000 area within the next 8–12 months.

Bulls could benefit from additional safe-haven demand if the equity selloff deepens, although forced selling could initially weigh on gold too. Rising inflation expectations could provide further support if nominal yields do not rise as quickly.

In the longer run, gold’s positive outlook remains intact. It is too early to tell whether US foreign policy will improve enough to bring the traditional big buyers back to US Treasuries. China, among other emerging markets, has been reducing its US Treasury holdings for years while adding to its gold reserves.

Japan has sold US Treasuries to support the yen, while Europeans need money to strengthen their own militaries, partly because of weaker US military support on the continent — who to blame!

What matters for gold is that central-bank buyers have continued to increase their holdings despite elevated US real yields. That source of demand will likely persist.