Back to basics?

Investors are turning away from artificial intelligence-related stocks in favour of more traditional sectors. Yet the AI theme remains very much alive, as Asian markets showed this morning. It is hardly surprising that, at the turn of the year, the market should go back to testing old recipes after gorging itself on semiconductors. In recent months, such rotations have never lasted very long.

Thursday's trading session confirmed the trend that has been taking shape for several weeks: stocks linked to artificial intelligence are less popular with investors, who are rediscovering battered sectors. This was plain to see at last night's Wall Street close, where the Nasdaq 100 shed 1.6% while the Dow Jones gained 1.1%, setting a fresh record in the process. Symbolically enough, the S&P 500 ended flat, illustrating the current tug of war among investors: put another coin into the AI machine, or go back and explore less richly valued corners of the market?

Against this backdrop, Europe is doing rather well, with its old-fashioned economy and its limited contingent of stocks fed on AI hype. The Stoxx Europe 600 gained 1.4%, setting, like the Dow Jones, an all-time high. Defence, healthcare and consumer stocks powered the indices, enabling France's CAC 40 to advance 1.6% and Germany's DAX to rise by more than 2%. Only the Dutch AEX closed in the red: with its stars ASML, ASM International and BE Semiconductor, the Amsterdam market is the closest Europe has to a semiconductor-anchored technology index.

While the mood was heavy in chips, the rest of the US market instead welcomed the return of an old refrain: "bad news is good news". Indeed, June labour-market data showed two things. On the one hand, the unemployment rate fell to 4.2%, proving the resilience of the US economy. On the other, job creation came in quite significantly below expectations, which is bad news in itself, but good news for the trajectory of interest rates. Indeed, if the labour market is in too rude a health, the Fed would not really have an excuse not to raise rates in order to counter inflation that remains close to 4%, or twice the level deemed healthy by central banks. With this slight stumble, traders have scaled back their bets on a rate rise this year. Equity markets do not like rate rises. So this piece of bad macroeconomic news is rather good news for investors. In fact, the saying should probably be: "not-too-bad news is good news", because excessively large disappointments create other problems.

Thursday's session was the last of the week in the United States, where Friday 3 July is a public holiday. With Independence Day on 4 July falling on a Saturday, US tradition dictates that the holiday is observed on the preceding day.

The new rate forecasts benefited gold and silver. Precious metals offer no yield, and therefore do not welcome expectations of higher interest rates, which create temporary competitors such as bonds. Oil is failing to rebound after the sell-off triggered by the compromise reached between Iran and the United States to reopen the Strait of Hormuz. Brent crude is up 17% since the start of the year, but has lost more than a third of its value in three months.

In Asia-Pacific, the technology sector moved against the trend seen on Wall Street, after hesitating at the start of the session. Korea's KOSPI is surging 4.9%, pulled higher by Samsung Electronics, which is reportedly being lined up to manufacture a bespoke artificial intelligence chip for Anthropic. In Japan, Kioxia took centre stage by announcing plans for the mass production of next-generation memory chips for AI. The Nikkei 225 is up 1.3%. The artificial intelligence narrative is far from over. Mainland China and Hong Kong are up by around 1%. Australia is enjoying a 1.4% rebound to end the week, helped by a recovery in its mining sector. The rebound is expected to continue in Europe at the open.

Today's economic highlights:

On today's agenda: industrial production in France; the services PMI in Spain and Italy; retail sales in Italy; ECB President Lagarde's speech for the Euro Area; consumer confidence in Spain; BoE Governor Bailey's speech in the United Kingdom. See the full calendar here.

• GBP / USD: 1.337
• Gold: 4,166.63
• Crude Oil (BRENT): 72.38
• United States 10 years: 4.48%
• BITCOIN: 61,673.6

In corporate news:

• HSBC is buying back 3 billion dollars’ worth of bonds ahead of their 2027 maturity.
• Mead Johnson, a Reckitt unit, says it is not liable in the latest preterm baby formula trial.
• Rheinmetall has quantified for the first time the impact of the cancellation of the F126 frigate programme, estimated at 12.8 billion euros.
• Julius Bär plans to relax its restrictions following the Benko affair.
• Germany is set to acquire at least four warships from TKMS.
• Mips has agreed to a $3 million settlement in a US patent dispute.
• Cewe has finalised the sale of its online commercial printing division.
• Palantir accuses OpenAI and Anthropic of siphoning off the companies’ intellectual property.
• Microsoft is investing $2.5 billion in a new AI deployment business.
• Tesla is launching the six-seater Model Y L in the US to boost sales.
• Rivian has raised its full-year revenue forecast, buoyed by the launch of its entry-level SUV.
• Mark Zuckerberg (Meta Platforms) admits that AI agent technology is progressing more slowly than expected.
• Coca-Cola is consulting with banks ahead of an initial public offering of its bottling operations in India.
• Lockheed Martin is in pole position to acquire Ultra Maritime from Advent for $3.5 billion, according to the FT.
• QTS, a subsidiary of Blackstone, is abandoning its Digital Gateway data centre project in Virginia.
• Ecolab is acquiring CoolIT Systems for $4.75 billion.
• Ford’s sales fell by 10.3% in the second quarter, mainly in the fleet segment.
• Anthropic is reportedly in talks with Samsung Electronics to become its manufacturing partner for a bespoke artificial intelligence chip, according to The Information.
• SoftBank will begin leasing AI-dedicated computing capacity to US companies from the next financial year.
• TSMC has been given the green light for its $20 billion project in Arizona.
• Today’s key earnings reports: Aker BP, Avanza Bank Holding.

See more news from UK listed companies here

Analyst Recommendations:

• Imi Plc: RBC Capital maintains its sector perform rating and raises the target price from GBX 2700 to GBX 2850.
• Coca-Cola Hellenic: Citi maintains its neutral recommendation and raises the target price from GBP 45 to GBP 50.25.
• Severn Trent Plc: UBS maintains its sell recommendation and raises the target price from GBX 2700 to GBX 2750.
• Baltic Classifieds Group Plc: Barclays maintains its overweight recommendation and reduces the target price from GBP 2.60 to GBP 2.45.
• St. James's Place Plc: UBS maintains its buy recommendation and raises the target price from GBX 1520 to GBX 1530.
• Quilter Plc: Jefferies maintains its buy recommendation and raises the target price from GBX 220 to GBX 245.
• Entain Plc: JP Morgan maintains its overweight recommendation and reduces the target price from GBP 10.40 to GBP 10.25.
• Wizz Air Holdings Plc: JP Morgan maintains its neutral recommendation and raises the target price from GBP 11 to GBP 12.
• Lancashire Holdings Limited: UBS maintains its buy recommendation and reduces the target price from GBX 710 to GBX 680.
• Hiscox Ltd: UBS maintains its buy recommendation and raises the target price from GBX 1850 to GBX 2100.
• Shell Plc: UBS maintains its neutral recommendation and reduces the target price from GBX 3500 to GBX 3180.
• Associated British Foods Plc: JP Morgan maintains its neutral recommendation and reduces the target price from GBP 17.80 to GBP 17.