The ASX is expected to drop further as Wall Street’s losses extend
The “rotation” trade has taken a breather
AI stocks might be a bubble, says this bearish strategist
The ASX200 index is expected to retreat further when the market opens on Friday as Wall Street extends its losses. At 8am AEST, the ASX200 futures contract was pointing down by more than 1%.
Overnight, the S&P 500 tumbled by 0.78%, the blue chips Dow Jones index slipped by 1.29%, and the tech-heavy Nasdaq declined by 0.7%.
The week-long drop in megacap tech stocks spread on Thursday to include smaller companies and financial shares, as economic worries dampened the optimism for rate cuts.
The “rotation” trade, which has recently shifted funds away from megacaps to small caps, took a breather.
The VIX index, a measure of market volatility and often referred to as the “fear index,” jumped 10% to reach its highest level in nearly three months.
Stocks were dumped across the board despite indications that the Fed might start cutting rates in September.
“While the market is convinced lower rates will prevent a slowdown, corporate earnings and Fed commentary continue to imply investors are too complacent when it comes to slowdown risks,” Tom Essaye at The Sevens Report told Bloomberg.
To stock news, Meta Platforms jumped by 3% as it as it negotiates to acquire a minority stake in the maker of Ray-Ban sunglasses, with the Facebook parent company intensifying its push into the smart glasses market.
Apple Inc dropped 2% as it discusses licensing additional films from major Hollywood studios to boost its Apple TV+ streaming service.
Amazon fell over 2% as US shoppers spent US$14.2 billion online during Amazon’s 48-hour Prime Day sale.
Ford Motor Co rose 0.45% after saying that it will spend US$3 billion to manufacture the Super Duty F-Series pickup trucks at a plant in Ontario, Canada, redirecting its focus after postponing plans for an electric SUV.
And back home, Beach Energy (ASX:BPT) and Whitehaven Coal (ASX:WHC) are about to release their quarterly operational updates later today.
Bear strategist says AI stocks are in a bubble
Meanwhile, a bearish strategist from Société Générale, Albert Edwards, warns that the AI stocks boom might be a bubble ready to burst, similar to the dot-com collapse.
In a note to investors last night, Edwards says technology stocks, particularly those related to artificial intelligence, could face a severe downturn.
He argues that history shows concentrated markets often lead to crashes, like during the 2007-2008 financial crisis and the 2022 bear market.
Edward challenged the idea that AI stocks are different from the dot-com era.
“Those of us who lived through the 1990s will recall that the Nasdaq bubble back then was partly fuelled by physical investment in what turned out to be excess capacity,” Edwards wrote.
“That Ponzi spending grew sector earnings, but never by enough to justify valuations.”
He also noted that while tech stocks have enjoyed rapid earnings growth, expectations may have become unrealistic.
Edwards believes Wall Street’s optimistic forecasts could be setting the stage for a significant drop in technology stocks, especially if the US economy slides into recession.
According to him, once Nvidia is excluded, the technology sector has not shown strong earnings growth, suggesting that the high valuations of many AI-related companies are indicative of an AI bubble.
Also read > Is AI a bubble? Goldman Sachs issues reality check for investors
In other markets …
Gold price fell by 0.7% to US$2,444.30 an ounce.
Oil prices eased by 0.5%, with Brent crude now trading at US$84.70 a barrel.
The benchmark 10-year US Treasury yield climbed by 4 basis points (bond prices lower) to 4.20%.
The Aussie dollar retreated a further 0.35% to trade at US67.08 cents.
The iron ore price added 0.1% to US$105.05 a tonne.
Bitcoin meanwhile traded down 0.3% in the last 24 hours to US$63,996 while Ethereum lifted by 0.7% to US$3,430.35
5 ASX small caps to watch today
Argosy Minerals (ASX:AGY)
Argosy has signed a new sales contract with a Korean chemical company for 20 metric tonnes of high-quality lithium carbonate from its Rincon Lithium Project. The price for this lithium carbonate is based on the standard market rates for battery-grade lithium. Payment will be made through an irrevocable letter of credit upon receipt of shipping documents. The company is now organising the logistics for exporting the product.
Adore Beauty (ASX:ABY)
The online beauty retailer reported strong results for FY24. The company earned $195.7 million in revenue, marking a 7.4% increase from the previous year. The company achieved a record of 519,000 returning customers, up 5.8%, and had a total of 814,000 active customers, a 1.6% rise. Despite a tough retail climate, ABY says its focus on customer satisfaction led to these gains, and its EBITDA margin for the year is expected to be between 2.2% and 2.5%.
Buxton Resources (ASX:BUX)
Buxton has provided an update on its Graphite Bull Project. Drilling is still ongoing, and the latest drill hole has intersected significant amounts of graphitic material above the expected depth. This highly graphitic zone, also seen at the surface, matches what was found in an earlier drill hole from 2023, which had impressive results. These new graphitic areas are outside the current resource estimate of 4 million tonnes at 16.2% total graphitic carbon, suggesting potential for expanding the resource further.
Aurelia Metals (ASX:AMI)
Aurelia has an update on its Federation Project progress. After delays from wet weather, underground mining resumed in early July. The company has completed a 30-megalitre water management sump dam, which is now in use, and is making good progress on a larger water management dam. It has also received approval for water discharge from a treatment plant, which is now operational. Underground mining has resumed around the clock, aided by a new water treatment plant and ongoing construction of a large water management dam to ensure smooth operations.
Everest Metals (ASX:EMC)
Everest has been approved for the Junior Minerals Exploration Incentive (JMEI) for the 2024/25 year. This scheme allows the company to offer tax credits to investors who buy new shares, turning potential tax losses into benefits for eligible shareholders. The Australian Taxation Office has confirmed Everest’s allocation of $1,170,000 in credits, which will be available to investors who purchase shares between July 1, 2024, and June 30, 2025.
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