Good afternoon. This is your midday market update from City AM.
A report by Gartner sent the AI world into a tailspin at the back end of last week.
The research and advisory firm made the bold, and somewhat alarming prediction that by 2030, cost pressure and a lack of a differentiating business model will force over 80 per cent of neocloud providers to collapse.
Add up all the spending plans of AI data centre owners between now and 2030 and they’d have to generate a cumulative $8.5 trillion (£6.4 trillion) just to cover all their capital and finance costs, Gartner said. The trouble is, these firms are projected to make well under half of that. Expect, in other words, some serious write-downs in the years ahead.
The report triggered the clearest sign yet that there is serious investor worry about the prospect of a looming AI bubble. Listed hyperscalers and cloud businesses saw sharp stock selloffs.
Heavily leveraged firms such as Coreweave were among the biggest victims of growing investor angst. Its stock tumbled nearly a quarter over the course of the week, while its bond yields surged and prices slumped.
The spread on the US firm’s credit default swaps – a type of derivative which insures against it failing to repay debts – widened to distress levels. Many in the market view Coreweave’s woes as something of a canary in the coal mine rather than a one-off.
Comments by Broadcom boss Hock Tan that AI investors’ behaviour is "casino-like" has only exacerbated market nervousness.
"This is going to be a turning point in the pricing and availability and structure of credit that's supporting the AI boom," Max Frumes, global head of distressed and leveraged finance at 9fin, said.
"It's going to get more expensive. There will be a lot more scrutiny and probably some pushback from investors."
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And the winner is… John Healey?
What will be the fallout from the AI rout? One unlikely beneficiary might be the Chancellor.
A consequence of the AI hyperscale borrowing splurge has been that government bonds are now competing directly with big tech firms for every available pound in the fixed income market.
Government bonds have eased off decade-highs in the wake of the AI selloff, granting Healey a much-needed – but perhaps only transient – reprieve as he gears up to deliver his inaugural budget next week.
“Governments nursing stressed debt markets could be forgiven for secretly wishing for an AI stumble just to give them breathing space,” wrote Reuters columnist Mike Dolan.
“If the most crowded trades unwind between now and year-end, there could be a scramble to lock in prevailing long-term yields before they disappear.”
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