Risk Aversion Takes Hold as The Mood in Markets Shifts

European stocks have opened sharply lower this morning, as the market mood shifts. The Eurostoxx index is down more than 1%, and S&P 500 futures are at their lows of the morning so far.

Palantir valuation concerns

There is no single driver for this shift in market sentiment. Palantir’s results were stronger than expected, with revenue coming in at $1.18bn, and net income at $528.7mn. However, with a 12-month forward PE ratio of 240 times future earnings, investors are getting skeptical about how far this stock can rise. We mentioned on Monday that although Palantir was a poster boy for the AI trade, a positive reaction was likely for the AI stock market rally to continue.

What next for the AI trade

However, Palantir’s stock price fell in after-hours trading on Monday, and the focus will be on whether declines continue Tuesday. If this indicates a pause in the AI trade then we could see a broad-based sell off, especially since the US indices have been led higher by a small number of big tech names in recent weeks.

Correction fears spook global markets

Wall Street CEOs have also put investors on notice for a correction in the next 1-2 years. The Goldman Sachs CEO said that tech stock valuations are ‘full’, and the Citadel CEO also warned that stock markets are irrational at the highs of bull markets. With the S&P 500 trading at a price to earnings multiple above its 5-year average, it is no wonder that the wisest on Wall Street are concerned about the future.

It seems like the investment community has taken heed of this message, and European stocks are falling. The Eurostoxx index is down more than 1% so far on Tuesday, the Dax is lower by more than 1%, and the FTSE 100 is lower by 0.5%. The relative outperformance of the FTSE 100 is led by Coca Cola and Diageo, both firmly anti-tech choices.

Safe havens falter

Even the usual safe havens are failing to take off this morning. The gold price is back below $4,000 per ounce this morning. This could be a sign that the gold price may sell off alongside equities during a period of risk aversion after the strong run up in the yellow metal since the summer.

The oil price is also tumbling and both Brent and WTI are lower by more than 1% this morning. The yen is the best performing currency in the G10 FX space this morning, as it attracts safe haven flows, however, the Swiss franc is barely higher vs. the USD, and is up by just 0.06%. This suggests that the Swissie is losing its allure as a safe haven when an equity market rally takes hold.

BP beats estimates, but the share price is weighed down by oil weakness

BP’s results were better than expected for last quarter. Although a good set of results would usually boost the share price, the sharp fall in the oil price this morning is limiting upside for BP and the stock price is giving back earlier gains. The oil major reported revenues of $48.42bn for Q3, net income also beat expectations by 11%, and rose to $2.2bn. However, although net debt rose slightly, the company will still maintain its share buyback programme.  

Investors were focused on the company’s disposal plan to raise cash. There was good news on this front. BP plans to divest $20bn of assets by 2027, and the cash from its disposals in 2025 are expected to raise a higher than expected $4bn. This suggests that BP’s turnaround plan is on track, which should be good news for the oil major’s share price in the long term. The stock has risen 13% YTD, but with a 12-month forward P/E ratio of 13 times earnings, if investors are looking for value stocks, then BP could be in favour.

Dollar debasement trade takes a pause, with ramifications for the gold price

Looking ahead today, the focus will be on how deep the sell-off will be once US markets open. For now, the US futures market predict that the S&P 500 will fall at a faster rate than the Nasdaq later today. Also, the dollar index is faltering today ahead of the 100.00 level, as the yen rallies. The 200-day sma comes in at 100.38, if the dollar breaks this level in the coming days then it could suggest that the dollar debasement trade is on pause, and it may also disrupt the gold rally. The dollar is also getting a boost from reduced Fed rate cut expectations, there is now a 66% chance of a cut in December, down from 94% a month ago.

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