The Big Three

1. Semiconductor stock supernova

The dominant positive trend in equity markets since the recovery began in early April has been strength in AI infrastructure-related stocks. This has been influenced primarily by growing evidence that large language models (LLMs) are beginning to generate meaningful revenue and are becoming increasingly embedded within enterprise workflows.

At the beginning of April, Anthropic - the company behind Claude - announced a 300% increase in annualised revenue to $30bn. While this figure remains modest relative to the $2.5tn projected to be spent on AI infrastructure this year, the pace of revenue growth is striking. The company has moved from an annualised run-rate of $9bn just four months earlier, and only $1bn at the end of December 2024.

To some extent, this has validated the significant capital deployed by AI hyperscalers. The stocks which have moved the most have been those directly exposed to this infrastructure spend, particularly in high bandwidth memory, a critical component used in Nvidia systems. Within this segment, Micron Technology in the US and SK Hynix in South Korea have been standout performers, rising 762% and 841% over one year until the 12th of May. While these figures represent clear outliers, the broader trend is also evident in the Stoxx Global AI index, which has risen 41.4% since the beginning of April in US dollar terms.

The positive momentum extended beyond just infrastructure, with the tech-heavy Nasdaq recording its strongest month in 23 years in April, as the majority of the Magnificent Seven rebounded sharply after several quarters of relative stagnation.

Source: Bloomberg as at 12^th May unless stated. All figures are in local currency unless stated.

2. Oil down but by no means out

The fluctuations in the price of oil since the start of April have been among the most dramatic ever witnessed. Coming into the month, the price of a barrel of Brent Blend was at multi-year highs, north of $120 a barrel, only to fall back sharply to around the $90 mark by mid-month off the back of a hope for a lasting ceasefire. However, the respite was short-lived with the price climbing back rapidly to an intraday Iran war high of $126.41 by 30^th April. At the time of writing, the price is still above $100 as uncertainty over the duration of the conflict persists.

Even the US - a net exporter of oil - is battling with an extremely elevated and whipsawing oil price, with WTI futures prices peaking at $117.63 on 7 April before falling back to $90 and currently settling at $101. This has been a significant contributing factor to rising inflation in the US, with Tuesday’s print coming in above expectations at 3.8%.

As a result, the implied number of rate moves has changed from two cuts by year end at the start of the year to a one in three chance of a rate rise this year. This repricing meaningfully alters the calculus across asset classes and sectors that had been relying on easing financial conditions to provide relief after an extended period of elevated borrowing costs. This includes smaller companies, property and utilities, as well as fixed income assets; especially longer-duration debt such as government bonds, which are most sensitive to changes in policy rates.

Source: Bloomberg as at 12^th May unless stated.

3. Gilt market bares its teeth in the face of change

The one constant in recent years has been the lack of investor confidence in both the strength of the UK economy and the UK government’s ability to manage its fragile finances. Gilts have been hit harder than all other G7 nations since the start of the Iran war, partly reflecting the UK’s reliance on imported oil. Pre-conflict 10-year UK gilts were yielding 4.2%, compared to the 5.1% today - comfortably the highest borrowing cost in the G7 and the highest for nearly three decades.

The most recent upward leg has been driven by the fallout to the UK’s local elections. The overriding immediate concern centres on the prospect of a more radical-leaning liberal government coming into power and loosening the already stretched purse strings. With the prospect of a general election now fast approaching, it is likely that volatility in the gilt market will persist for some time with Sterling likely to come under pressure.

Source: Bloomberg as at 12^th May unless stated.