(The opinions expressed here are those of the author.)
By Anna Szymanski
July 24 (Reuters) - From the Editor
Hello Morning Bid readers!
Cash burn and spiking crude prices dominated market
headlines this week. The AI capex boom has helped many asset
classes ignore the rising geopolitical turmoil of the past seven
months, but - like the rest of the world - it might be running
out of fuel.
U.S. stocks fell to multi-week lows on Thursday, led by the
tech-heavy Nasdaq, due, in part, to jitters about the durability
of the AI capex spree. Alphabet, the first of the tech giants to
release earnings this quarter, reported negative free cash flow
for the first time ever while also boosting its 2026 capex
projection by $15 billion.
Moreover, Tesla also reported that it is back in cash-burn mode.
Elon Musk's electric vehicle company missed analysts' profit
forecasts for the second quarter and reported negative free cash
flow for the first time in more than two years, reflecting
massive spending on infrastructure related to AI and robotics.
Zooming in on the cash burn question, an analysis from Reuters
shows that the four major U.S. hyperscalers - Microsoft,
Alphabet, Amazon and Meta - could collectively start to spend
more on capex than they generate in free cash flow by 2027 if
their current spending pace continues, according to LSEG
consensus estimates.
Markets will get more color on this story next week as
Microsoft, Meta and Apple all report.
Asian equities remained volatile as well this week. South
Korea's chip-heavy KOSPI hit its lowest point in almost three
months on Monday. It was in positive territory afterward, but
has dipped again on Friday, falling more than 5%.
The latest bout of weakness likely reflects the other story
dominating headlines: the inferno in the Middle East. After two
weeks of renewed fighting between the U.S. and Iran, the
conflict has now expanded, with Yemen's Iran-aligned Houthi
militia announcing a blockade of Saudi Arabian vessels seeking
to pass through the Bab el-Mandeb Strait.
This is a massive problem not only for the Saudis but for
energy markets overall, as Bab el-Mandeb had become the primary
workaround for oil exiting the Middle East following the
effective closure of the Strait of Hormuz after the outbreak of
the U.S.-Israeli war with Iran on February 28.
While energy markets have proven remarkably adaptable in recent
months, this may be one crisis too many, as global reserves have
been depleted and alternative routes for getting crude out of
the Middle East are becoming increasingly inefficient.
On top of all this, the Russia-Ukraine war is also disrupting
supply, as Kazakhstan's oil production has now
plummeted following the closure of a key port after several
drone attacks on ships in the Black Sea.
Crude prices finally appear to be waking up to the risk.
Brent rose above $100 a barrel on Thursday for the first time in
two months. Prices dipped below that symbolic threshold on
Friday morning, but are still up over 30% in July so far. Given
the likelihood that this conflict could escalate further this
weekend, prices may not remain capped for long.
Ultimately, though, the real energy crisis right now is not in
crude but in refined products - fuels like gasoline and diesel -
that households and industry actually consume. Refining capacity
has been cut drastically this year because of both the Iran and
Ukraine wars, and while India may be able to help offset some of
that pain in Asia, the crunch is still very real.
Given all this, markets outside the energy space are starting to
show more signs of concern. The "term premium" on Treasury
yields has risen, government bond yields overall are spiking and
the dollar continues to strengthen - all indicating that the
"stagflation" risk premium is building.
The above-mentioned dollar strength is rippling through currency
markets, most notably in Japan, where the embattled yen fell to
a fresh 40-year low against the greenback this week. Japan
imports 90% of its energy, with 95% of that previously coming
from the Middle East, so the country is highly exposed to the
inflationary pressures posed by the latest energy supply crisis.
More broadly, Japan's government appears to be in a policy "doom
loop," with markets balking at its loose fiscal policy and
insufficiently tight monetary stance.
Now, from real wars to trade wars, the White House announced on
Friday that it was imposing new tariffs of 10% and 12.5% on
goods from 60 trading partners, including Europe and China, over
allegations of lax enforcement of forced labor bans. This
occurred just as the president's temporary 10% global tariff
expired.
Over in the UK, Andy Burnham took over as prime minister on
Monday, becoming Britain's seventh leader in a decade. He
surprised many by appointing former defence minister John Healey
as finance minister, a move that could indicate that a boost in
military spending is coming.
Either way, UK markets appear to be giving Burnham the benefit
of the doubt for now, with gilts staying relatively calm.
Markets may be hoping that the proponent of "business-friendly
socialism" has some success because the party waiting in the
wings - the populist Reform UK - arguably presents a greater
fiscal risk.
Looking to next week, the Federal Reserve meeting will be
the main event. Little is expected to happen, though the
potential for a rate hike has increased this week given the
energy price spike. Markets will be listening closely to hear
what Chair Kevin Warsh says - or doesn't say - about the current
inflation environment and the labor market outlook. He'll get a
bit more data to chew on later in the week as second-quarter GDP
and core PCE inflation results for June are released.
For more data-driven insights on markets and commodities, check
out Reuters Open Interest. You can learn:
* Who's funding America's widening debt with the rest of the
world?
* How large is America's wealthy class? (Hint: bigger than
you think.)
* Has AI killed diversification?
* Is China's steel sector really as weak as it looks?
* Could leveraged ETFs stoke massive volatility on Wall
Street?
* Are junk bond spreads actually thin - or are you just
measuring them incorrectly?
* What's the biggest risk to Europe's ambitious
electrification goals? (Hint: it's not the buildout.)
* What might be China's next surprise for energy markets?
* How are wildfires threatening the U.S. power system?
* Is European industry headed for a lost decade?
I'd love to hear from you, so please reach out to me at .
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Opinions expressed are those of the authors. They do not reflect
the views of Reuters News, which, under the Trust Principles, is
committed to integrity, independence, and freedom from bias.