Good morning. This is "Horizons Middle East & Africa." Our top stories this morning: AI trade unwinds, tech stocks extend losses as investors question the sustainability of the sector's boom. Treasuries and the yen gain as the selloff drives investors toward safety. Supply risks build, oil heads for a third weekly gain as Houthi raids intensify, raising concerns over wider disruptions across the region. And Gulf economies contract: the IMF downgrades its Middle East growth outlook as the U.S.-Iran conflict drags on, and we will speak to the IMF's Middle East and Central Asia director later on the show. It has just gone 8:00 a.m. across the Emirates.
Let's start with a look at what markets are doing on this Friday morning. Yesterday was miserable for U.S. stocks. We saw the S&P snapping three sessions of gains, was in the red, over 1% lower. Nasdaq down quite a bit. Semiconductors, that gauge that collects the movement of those stocks, was down over 6%, very close to 7% lower. That is seeping into the Asia session. That lower performance in technology stocks is impacting the Kospi in South Korea. We are seeing the MSCI Asia Pacific about 0.4% lower. On the currencies front, the yen is gaining against the U.S. dollar, roaming around 156, 157 against the USD. Crude prices are gaining. We had alluded to the fact that they are headed for a third weekly gain.
As the attacks on Saudi Arabia by the Yemen-based Houthi rebels intensified, we are gearing up to witness if anything on that front is going to happen in Saudi Arabia. We had reported on three casualties throughout the course of this week in different parts of the kingdom. Look at the yields on the benchmark, below 5% for the first time in a while, slightly gaining this morning, but around 4.97. Treasuries holding gains as investors rush to safety. The benchmark yields had fallen 17 basis points yesterday and broadly holding the gains from the previous session. Now for the wider weaknesses that we see in Asia, let's get a market check from Avril Hong, who is standing in Singapore for us. What are you looking at?
Asia stocks coming under pressure as hyperscale earnings reignited the debate of how sustainable these AI investments ultimately will be. The Kospi is the underperformer yet again, not as violent a reaction as a day ago. It even pared the declines of 4% from early on. Maybe this idea that all of the selling was a bit overdone. And don't forget next week we have SK Hynix and Samsung Electronics. SK Hynix was interesting: the U.S. listing of one of its memory units, that was because of capital market conditions. Aside from that, the CSI 300 is in bear market territory. This is despite the national team stepping in. We see some gains on the Hang Seng. To your point, after three sessions of heavy selling, maybe those buyers are stepping in.
To your point about the flocking to safety, we are seeing JGBs rallying really hard, tracking the move in Treasuries overnight with the 10-year yield in Japan moving as much as 11 basis points lower. The yen also gained to the highest level against the greenback since the month of September and was top of the pack among the G10's. All of that is petering out for the moment.
Thank you, as always, for the market update. We are gearing up for earnings season in the U.S. with some Mag 7 companies reporting next week. Focusing in on the AI rout, a global rout in technology stocks is deepening as investors rotate out of the hottest trade of the year. Asian tech stocks are tracking a selloff on Wall Street due to concerns over AI spending. For more on this story, we are joined by Bloomberg Asia tech correspondent Annabelle Droulers. Good morning. Walk us through what is happening. Tech stocks were hammered yesterday. That is seeping into Asia today. What are you looking at?
I think there are a couple of different competing narratives. The first one, when you look globally, yes, you see this big flight to safety that has been persistent. You see moves in yields and Treasuries looking more attractive, equities really bearing the brunt of that. Concerns around what we have seen in data centers reflecting this week, but essentially ROI and when we will see delivery on a huge amount of spending. Within China, this story is more idiosyncratic. You actually have the Hang Seng tech gauge looking relatively flat today. We have seen some very stock-specific names dropping quite significantly, particularly in optical connectivity. That comes back to that data center supply chain story. Semiconductors looking more mixed. On the regulatory front in China, we do have essentially questions over whether we can see spinoffs of companies, and that is also affecting sentiment.
Avril was talking about SK Hynix. We know it is scrapping plans to list Solidigm. What is driving that decision?
This is an interesting one. Given that has been scrapped, this plan to list in the U.S. removes what was a big overhang on the stock price rather. We had seen so much uncertainty over the way forward. Investors were getting really concerned around the value of that stock being diluted. As we said, SK Hynix has pulled this idea of the IPO and parallel pre-IPO funding that was confirmed into regulatory findings. Market conditions were cited here. That was really only part of the picture. The bigger issue was shareholder opposition, and that was strong in Korea. Regulators have been signaling that there was going to be scrutiny over this deal. The key question is what happens moving forward? Can that expansion continue in the U.S.? That is what the IPO proceeds were going to be toward. The short answer is yes, the cash flow position is strong enough to enable that in other ways.
Okay. Annabelle will continue to watch out for that story. Annabelle Droulers, Bloomberg tech correspondent, joining us there. Meanwhile, Wall Street's AI bubble debate rages on. Blackstone President Jon Gray is downplaying risk, calling demand for the technology almost parabolic, and supply is struggling to keep up.
Our portfolio companies' demand for models, spend on models, is up 20-fold year on year. We created a company with Anthropic called Code, and this company has designed to deploy AI, and we can't keep up with customer demand. Obviously, these personalized agents are rolling out as well, creating incremental demand. Demand is almost parabolic.
Joining us now is the founder of 10 Cap to discuss what are the market moves. Let's start with what is happening in AI. This selloff that we saw yesterday, we have some divergence between some of these Wall Street executives. Earlier in the week, we heard from Ken Griffin that we are definitely in a bubble. Now we hear from Blackstone saying no bubble. What are your thoughts? What school of thought do you follow at this point?
Thank you so much for having me. Amazing to chat with you. I think put aside the bubble, they also both are right in some of the base factors. We all know demand is strong. The demand is not in a bubble. We know they are growing exponentially. Every day we find new use cases for the AI tools for businesses, different sectors, for individual use, personal agents. There are so many use cases coming through. Supply, it's true, it can't keep up. We are seeing delays across data centers. We see that they are struggling to get energy. We see a lot of those issues and costs begin to blow up. We are now saying this whole supply chain, the demand remains strong, it's just you have to be very selective. Which company do you gain exposure to? The company that operates in a neo-cloud, that is very tough, because you need so much capital still needed to be secured for the next few years to secure the contracts. You cannot afford any delay because the customers will walk. It is a very interesting dynamic at the moment.
Speaking of contrasts, it feels like an inverse relationship when stocks get hit as much as they had yesterday. We see the benchmark yields dropping 17 basis points, below 5%. Do you think the struggle in elevated yields in U.S. Treasuries is behind us at this point? And do you think it is driven by the capex, since that inverse relationship occurred yesterday?
Yeah, that was a big drop. It's good to see that fixed income is operating the way it should be. When the market is worried about the future, going risk-off, and we see the fixed income, or the bond market, pick up the slack and act as a defense mechanism, I think that is the right way to behave. That is good to see that it has that inverse relationship. By bond yields falling as it is, big move, it does provide relief pressure for the rest of the economy, not just the AI capex area, for the rest of the economy, and we see a huge amount of pressure given the elevated bond yield.
Let's talk about the geopolitics. We are still seeing oil above $100 on the barrel. We are still seeing the escalations continue here in the Middle East, with the potential of a pending story currently happening in elevated yields. If we see yields get more elevated once again and stocks continue their rout, where do investors hide?
At this stage, I think the best area to hide is one, defensive. Two is health care. Health care is looking very attractive at this stage. It is more insulated from the AI changes and AI rout that is taking place at the moment. And their valuation is still quite reasonable when you compare it to the AI area. Given that this sector a few months ago was one of the worst-performing sectors for quite some time, it certainly now seems to be a good place to position, to gain growth and defensiveness for the portfolio.
Finally, next week we are gearing up for the October Fed decision. We are also gearing up for Alphabet, Amazon, Microsoft to issue their earnings for the third quarter. Those are coinciding. What are your expectations for next week?
We are quite worried. We think there will be heightened volatility. What we have seen from the tech companies has been disappointing relative to expectations. If we do get a few more of that, we will have markets heading lower, just given the amount of expectations out there for those businesses. My view is there will be more volatility over the next week.
Okay. Always a pleasure to chat with you. Jun Bei Liu, founder of 10 Cap. Coming up, Saudi Aramco set to move its HQ. We will have more details on that story coming next. This is Bloomberg.
Welcome back to "Horizons Middle East & Africa." Bloomberg understands that Saudi Aramco evacuated its headquarters after an alarm on Thursday, with staff asked to work from home. It comes as Brent heads to a third gain with the risk of wider Middle East supply disruptions. I'm now joined by Stuart Livingston Wallace, Bloomberg's executive editor of the Middle East and North Africa. Another escalation once again, this is a line we start with when it comes to Saudi Arabia over the past 10 or 12 days or so. Can we just walk through the latest?
Much the same as before, it shows the extent to what they're capable of doing, basically through to the Eastern Province in the area where some of those services are. There's no sense that it is diminishing in terms of intensity, and one everyone always forgets about is what is going on offshore, with an escalation of the targeting of tankers, which largely seems to add pressure to the energy price and for that to add pressure to inflation and pressure to the West to make concessions. None of this is a good situation, obviously. I think the ripple effect now is seen pretty much across every continent on the planet.
Meanwhile, President Trump was telling reporters at the White House that the U.S. had not hit Iran and threatened to go even further. What do we know about the prospect of a continuation of escalation between Iran and the U.S. post-midterm elections on November 3?
It's very hard to predict because he has made quite alarming threats repeatedly over the last several months, some of which turned into action and many of which don't. It's often hard to parse out which ones are serious and which are not. Tankers and their proxies continue to attack a series of targets, but including civilian targets. You can say that Iran economically, there was damage before this started and now it has gotten worse. What you're seeing is an escalation in the rhetoric. It's hard to say if it's a prelude to another round of more intense fighting, which has diminished somewhat, or is an attempt to put pressure on both the negotiating sides on this. As far as we can tell, the diplomacy is still going on, but it's not reached the point where we can say a deal is on the table, as far as we can tell.
What about disruptions? How do you square the fact that exports are at pre-war levels but we are still seeing upside in Brent crude prices? Is it perceived risk or could things get worse very quickly?
That's exactly right. You have seen a big jump in oil prices that were already pretty elevated. You look at the forward curve in Brent, it's gone up right across the board. I think it speaks to the increasing anxiety that it's not going to be terribly difficult to shut things down, and with ongoing action in the Red Sea, a large part of the world is affected by this, knocked offline.
We're heading to the ninth month of this war that is still happening. Thank you for those insights and the latest analysis. Coming up, we will hear exclusively from the OpenAI president on the pressure AI is putting on firms to address cyber risks. That is next, and this is Bloomberg.
Welcome back to "Horizons Middle East & Africa." Governments and companies around the world are rushing to fix critical flaws in widely used technology after OpenAI's technology helped identify a potentially catastrophic cybersecurity vulnerability in PHP. That's a programming language that runs millions of websites and applications. The president spoke exclusively to Bloomberg about managing risk as AI empowers both cyber defenders and attackers. Have a listen.
The core question we have, and I don't think we have any answers yet, but we are asking the question: as the scale of vulnerabilities found increases and it is harder and harder for anyone to make sure they are taking appropriate action, how does this whole system need to change? If you look at PHP, we had two months of manual processes. We've been on the phone with many of our partners in government. We see other vulnerabilities coming and have been working on several of those as well. The system of making sure that we stay ahead and defenders are advantaged and there is some sort of process to keep the internet secure, that is the question we think people should be asking.
Before you go, I've been using Codex a lot. I put this question to Sam the other day, trying to work out how to make it useful to me. Is there any updated data on how it has gone from an adoption and user perspective?
