US stock futures fell on Tuesday as investors worried about oil, interest rates and AI stocks. Higher crude oil prices, rising Treasury yields and growing uncertainty around demand for artificial intelligence technology were the main reasons for the weakness. Investors are also worried that high inflation could force the Federal Reserve to keep raising interest rates, making borrowing more expensive.
Alphabet and Microsoft both fell about 1% in premarket trading. Chip stocks, which were hit hard during Monday’s selloff, were mostly moving within a narrow range. Nvidia was slightly higher, showing that not every AI-related stock was falling, according to Reuters. The weakness in technology stocks is important because the sector has been a major driver of the US stock market’s gains in recent years.
AI stocks face new investor fears
The latest market worries came after leading AI companies called for slower development of the technology because of safety concerns. It is still unclear how a slowdown in AI development would actually work. However, the calls have made investors question whether the huge AI investment boom can continue at its current speed. The concern comes after AI stocks have already risen sharply in recent years, increasing fears that some companies could face a correction.
Investors watch AI market correction
Nancy Tengler, CEO of Laffer Tengler Investments, said the recent weakness is more likely to be a temporary problem than the end of the AI trade. She said AI technology is unlikely to simply disappear and added that a correction in AI stocks would not necessarily damage the wider market. Tengler said this, according to Reuters. Her comments reflect the view that investors may simply be taking profits after a very strong run in AI-related shares.
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Fed rate hike puts stocks under pressure
Traders are expecting the Fed to raise interest rates on Wednesday. Markets were pricing in a 92.5% chance of a rate hike, according to the Reuters report. Higher interest rates can hurt stocks because companies and consumers face higher borrowing costs. Higher rates can also make safe investments such as US government bonds more attractive compared with stocks.
10-year Treasury yield crosses 5%
The benchmark 10-year Treasury yield reached its highest level since 2007. It was last up 6.76 basis points at 5.0286%. A Treasury yield above 5% is significant because government bonds are considered relatively low-risk investments. When investors can earn high returns from safer government debt, stocks can become less attractive.
More Fed rate hikes worry investors
Investors are worried that the Fed’s rate hike on Wednesday may not be a one-time move. Markets are preparing for what could be the first of several interest-rate increases.
Anthony Saglimbene, chief market strategist at Ameriprise Financial, said the current inflation situation, strong employment conditions and the need for new Fed Chair Kevin Warsh to establish credibility are increasing the chances of a rate hike. Saglimbene said this, according to Reuters. He said investors should be ready for the Fed to act this week, although there is still a small possibility that policymakers leave rates unchanged.
Oil prices rise above $100
The conflict in the Middle East has shown few signs of easing. The lack of progress has kept oil prices high and increased fears of a disruption to global oil supplies. Brent crude rose more than 1% to $107.02 a barrel. US West Texas Intermediate crude was around $103.30 a barrel, up 1.8%.
High oil prices add to inflation fears
Higher energy prices can increase costs for businesses and consumers. That can push overall inflation higher and make it harder for the Fed to cut rates. Saglimbene said energy prices are currently doing much of the damage on the inflation front. Saglimbene said this, according to Reuters. This creates a difficult situation for stocks because investors are facing both expensive oil and the possibility of higher interest rates.
Also read: US 10-year Treasury yield hits 5%: Will oil prices and Fed rate decision push yields even higher?
Data from the Labor Department showed that consumer prices accelerated in August. A key measure of underlying inflation also recorded its biggest increase in four months. The stronger inflation figures have given investors less reason to expect an easy path for interest rates. If inflation stays above the Fed’s target, borrowing costs could remain high for longer.
At 6:39 am ET, Dow E-minis were down 205 points, or 0.39%. S&P 500 E-minis were down 21.25 points, or 0.28%. Nasdaq 100 E-minis were down 73.75 points, or 0.25%, according to Reuters figures. The moves show that investors were taking a cautious approach ahead of the Fed’s decision and amid concerns about oil and AI stocks.
Crypto and other stocks also fall
Bitcoin dropped nearly 3%, putting pressure on companies linked to the cryptocurrency market. Coinbase and Strategy both fell more than 3% in premarket trading, according to Reuters. The decline shows that the risk-off mood was spreading beyond traditional technology stocks into crypto-related assets.
Shares of Dave & Buster’s dropped nearly 11.2% before the market opened. The fall came after the company reported second-quarter revenue that missed Wall Street’s expectations, according to Reuters.
Overall, Wall Street is being hit by several worries at the same time. Oil above $100 is raising fears about inflation and a possible supply shock. The 10-year Treasury yield above 5% is making bonds more attractive and increasing borrowing costs.
The expected Fed rate hike is adding to concerns about tighter financial conditions. AI uncertainty is putting pressure on some of the technology stocks that have driven recent market gains. Together, these factors are making investors more cautious and pushing US stocks lower before Tuesday’s trading session.
