LIVE MARKETS-Looming tech threat

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LOOMING TECH THREAT

The spending boom has made tech companies more vulnerable to rising borrowing costs, and there's looming threats attached to that issue, Capital Economics say.

They estimate that in the third quarter, aggregate cash flow will have been negative, as total hyperscaler capex will have just about exceeded incoming cash flows.

"At face value, that increases the tech sector’s financing needs and may therefore make its earnings — and share prices — more vulnerable to rising yields," Thomas Mathews, head of markets, Asia-Pacific at Capital Economics said.

That leaves the big question of how much more yields might actually rise, he says.

Markets already show traders are assuming there will be almost three quarter-point hikes in the coming year, which limits the impact on yields.

Mathews noted there are other threats for those tech companies with big debt piles.

For one, another chunky rise in oil prices, and secondly, Treasury term premia - the extra return investors demand for holding debt over the long term - rising further.

Fiscal problems, market volatility, geopolitical risk, and waning demand from key institutions are among risks, along with uncertainty about Fed policy, he said.

"That’s not likely to burst the AI bubble on its own. But rising term premia more broadly do, in our view, pose a clear threat to the increasingly debt-funded capex boom and, therefore, to the share prices of the companies that have benefitted from it."

(Sophie Kiderlin)

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