Global Stock Market Rout, France's Anaemic Growth, Hungary's Euro Bid

0:02 Bloomberg Audio Studios.

0:04 Podcasts.

0:05 Radio.

0:06 News.

0:10 This is the Bloomberg Daybreak Cure podcast. Good morning. It's Tuesday, the 13th of October. I'm Caroline Hepka in London. Coming up today, AI stocks plunge as trillions in global investment raises fears the boom could carry echoes of 2008. The IMF slashes French growth and forecasts only modest gains for Germany and the UK next year. Plus, Hungary's new leader begins his biggest challenge, joining the euro. We have a special report. Let's start with a roundup of our top stories.

0:42 A global stock route is deepening as concerns mount over artificial intelligence bets. South Korea's KOSPI plunged as much as 7%, with SK Hynix and Samsung both falling about 9%. The losses followed a Wall Street sell-off as concerns about Chinese competition and stretched AI valuations has intensified. Bloomberg's Danny Berger points out that even some of the industry's biggest names are questioning the AI boom.

1:09 Broadcom CEO Hawk Tan is likening the AI trade to a casino and questioning the economics of money losing AI labs.

1:17 Tan says that a.

1:18 Lot of investors have no clue what they are investing in and set very extreme expectations almost to find out that.

1:24 They are in a casino.

1:26 Danny Berger there on the comments from Broadcom CEO Hock Tan, which were made at an event in Singapore. Last week, billionaire Ray Dalio also warned that AI is a classic bubble nearing a bursting point. The sell-off in AI stocks is reviving a much bigger question, whether the boom is creating risks reminiscent of the 2008 financial crisis or Bloomberg Economics says that a global pool of excess savings is increasingly flowing into US tech stocks and the $ 9 trillion AI build-out. Now, foreign investors have about $ 4. 9 trillion exposed to US-listed shares in industries that are at the heart of the AI boom. Bloomberg Economics' chief economist, Tom Orlick, says that one important difference, though, from 2008 is who

2:19 controls the money flowing through global markets.

2:23 On the surplus side, it's not very cautious, very risk-averse central banks moving the money. It's private investors who are much more nimble, much more focused on returns. And on the companies which are taking the investment, well, it's not the safe, secure US Treasury market anymore. It's the AI hyperscalers.

2:40 And if they deliver, well... Everyone's going to be better off and the Asian investors are going to get paid. But if there's a moment where the market says, you know what, we thought the profits from AI were going to be here and they're not. We're shifting from bulls to bears. Well, it's going to be a challenging moment. Well, there's an if there, isn't there?

2:57 Tom Orlick, though, also points out that a sharp AI downturn could spill across other assets if investors are forced to sell government bonds in order to cover losses elsewhere.

3:09 U.S.

3:10 Bank stocks are hovering in correction territory as Wall Street's biggest lenders begin reporting earnings today.

3:16 J.P.

3:17 Morgan, Citigroup, Goldman Sachs and Wells Fargo all report before U.S. markets open. The KBW Bank Index has fallen about 12% since August as Treasury yields have surged and the Federal Reserve has raised interest rates. McRae Sykes of Gabelli Equity Trust says that despite rate and credit risks, he still expects strong results.

3:42 The background for earnings growth for these major companies is good. You have nominal growth, low unemployment, good credit, and then the wealth effect. As we know, household wealth is up almost $ 20 trillion as of June. So a lot of these things. And then we just got a report on September spending in terms of the consumer, which is 70% of the overall economy. It was very strong there, too.

4:02 So despite some of the challenges in terms of worries about the outlook, we still see a pretty good environment for owning the banks.

4:08 McRae Sykes there. Today's earnings will be followed then on Wednesday by Bank of America and Morgan Stanley. The IMF is downgrading France's growth outlook, even as it says that the global economy will get an AI boost. The fund expects France to grow by 0.4% this year against global growth of 3.1%. BNP Paribas chief economist Matthias E. Lagos says that there are asterisks to that prediction.

4:37 How long can this resilience last in the face of those strong-ish headwinds of the energy shock and of the... very strong rise in interest rates, which again, we're seeing across the world.

4:51 So, these are strong tailwinds.

4:53 And so, I think this is going to test the resilience that we've seen so far.

4:58 That was BNP's Isabel Mateos-Hilargo speaking there. The high energy prices that she noted have weighed on Europe. Germany is expected to grow by 1.1% next year. Meanwhile, UK growth is forecast to edge down. to 1.2% as energy prices and high interest rates weigh on consumption. French students are set to take to the streets again today as protests over education enter a third week. More than 250,000 people joined demonstrations last Tuesday with students demanding action on understaffing and overcrowding. However, the French government has little scope to spend more as Parliament begins debating plans to rein in France's fiscal deficit. Bloomberg Economics says that India's expanding trade deals could add about $ 140 billion to its economy by 2035.

5:55 The outlook comes as Bloomberg's new economy forum gets underway in New Delhi, focused on India's economic ambitions and investment plans. Prime Minister Narendra Modi has been speaking to the forum on India's role in a changing global order with AI and technology at its heart. Now, his words are spoken by a female translator.

6:18 Is not who has the power. The real question is how is this power being used? Will technology only help a few people to progress?

6:36 Or will it.

6:39 Create new opportunities for millions of people?

6:43 Narendra Modi speaking via a translator at Bloomberg's New Economy Forum in New Delhi today. America is under pressure meanwhile to step up as Saudi Arabia struggles in its battle against the Houthis in Yemen. Bloomberg understands that Riyadh is now desperately looking to the US and other allies for support.

7:01 Here is Bloomberg's National Security Editor Ian Marlowe.

7:05 It's getting really bad. And I think this is for Saudi in particular, this is the worst we've seen throughout the whole Iran war in terms of the fallout. And now we have a proxy group in Yemen. And I think we're seeing something that could push the U.S. to potentially get, you know, increasingly bogged down.

7:25 Bloomberg's national security editor Ian Marlow there. The conflict risks further pressure on oil prices, but the Trump administration is wary of getting drawn into another conflict in the region ahead of the US midterm elections. The UK's prime minister says that Iran's IRGC was almost certainly responsible for an alleged terror plot at a British airbase used by the US.

7:48 Andy Burnham was speaking in parliament for the first time since the incident at RAF Fairford last month.

7:55 We will not tolerate these threats on our soil. We will crack down on Iran's use of criminal networks, using our full range of powers to target them and their funding streams. And we will bring further sanctions to restrict the capacity of Iran and the IRGC to do us harm.

8:12 That was the UK Prime Minister Andy Burnham. The Foreign Secretary Ed Miliband summoned the Iranian ambassador who rejected the claims. More than two dozen UK allies, including the US, released a joint statement condemning Iran's attacks and hybrid actions. German police have detained two Turkish citizens suspected of setting fire to a Starling facility near Warsaw last month. Poland says that it has requested their extradition and has no doubt that Russia was behind the arson attack. In a social media post, Prime Minister Donald Tusk called it another act of hybrid warfare. It follows a spate of recent incidents which Poland's foreign minister described as just below the threshold of invasion.

8:58 The Russians have conducted operations that only by miracle haven't killed people. They've burned down a huge shopping mall here in Warsaw. They've blown up rails underneath a moving train. They've actually assassinated people. Last winter, they tried to block our heating system. They've attacked a hospital. We are apparently, according to some credible research, the number one target of disinformation and cyber attacks.

9:28 That was the Polish Foreign Minister, Władysław Sikorski, speaking at the Warsaw Security Forum. Those are our top stories for you today. Looking at the markets, we see a global slide in tech stocks, which is deepening. So, the KOSPI at the moment is down by 5.6%. The Nikkei 225 dropping 2%. Stock futures for Europe and the US in the red. Eurostox 50 futures down 0.1%. NASDAQ futures slumping 0.7%.

9:54 This is despite the high expectations in terms of earnings season that we'll get into in a moment. Looking at 10-year U.S. Treasury yields, which are back after a long weekend, a U.S. holiday, they're down four basis points at 5.2% oil prices. Although down 1.2%, Brent crude futures are still well above $ 105 a barrel. And an interesting line, Andy Burnham and the Chancellor, John Healey, expected to host British businesses ahead of the budget. I think that's also worth noting as we think about markets this morning. Now, in just a moment, I want to bring you a special report about Hungary, changes there, and also think about the earnings season this quarter. Before that, though … Something else

10:39 that I spotted. Do you have a print on your wall? And do you consider it art? The history of printmaking going back to Albert Durer, of course, with the rhinoceros, which was made in 1515, sold 15,000 copies of a beautiful, intricate pattern of this animal that actually the artist had never seen. Then that goes to, of course, Hogarth and Andy Warhol. Felix Sammon has been writing about this, a lovely story in Bloomberg Businessweek. about the origins of the print and its uses today, how prints generate real money.

11:12 They add up, of course, if you do a decent print run. I didn't realize that they are increasingly being used in fundraising for museums or projects. and that they're sort of an on-ramp for collectors. There are a few names that stand out, companies that do this work that I thought were interesting. Edition Copenhagen in Denmark. You've got Pace Prints, Two Palms in New York. And then Felix also talks a lot about Avant Art. which is based here in London that sells almost exclusively online. Its prices are very low. And Felix points out that it democratizes art.

11:50 It's the chance to sort of own something from the artist with a lesser price tag. I'm going to put a link to this story in our podcast show notes because I think it's just so interesting about the art world. European stocks have struggled to recapture the record highs that we saw in August with the bond sell-off and rising oil prices in the backdrop. But investors are now turning to the earnings season and whether third quarter results can allow the bull market to extend. Tim Craighead is Bloomberg Intelligence's Director of Equity Research and joins us now. Tim, great to speak to you. After a positive surprise with mid-year results, What's the overall setup for European earnings in the third quarter?

12:34 Well, thanks for having me on. It's great to be here as always.

12:37 The setup going into 3Q on the surface looks amazingly robust. Expectations at this point are for 23% year-on-year growth, which is It compares nicely to what was a very positive, robust second quarter earnings reporting period that was up 17% year on year. And remember, the expectations for 2Q were only 12% to begin with. So it went from 12% to 17%. And now we're looking for 23%. So all of that would suggest.

13:15 Pretty nice backdrop.

13:17 And we've also seen about 10% positive revisions for this year and next, if you look year to date in.

13:24 Terms of where expectations are going. So it's pretty interesting.

13:28 Yeah, that is. What are the key drivers then? I mean, how important are elevated energy prices going to be to businesses?

13:36 Yeah, no, this is where the interest really goes if you start digging under the surface. And I'm leveraging a note that Laurent Doulet has published this morning, which is absolutely fantastic.

13:48 And there's a lot to unpack.

13:49 But there is a potentially soft underbelly here in terms of the narrowness of where earnings are coming from. About 70% of the earnings gain that's expected... is actually coming from energy and AI-related infrastructure plays with the whole data center build-out. You look at energy and it is sort of the best of all worlds. You've got strong energy prices and you've got really good refining margins. And if you look ahead the next few quarters, forward estimates actually don't really seem to reflect where energy prices are.

14:29 I think the big question.

14:31 at this point with the energy sector is what do they do with their with the cash flow do they buy back stock or pay dividends or reduce the leverage or do they invest because folks like donald trump want more energy resources and europe needs energy independence so i think there's a lot of questions not so much about the earnings stream but what do they do Yeah.

14:54 What about AI, though, and that theme, given the lack of hyperscalers in Europe and the rest of the U.S. tech stack?

15:05 Yeah, I tell you, it is interesting from that perspective. We don't have the big tech problems. that you mentioned, but we do have ASML. We do have some other semiconductor companies like STMicro and Finian that play in various ways into the infrastructure. And we've got a lot of industrial companies that play into the data center build-out in terms of power supply. So if you look at this group...

15:36 um it's it's actually a pretty decent group of companies um you know our strategy team tracks a set of about 30 companies um and you know the stocks are off even with positive revisions so clearly there is a question along the lines what you all were talking about from a new setup that um We need proof that there is real benefit coming to the rest of the economy that continues to push forward the data center story that plays into these sort of second derivative ideas that Europe has so many of. We did just publish our updated AI data center model yesterday, and we've raised our forecast yet again.

16:20 Amazing. Just lastly, on financials, they've also been riding a wave of better revenue, obviously, because of higher interest rates. But when does that become a problem for the banks?

16:31 Yeah, that's a 54,000 pound, euro, whatever question, isn't.

16:37 It?

16:38 It is the third biggest source of earnings gains this quarter, almost 15% of that expected increase. And so far, we've had higher rates equal higher net interest income increase. And AI is starting to be implemented across the banks. We should actually hear plenty from the financial companies about AI implementation.

17:00 That's quite critical. But at some point... too much of a good thing is too much of a good thing. Higher rates end up clamping.

17:09 Down on loan growth.

17:11 They can have a negative impact on credit quality as people have a hard time repaying their loans. And AI agents are helping depositors find higher yields, which increases the cost for the bank. So we're at an interest point to look at a rate to good or a rate starting to be you know a crack and you know what the what the banks here as well as in the u.s that you highlighted um are going to.

17:40 Say this third quarter i think it'd be quite uh quite timely.

17:43 Yeah tim thank you so much for being with us for laying it all out uh the third quarter earning season in europe tim craighead is bloomberg intelligence's director of equity research thank you so much Stay with us. More from Bloomberg Daybreak Europe coming up after this. Hungary has seen rapid change under a new government. Peter Maia won a landslide election, if you recall, six months ago, defeating Viktor Orban. Now the big question is whether he can deliver membership of the euro. Andras Kegeli is our Emerging Markets Editor and joins us from Budapest. Good morning. How has Maja changed the country so far? What's different in Hungary?

18:26 And also, what are the election pledges that he has started to work on and deliver?

18:31 Hello. Good morning.

18:33 So, yeah, Peter Maja's new government has removed the previous leadership appointees from almost all of the key positions that could have stood in the way of its agenda. The Orban-appointed president of Hungary was removed via change to the constitution and along with top justices and prosecutors. And the propaganda machinery that helped Orbán win four consecutive elections has been shut down. Some of his allied media imploded, basically, after the elections. And Hungarians were also quite impatient to see those who are suspected of corruption to be locked up.

19:10 And those prosecutions are also picking up speed.

19:16 Okay. Yes, I've been reading about how radical the change in the media landscape in Hungary has been and how sometimes stressful that can be for people to understand and adopt. In terms of the plan, though, going forwards for the country financially, this idea of adopting the euro, which was a huge pledge, there are big challenges. Just explain what they are. Yeah, right.

19:42 So, for investors, first and foremost, they had that pledge by Peter Maggio to abandon the foreign currency and adopt the euro is really the key here. And that's already sparked a sort of virtuous circle of lower borrowing costs and already a stronger currency and lower inflation as well. And more of this convergence process is yet to play out. So, so far so good, but the hard part is still ahead and that's what we've been writing about today. We'll get to hear from the government next week on how it plans to cut the budget deficit. That's been a really difficult part and it's eluded its predecessors so far.

20:19 Okay. And so, how do you think the wider Hungarian business community and then also the electorate are sort of responding to this plan amidst quite rapid change?

20:29 Yeah, so it's been remarkable to witness gatherings of Hungarian business leaders and economists in the past few weeks. It's basically conference season here in the autumn. And the Euro adoption plan has totally dominated discussions. And most of the influential corporate executives and economic commentators that we spoke to and that we heard at conferences, they're united in benefits of that Euro adoption plan. Of course, they also shared concerns about the challenges of meeting the criteria for getting there.

21:02 Thanks for listening to Bloomberg Daybreak Europe. If you're enjoying the podcast, give us a follow, leave a rating or review and maybe send it to that one friend or colleague who's always trying to keep up with the news.

21:13 And if one podcast a day isn't enough for you, you can also listen to us live every weekday from 6am in London on DAB Radio, on TuneIn and on the Bloomberg Business app.

21:23 Or if you've got a smart speaker nearby, just say play Bloomberg Radio.