Wall Street Faces Decline Amid AI and Interest Rate Concerns

European markets opened significantly lower on Friday, following a retreat in Asian shares and a tumble on Wall Street the day before. Investors are reassessing the outlook for interest rate cuts and questioning the high valuations of leading US technology and AI stocks.

Dan Coatsworth, head of markets at AJ Bell, mentioned that there are concerns about rich equity valuations and the billions being spent on AI at a time when the jobs market appears fragile. In the UK, government bond yields increased after reports that Chancellor Rachel Reeves has abandoned plans to raise income tax rates in the upcoming Autumn Budget.

The ten-year gilt yield climbed above 4.54% before easing slightly, which has contributed to a gloomy sentiment across European markets. By around 11:00 CET, the FTSE 100 was down more than 1.1%, the European benchmark Stoxx 600 had lost nearly 1%, and major indexes in Frankfurt and Paris also fell.

Bank shares were particularly hard hit on the FTSE 100 as investors digested the prospects of a tighter fiscal backdrop. Despite the declines, Coatsworth commented that a 1% drop is not unusual during market downturns.

On the corporate front, luxury group Richemont rose 7.5% after exceeding first-half forecasts, while Siemens Energy jumped more than 10% after raising its financial targets. In stark contrast, French company Ubisoft suspended trading on its shares following a significant drop of more than 8%.

Over in the U.S., Wall Street experienced one of its weakest sessions since April, with the S&P 500 and Dow Jones Industrial Average both falling 1.7%. The tech-heavy Nasdaq saw a 2.3% decline, with major AI-linked companies like Nvidia and Palantir facing heavy selling pressure.

The extraordinary gains of these tech stocks this year have led to comparisons with the dot-com boom, sparking skepticism about further price increases. As for the Federal Reserve, expectations for a rate cut in December have diminished, with market pricing suggesting only a marginal chance of any further movement this year.

Asian markets followed suit, with China's factory output growth slowing to its weakest pace in 14 months, contributing to a decline in regional indices. South Korea's Kospi led losses, tumbling 3.8% amid heavy selling of technology shares.

In Japan, the Nikkei 225 shed nearly 1.8%, and in China, Hong Kong's Hang Seng fell 2%. Meanwhile, oil prices have strengthened, with Brent crude rising nearly 1.6% to $63.99 a barrel. The dollar has also gained slightly against other currencies, trading at 154.55 yen, while the euro is at $1.1637.