CoreWeave’s rout exposes cracks in the AI market, Labour reopens the Brexit debate amidst a fiscal squeeze, and ASML warns that chip equipment demand will outrun supply.

Welcome to this week’s Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

Today, we’re looking at CoreWeave’s bond sell-off, Labour reopening the Brexit debate, and ASML warning that demand for its chipmaking machines will outstrip supply.

But first, our number of the week…

100 million barrels

That’s how much oil International Energy Agency members agreed this week to release from emergency stockpiles to cool fuel prices. The total includes 20 million barrels of diesel, to be released ‘as soon as possible.’

Sidekick Takeaway: Stockpile releases can ease near-term pressure, but they don’t fix the underlying shortage. With the Iran war and Ukrainian strikes on Russian refineries squeezing diesel supplies, fuel costs could keep adding to UK inflation pressure.

Only have a minute to read? Here’s the TL;DR:

• CoreWeave’s bonds sank to distressed levels this week, with yields spiking to around 15% and credit default swaps implying an elevated chance of default. Neoclouds run a highly leveraged business model, making them sensitive to rising borrowing costs.
• Foreign Secretary Ed Miliband called for a deeper relationship with the EU, backing Andy Burnham’s push to reopen the Brexit debate. With Brexit estimated to cost the UK £30 billion a year in lost taxes, the fiscal case for closer ties is hard to ignore.
• ASML warned that demand for its chipmaking machines will outstrip supply through 2028, with some customers already seeking orders for 2030. As the only maker of advanced lithography machines, ASML has become a chokepoint in the AI buildout.

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

Storm Clouds: CoreWeave Rout Exposes Cracks in the AI Market

CoreWeave’s bonds sank to distressed levels this week, with soaring yields starting to expose cracks in the AI market.

CoreWeave is the largest ‘neocloud’ – a company that borrows heavily to buy advanced chips and rent out computing power to AI firms.

That model has fuelled rapid growth. But as the company’s borrowing costs have risen, it’s also become extraordinarily expensive to finance.

Yields on CoreWeave’s debt have climbed to around 15%. Meanwhile, credit default swaps on the company’s bonds spiked, implying a more than 60% chance of default within five years.

For investors, these moves are a warning sign in one of the most fragile corners of the AI trade.

CoreWeave worries are spreading

CoreWeave’s sell-off was amplified by a range of factors, adding to a broader slide among AI stocks:

• This week, a CoreWeave co-founder noted that the company was seeking ‘unlimited’ pools of capital. The comments spooked investors worried about aggressive borrowing.
• On X, Elon Musk drew further attention to the sell-off, responding to a chart of CoreWeave’s bonds with a simple ‘yikes.’
• Adding to investor anxiety, research firm Gartner released a report this week stating that about 80% of neocloud providers could shut down by 2030.

Even Nvidia, CoreWeave’s second-largest investor, has been drawn into the turmoil.

CEO Jensen Huang had to assure markets that there’s no need for the chipmaker to backstop the company. And with CoreWeave holding an order backlog of over $100 billion, some analysts see the sell-off as overdone.

Sidekick Takeaway: CoreWeave’s sell-off is a stark reminder that the AI trade isn’t immune to higher financing costs. While cash-rich hyperscalers can typically absorb rising yields, the same can’t be said for highly leveraged neoclouds.

Exit Strategy: Labour Reopens Brexit Debate Amidst Fiscal Squeeze

Foreign Secretary Ed Miliband called for a ‘deeper and stronger’ relationship with the EU, adding fresh momentum to the renewed debate over Brexit.

Last month, Prime Minister Andy Burnham called for a new deal with Brussels, floating the possibility of rejoining the EU. Miliband’s comments show that the idea is gaining traction.

Attempting to rejoin the EU would be deeply controversial, especially since Labour has pledged to keep Brexit’s core red lines in place.

Yet with Britain’s public finances under severe strain, the economic case for closer ties is becoming harder to ignore.

Political lines, fiscal reality

Ten years on from the referendum, the economic costs of leaving the EU continue to add up:

• Bloomberg Economics estimates that Brexit has cost the UK 2.5% of GDP and about £30 billion a year in forgone tax revenue.
• These figures come at a time when the fiscal backdrop has rarely been tighter. UK debt sits at a 60-year high, with borrowing costs recently hitting levels not seen since 1998.
• Adding to the economic case, Goldman Sachs published research this week estimating that rejoining the EU could give the UK a £150 billion boost to growth.

As the debate grows, public opinion has begun to shift.

Polling suggests the UK would likely vote to remain in the EU if the referendum were rerun, with 57% of Britons believing it was a mistake to leave the bloc.

Sidekick Takeaway: Ultimately, the decision to rejoin the EU isn’t Britain’s alone, with Brussels setting the terms for a closer relationship. Canada’s recent EU partnership could offer a framework for deeper cooperation, even if rejoining is off the table.

Light Work: ASML Says Equipment Demand Will Outrun Supply

ASML, the world’s leading lithography firm, has warned that demand for its chipmaking machines will outstrip supply at least through 2028.

Europe’s most valuable company now expects fourth-quarter sales up to €15.2 billion, ahead of analyst forecasts. Some customers are already trying to place orders for 2029 and 2030.

ASML is the only company in the world that manufactures the machines needed to make the most advanced chips.

This guidance indicates that the AI buildout is being increasingly constrained by supply, not demand.

Abundant demand, scarce machines

ASML is planning to raise production of its most advanced machines by 30% next year. But that still won’t be enough to keep pace with the AI buildout:

• Customers like TSMC and Intel are seeing what ASML’s chief executive called ‘very, very strong demand’ for their own products, prompting them to accelerate production capacity.

• But lithography equipment supply can’t ramp up quickly. ASML’s machines are among the most complex ever built, taking months to build and install.

• For ASML, that scarcity is translating into results. ASML’s third-quarter sales rose 55% year on year to €11.7 billion, and its shares have risen sharply over the past 12 months.

No matter how much capital flows into AI, the buildout can’t move faster than the machines that make cutting-edge chips.

Still, bottlenecks cut both ways. If AI demand cools, ASML customers could find themselves with expensive capacity they no longer need.

Sidekick Takeaway: Being the sole supplier at the industry’s deepest chokepoint brings significant pricing power. ASML has already completed a new round of price negotiations with customers, which it expects to show up in next year’s results.

Notices

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