Global markets experienced heightened volatility in the fourth week of August as technology stocks faced renewed scrutiny over artificial intelligence valuations, central banks charted divergent paths, and political drama tested Federal Reserve independence.

Technology Reckoning Intensifies

The technology sector bore the brunt of selling pressure, with the Nasdaq experiencing notable swings throughout the week. The selloff gained momentum following OpenAI CEO Sam Altman's warning about investor overexcitement in AI, but deeper concerns emerged from an MIT research report revealing that 95% of large U.S. companies were not generating profits from their AI investments. This sobering reality check highlighted the disconnect between massive AI infrastructure spending by tech giants and actual monetisation, drawing uncomfortable parallels to the dot-com era.

Nvidia declined over 3% while AI analytics firm Palantir plummeted more than 9% amid the reassessment. The weakness in expensive, long-duration tech names coincided with bond market volatility, as 10-year Treasury yields swung within a 20 basis point range, significant movement by modern standards.

Divergent Market Performances

While technology struggled, other market segments showed resilience. Small-cap stocks notably outperformed, with the Russell 2000 gaining 6% in August, suggesting awakening "animal spirits" in the real economy. Emerging markets and Chinese equities rose approximately 5%, buoyed by policy reforms around residence and property ownership that signalled greater openness to market mechanisms.

Central Banks Navigate Different Challenges

The Reserve Bank of New Zealand delivered a dovish 25 basis point cut, signalling additional easing ahead as the economy faces persistent weakness and widening output gaps. In stark contrast, the Bank of England confronted stubborn inflation with UK CPI at 3.8% year-over-year and retail prices surging 4.7%, complicated by robust 5% wage growth.

Federal Reserve meeting minutes revealed hawkish concerns about inflation risks from tariffs, though this assessment preceded weak employment data. Markets continued pricing a September cut despite the uncertainty, while Fed officials like John Williams suggested neutral rates would ultimately settle below 3%.

Trade and Economic Headwinds

Japan's trade data underscored tariff impacts, with July exports falling 2.6% and auto exports plunging 28.4%, swinging the trade balance from surplus to deficit. Walmart's disappointing forward guidance added to concerns about consumer resilience and tariff effects on retail.

Australian Earnings Disappoint

The Australian reporting season proved challenging, with more earnings misses than beats, an unusual reversal of typical patterns. Notable disappointments included CSL falling nearly 17% after a Behring division miss, while bright spots included Brambles rising 13% on strong cash flow outlook.

Fed Independence Under Fire

President Trump's attempted dismissal of Fed Governor Lisa Cook over alleged mortgage fraud created political theater, though markets largely shrugged off the move. Cook's intention to challenge the action in court set up a potentially lengthy legal battle over central bank independence.

Market Positioning

Bond markets reflected a "knife-edge equilibrium" between inflationary deficit spending and potential liquidity squeezes. Interest rate expectations showed U.S. rates falling more dramatically than Australian rates initially but remaining lower longer-term, suggesting markets aren't pricing a deep recession but rather modest policy adjustments.

The week ultimately highlighted markets grappling with the reality that AI investment returns remain uncertain, global growth faces tariff headwinds, and central banks must navigate increasingly complex political and economic crosscurrents.