Earnings season is underway in the US, and so far, the numbers are weighing heavily on equity valuations. Nasdaq suffered the worst, trading down 2.05%, with semiconductor stocks leading the losses; ASML sank 7% on poor results, while ARM and Nvidia dropped 12% and 3.8%, respectively. The fundamentals continue to look weak for the sector as the semiconductor war with China reaches new levels. Fed Chair Powell reiterated more of a hawkish stance, which was not entirely expected by the market, with June cuts seemingly off the agenda until core inflation looks like softening. Sighting the unresolved geopolitical pictures in the world to keep the status quo until a clearer picture emerges. After Iran’s drone attack on Israel, Oil has settled back into the range after a spike, and we are waiting for the IDF’s next move. Iran has taken global advice and downplayed the events, seemingly reluctant to take it further. The next move is from Israel, so here is hoping the focus will be on resolving issues with Gaza and hostages rather than opening up a new front.
But first, lets a have a closer look at what is happening in the semi-conductor markets, as this will help provide an insight into what may be happening in the tech-heavy NASDAQ. The semiconductor industry's dismal performance during earnings season reflects broader concerns about the sector's outlook amidst escalating geopolitical tensions and trade disputes.
The semiconductor industry's woes are further exacerbated by supply chain disruptions and ongoing trade tension between the United States and China. The imposition of tariffs and export restrictions has added another layer of complexity to an already volatile market environment, leading to increased uncertainty and risk for semiconductor manufacturers. As geopolitical tensions continue to escalate, semiconductor companies are faced with the daunting task of navigating geopolitical headwinds while maintaining profitability and competitiveness in an increasingly challenging operating environment.
The US is restricting the supply of semiconductor chips to China. China has banned the chips made in the US in critical infrastructure projects. At the core are restrictions designed to protect foundation technologies aiming to curb sales of advanced chips and chip-making technology from US suppliers. The Biden administration feels that a big part of the frustration involves developing autonomous weaponry, including hypersonic autonomous weapons and AI. The PLA in China wants to become a “world-class” military by 2050, and semiconductors are a key component to achieving this goal.
According to Nvidia's CEO, the US restrictions will cause enormous damage, “revenue for the group from sales into China have declined by nearly 20%”. Nvidia tumbled nearly 10% during the week to book the biggest market-cap loser of the week. The semiconductor war with China is reaching new levels of intensity, casting a shadow over the industry's fundamentals and weighing heavily on investor sentiment. ASML, a key player in the semiconductor manufacturing sector, saw its stock price plummet by 7% following disappointing earnings results. Similarly, ARM and Nvidia faced steep 12% and 3.8% declines on the day, respectively, underscoring the challenges semiconductor companies face in navigating a rapidly evolving geopolitical landscape. This will continue to haunt the industry until a resolution is found.
Although not news, Federal Reserve Chair Jerome Powell's unexpected shift towards a more hawkish stance has added to the uncertainty surrounding market expectations for interest rate cuts. While the market had anticipated potential rate cuts in June, Powell's comments suggested a more cautious approach, citing the need to wait for clearer signs of inflationary pressures to emerge. In a statement to resent expectations, he said that monetary policy needs to be restrictive for longer, further dashing investors' hopes for meaningful reductions in borrowing costs this year. Put lightly, the cost of money will remain as it is and companies need to navigate around this when adjusting their expectations in profitability. This a measure that we are seeing companies completing, albeit at a cost to their valuations. Along with JPMorgan’s results, Bank of America last week showed weakening interest rate returns, and further, whilst agreeing that retail sales remain robust, net debts are unlikely to be recovered, rose to $1.5 billion in the first quarter from $807 million a year earlier, mainly from credit card losses. Spend now, pay later, and if you can’t, the default seems to be how consumers are going, especially as the profitability of the bank sector in other income streams remains so robust.
This week in the US, all eyes will be on Q1 GDP growth rate, PCE prices, and personal income and spending figures. Additionally, investors will closely monitor durable goods orders, S&P Global Manufacturing and Services PMI's and pending and new home sales. Earnings season will hit a crescendo with over thirty companies boasting market caps exceeding $100 billion set to unveil their financial reports. Closer to home, we have important inflation data in Australia that will help policy for the RBA. The market is expecting a weak number on a YoY basis, coming out at 3.4% (previous 4.1%); however, MoM data is expected to witness an uptick to 3.4%. We expect to see an increased trend in inflation over the coming months that will deter the RBA from any action on interest rates.
On the position front, we remain … in the S+P (…), and we added another … at …, so the positions are good. We are … USD/JPY at … and looking for another entry point. In the other currencies, we are still …, both the AUD/USD (US…) and AUS/CHF (…).
Trade Focus:
Fundamentals:
US Equity NVIDIA: Chat in the semiconductor market looks to continue, and with the US Government weighing in against China, we expect modest expectations from the sector going forward …
Technical Analysis:
The chart looks interesting. The rejection of the high at …
Support …
Resistance …
Momentum …
