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Wall Street investors continue the rotation out of tech stocks, a trend that has been exacerbated by geopolitical tensions with China. The Biden administration is reportedly considering a rule that would restrict companies from exporting critical chipmaking equipment to China. The way the rule is structured means it could also impact non-US companies, such as Netherlands-based ASML Holdings and Japan’s Tokyo Electron.
Some say the US is using the rule proposal as leverage to get those two countries to tighten their own China measures. ASML coincidentally reported Q2 2024 earnings yesterday that easily topped Wall Street expectations, with orders for its chipmaking machinery up +24%. However, nearly half the company’s sales were to China, which shows how bad a deal the proposed restrictions could be for many companies.
More widely, investors are growing more concerned about how growing tensions between the US and China could impact tech companies as both sides seem keen to keep putting up new trade barriers over “national security” concerns.
Chipmaker stocks may also be under pressure after Trump in an interview suggested that Taiwan should pay for the US to defend it. Taiwan is an important tech hub and home to Taiwan Semiconductor, the biggest chip contractor in the world with customers including Nvidia and Apple. For those not familiar, China claims Taiwan as its sovereign territory but Taiwan considers itself an independent Democracy.
Bottom line, a significant portion of tech companies’ overseas businesses could face major headwinds and the new threats are coming as Wall Street was already questioning some of the nosebleed valuations. Because of big tech companies’ enormous size, the selloff across the sector is pulling the S&P 500 and Nasdaq indexes down pretty hard.
The Nasdaq lost more than -500 points for its worst day since 2022. However, money doesn’t appear to be leaving the market but rather continues to flow into other sectors. The Dow yesterday gained for a sixth consecutive trading session and set its 22nd record closing high of the year. Taiwan Semiconductor just happens to be on the earnings calendar today, with results due after the market close.
Investors will also be digesting earnings from Abbott Labs, Blackstone Group, Cintas, Domino’s Pizza, D.R. Horton, Intuitive Surgical, Marsh & McLennan, Novartis, PPG Industries, and SnapOn.
Turning to economic data, the Philadelphia Fed Index is today’s only key release. There are also several Federal Reserve officials scheduled to speak today, including Fed Governor Michelle Bowman.
Logistics Executives Say America’s Freight Recession is Nearing Its End: The trucking industry is turning a corner after a prolonged freight recession that succeeded the Covid boom in transportation rate and services, according to logistics executives. Data from Motive, which tracks trucking visits to North American distribution facilities for the top five retailers, shows volume up 30% year-over-year in June. Data across the retail sector shows year-over-year order increases through June, including at department stores, electronics, and apparel retailers with bricks-and-mortar locations 32.9%, home improvement 24.4%, grocery & superstores 22.1%, and discount retailers & wholesalers 13%. Hamish Woodrow, Head of Strategic Analytics founder and CEO of Motive said that the trucking industry has been in one of the longest recessions in history, combating flat to slow demand. The bankruptcies of Yellow, Convoy, and the financial struggles of Flexport were among the U.S. companies hit hard by the freight recession. Source CNBC
Real-Estate Meltdown Strains Even the Safest Office Bonds: The commercial real-estate meltdown is spilling over into the bond market. Defaults are mounting in a favorite Wall Street mortgage-bond investment, setting off fresh alarms about the future of offices and malls in cities across the U.S. There are about $260 billion of the deals, known as single-asset, single-borrower bonds, held by investors such as banks, insurers, pensions and mutual funds. Landlords, often private-equity firms, used that money to purchase skyscrapers, shopping centers and other properties. Much of the debt is coming due and refinancing markets are frozen for many office and retail landlords. Some are defaulting even before their due dates because their interest expenses soared when the Federal Reserve raised rates. These so-called SASB bonds were meant to be ultrasafe, but the rate of loans at or near default has nearly tripled over two years, hitting 8.7% in 2024, according to data from the CRE Finance Council, a trade group. The losses are particularly jarring for investors because credit-rating firms initially gave many of the bonds triple-A ratings—higher than even U.S. Treasury bonds. But the financial models behind the ratings never forecast property prices falling below the value of the debt. When the pandemic gutted demand for offices, private-equity firms abandoned near-vacant buildings and their debts, leaving bondholders holding the bag. Source WSJ
America’s Oil Industry is Booming: For all of the focus on an energy transition, the American oil industry is booming, extracting more crude than ever from the shale rock that runs beneath the ground in West Texas. After years of losing money on horizontal drilling and hydraulic fracturing, the companies that have helped the United States become the leading global oil producer have turned a financial corner and are generating robust profits. The stocks of some oil and gas companies, such as Exxon Mobil and Diamondback Energy, are at or near record levels. The industry’s revival after bruising losses during the Covid-19 pandemic is due largely to market forces, though Russia’s war in Ukraine has helped. U.S. oil prices have averaged around $80 a barrel since early 2021, compared with roughly $53 in the four years before that. Oil companies’ success is not just the result of higher prices. Under pressure from Wall Street to improve financial returns, the companies that survived the 2020 oil-price crash generally ditched the debt-fueled growth strategy that had propelled the American shale boom. Since 2021, oil and gas wells in the lower 48 states have generated more than $485 billion in free cash flow, the money left over after spending on operations and new projects. In the decade prior, the industry spent nearly $140 billion more than it took in. Source NYT
AI Faces Ominous Hurricane Season Test: This hurricane season will provide a true measuring stick for WindBorne Systems Inc., an artificial intelligence weather-forecasting startup. It’s already been marked by the strongest June storm on record, and the superheated oceans are primed to spin up more dangerous cyclones. Throughout the season, WindBorne is launching balloons from Cabo Verde, a hurricane formation hot spot. The startup says it has “more inbound interest than we can handle right now” in terms of customers. Those customers will have other choices, too. Rival AI forecasting startups including Atmo, Jua and Tomorrow.io are all hoping to sell their weather predictions to government agencies and weather-dependent industries such as energy and aviation. ECMWF and NOAA are also working on AI models of their own, drawing on a wealth of in-house meteorology and modeling expertise. Then there’s the possibility that an inaccurate AI forecast for a high-stakes event such as a hurricane or wildfire conditions could undercut public trust in the technology. Source Bloomberg
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