London Quick Take - 5 Things to Know in Markets Today - 13 Oct

Casino:  A rout in semiconductor and other AI-related stocks worsened Tuesday after Broadcom boss Hock Tan likened investing in the sector to being in a “casino”, whilst the initial trigger seemed to be claims of technological advances by China’s CXMT. The Kospi in Korea, the highest beta AI proxy, was about -6% lower overnight as heavyweights SK Hynix (–10%) and Samsung Electronics (-7%) plunged. The two firms make up about half the index and are approximately –15% lower the last five sessions. CXMT is reportedly making progress on a new chip architecture that improves memory density, which has affected sentiment towards memory chip stocks in particular. AI-obsessed SoftBank tumbled –8.5% in Japan, while chipmaking equipment supplier Tokyo Electron fell –7%. Whatever the reasons/excuses it looks like investors are starting to get a bit twitchy ahead of this earnings season and maybe looking for an excuse to take profits. Cue BlackRock, which has downgraded US equities to neutral from overweight, citing AI investment volatility and improved international opportunities. The idea that the AI bubble could burst got some legs after Broadcom's Tan said "a lot of investors have no clue what they're investing in" and that they set "very extreme expectations", likening them to gamblers in a casino. Caveat emptor etc.

There was some weakness in US chipmakers yesterday – expect more today after the selloff in Asia. Micron fell about –4%, with Intel –3% and AMD –2%. Broadcom’s shares fell nearly -2%. The Nasdaq finished the day about half a percent lower with futures indicating some further softness. In contrast, the Dow Jones rallied +0.4% as Salesforce jumped on a double upgrade from Sell to Buy at Bank of America. The S&P 500 split the difference to end the day almost flat. Today’s focus is on bank earnings, with JPMorgan, Goldman Sachs, Citi and Wells Fargo reporting, followed by Bank of America and Morgan Stanley tomorrow.

European AI-related names have been caught in the selling this morning with the likes of ASML, STMicroelectronics, Infineon, BE Semiconductor and ASM International all lower. That pushed Amsterdam (ASML heavy) down in early trade but otherwise European indices advanced early Tuesday, extending Monday’s positive tone as risk sentiment improved along with a cooling in rates. The FTSE 100 added 1% yesterday and was last up another 1% to 10,760, while the DAX and CAC were each up about 0.5%, albeit soft earnings from LVMH took some of the shine off the Paris bourse and took Kering and Hermes lower with it. Stocks across Europe and Britain have largely shrugged off the chip selloff, as it looks a) relatively contained to memory names, b) we've been here plenty of times before with China companies making big claims, and c) rates are lower.

Bond markets are much steadier, which is helping a lot of the European cyclicality and defensive names. US 10yr Treasury yields slipped about 5bps to 5.19% as bonds catch some bid. BlackRock also turned more bullish on bonds and upgraded short-term Treasuries to overweight. French and UK yields were backing off a similar level, which has provided some relief for more rate-sensitive sectors. Oil prices were lending a hand with Brent down –1.5% having yesterday spiked to a two-week high on escalating attacks on Saudi Arabia by the Iran-backed Houthis. In FX the dollar it an 18-month high, lifted by risk-off flows and hawkish Fed comments from Cleveland's Hammack, who said she prefers quicker, smaller hikes. USD/JPY hit its highest level since Sept 25 during Japan's long weekend, breaking above its 200-day moving average. US CPI tomorrow is the next catalyst.

In London, BP shares rose as its Q3 trading statement revealed it is making progress on the balance sheet as it profits from higher oil and gas prices. Net debt has been taken down from $22bn at the end of June to between $13.5bn and $14.5bn at the end of the third quarter, with management having previously set a target of $14bn-$18bn by the end of next year. New CEO Meg O’Neill took over in April and will reveal her updated strategy in December. Shares have hit their highest since the brief March spike above 600p, which means it’s trading at levels last seen before the Deepwater Horizon disaster. Drilling down to focus on the core oil and gas business is paying off.  Elsewhere, Bellway shares rose as profits were a little ahead of expectations, with underlying operating profits +5.6% to £320.6mn. The housebuilder, which sells around a third of homes to first-time buyers, welcomed the government’s Your First Home scheme. It also said it will target fewer completions this year as mortgage affordability pressures continue to weigh on demand. It’s taken down its completion target to 9,000-9,400 this financial year from the 9,695 in the year to July, which was up 11% on the year prior.