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London Quick Take - 19 Aug - Chip stocks bear brunt of bond rout as selloff eases a touch, UK inflation rises but rate hike odds lengthen
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
UK inflation accelerated in July but there's nothing in particular in the report to give reason for the Bank of England to be more worried. If anything there ought to be some relief and the print should give the BoE some breathing space to resist calls for hikes. July CPI picked up to 2.9% from +2.6% in June, as expected and largely due to a 13% rise in the energy price cap. Food inflation was at a five-year low and services inflation ticked lower to +3.4% from 3.6%. Yes, there is likely more headline CPI in the post, but the key component for the BoE is wages and yesterday's labour market report shows pay growth is cooling sharply. The Bank can't hike into a supply shock like when the underlying economy is weaker as a result...no hikes, next move is a cut. Markets accordingly trimmed expectations for a hike from about one-in-four to less than one-in-five as the 2yr gilt yield dipped a couple of bps. Nevertheless, the BoE will be mindful about de-anchoring inflation expectations due to persistent supply shocks and the pass-through from prolonged conflict on things like diesel and food.
Global bond yields remained near multi-year/multi-decade highs, pushing pressure on global equity markets, but the rout has eased somewhat with the US 30yr yield backing off its 19-year high at 5.339% to 5.269%, while the UK 30yr down to 5.80% from its two-decade peak at 5.877%.
Chipmakers are bearing the brunt and led the fallout with the SOXX semis ETF –5% yesterday on Wall Street, with Micron and Intel each –7%, Nvidia –2%, which pulled the Nasdaq down –1.33% for the session. The broader S&P 500 declined –0.7% to break through some support around the 7,700 level, while the Dow Jones held up better, sliding –0.2% for the day.
Asian markets took the cue as the Kospi – the AI hardware/infrastructure proxy play – tumbled more than –5.8% for overnight, while the Nikkei 225 fell over –3%. SK Hynix slipped –10% and announced a massive 40 trillion won ($29bn) share buyback, aiming to reassure investors on AI demand durability.
European markets were a little more mixed with the FTSE 100 marginally higher thanks to some support from basic resources stocks as the miners and oil majors caught some bid. The rise in bond yields is concentrating some risks around chips and AI so Europe is less exposed to downside risks on a relative basis. European equities had broadly weakened on Tuesday, with the Stoxx 600 down -0.7% and Germany’s DAX down -0.8%, while the FTSE 100 edged 0.1% higher on the climb in oil prices.
Oil prices were steady near 3-week highs but Brent has now failed to break out above $92 a couple times in the last two session. Without further escalation by either beligerents we could see some geopolitical risk premia taken off the table. Gold prices were reluctant to sustain any move beyond $4,400 and last were back to $4,355
Back to the bond market story, which is driving everything right now. Assessments of causes for this move are plentiful – we can some up with excess/reckless fiscal spending being punished as the Middle East conflict underlines the likelihood that we have entered a more fragmented era for the global economy where persistent supply shocks pushing up on prices. AI capex spending is growing too and needs to be absorbed, adding to corporate bond pressure to the sovereign mix. But I would point to the last Fed meeting as the main catalyst for this move as the lack of forward guidance and uncertainty about the policy path under Kevin Warsh led to a de-anchoring of expectations. Despite the hawkish split on the FOMC with three members voting for a hike, the market is reading no forward guidance as essentially dovish, which is – alongside war, fiscal risks and worries about greater issuance -driving up term premia. I spoke a bit more about this here.
Global bond yields remained near multi-year/multi-decade highs, pushing pressure on global equity markets, but the rout has eased somewhat with the US 30yr yield backing off its 19-year high at 5.339% to 5.269%, while the UK 30yr down to 5.80% from its two-decade peak at 5.877%.
Chipmakers are bearing the brunt and led the fallout with the SOXX semis ETF –5% yesterday on Wall Street, with Micron and Intel each –7%, Nvidia –2%, which pulled the Nasdaq down –1.33% for the session. The broader S&P 500 declined –0.7% to break through some support around the 7,700 level, while the Dow Jones held up better, sliding –0.2% for the day.
Asian markets took the cue as the Kospi – the AI hardware/infrastructure proxy play – tumbled more than –5.8% for overnight, while the Nikkei 225 fell over –3%. SK Hynix slipped –10% and announced a massive 40 trillion won ($29bn) share buyback, aiming to reassure investors on AI demand durability.
European markets were a little more mixed with the FTSE 100 marginally higher thanks to some support from basic resources stocks as the miners and oil majors caught some bid. The rise in bond yields is concentrating some risks around chips and AI so Europe is less exposed to downside risks on a relative basis. European equities had broadly weakened on Tuesday, with the Stoxx 600 down -0.7% and Germany’s DAX down -0.8%, while the FTSE 100 edged 0.1% higher on the climb in oil prices.
Oil prices were steady near 3-week highs but Brent has now failed to break out above $92 a couple times in the last two session. Without further escalation by either beligerents we could see some geopolitical risk premia taken off the table. Gold prices were reluctant to sustain any move beyond $4,400 and last were back to $4,355
Back to the bond market story, which is driving everything right now. Assessments of causes for this move are plentiful – we can some up with excess/reckless fiscal spending being punished as the Middle East conflict underlines the likelihood that we have entered a more fragmented era for the global economy where persistent supply shocks pushing up on prices. AI capex spending is growing too and needs to be absorbed, adding to corporate bond pressure to the sovereign mix. But I would point to the last Fed meeting as the main catalyst for this move as the lack of forward guidance and uncertainty about the policy path under Kevin Warsh led to a de-anchoring of expectations. Despite the hawkish split on the FOMC with three members voting for a hike, the market is reading no forward guidance as essentially dovish, which is – alongside war, fiscal risks and worries about greater issuance -driving up term premia. I spoke a bit more about this here.
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