Written by SK Hynix earnings fail to set markets alight
The rout in chip stocks worsened on Wednesday after Korean semiconductor giant, SK Hynix, disappointed investors with its Q2 earnings results, plunging the Philadelphia Semiconductor index to its worst monthly performance since 2022.
SK Hynix missed both its operating profit and revenue forecasts even as the former soared by 557% over the year – representing a six-fold increase. The market reaction once again proved that the earnings bar has been set very high this season, as investors fret not only about the sustainability of all the spending by the AI hyperscalers, but also about rising competition from China.
China’s growing presence in the AI space has come to the fore this week, first with the successful IPO of domestic chipmaker CXMT and also on the reports that a Chinese state-backed manufacturer has made inroads with making immersion deep-ultraviolet lithography machines capable of producing advanced chips.
Moreover, concerns about overspending by the tech giants are no longer just centered on whether they will pay off but increasingly on how all these investments are being financed.
Another fear is the circular nature of the latest AI deals that are raising worries that major players like Nvidia and OpenAI are becoming too intertwined, making it difficult to accurately gauge the strength of AI demand and leaving them more vulnerable to potential risks to the sector.
Rotating winners and losers
It’s not all doom and gloom in equity markets, however, as the rotation out of AI has been boosting value stocks. The Dow Jones is the best-performing major index on Wall Street this year, gaining 1% on Tuesday even as the Nasdaq 100 slid by the same amount.
In South Korea, meanwhile, the KOSPI index sunk another 6%, adding to Monday’s 10.8% slump.
The focus later in the day will be on Microsoft and Facebook parent Meta Platforms, who publish their results after Wall Street’s closing bell. Following Tesla’s and Alphabet’s earnings last week, any signs that other Magnificent Seven companies are also tapping into their free cash flow to pay for costly AI vanity projects will likely spook investors again.
Nevertheless, even with the recent jitters directly impacting the hyperscalers, Big Tech stocks have outperformed semiconductors this month. Some, such as Apple, which reports tomorrow, have even set new all-time highs.
Oil spikes after Iranian attacks
The volatile geopolitical climate certainly hasn’t been helping investors’ anxieties about overstretched valuations. After a brief calm in the Middle East, tensions flared up again overnight after Iran attempted to stage a surprise attack on US troops in the region.
The Iranian missiles were successfully intercepted by the US military, but more importantly, President Trump has signalled he wants to avoid another major escalation, raising hopes of fresh negotiations, even though Tehran has denied there have been any talks. A lot is riding on the current efforts by Oman to get Iran to agree to a deal to jointly manage the Strait of Hormuz, as this could help break the current deadlock, as well as reopen the waterway to traffic.
In the meantime, oil prices are surging again, with both WTI and Brent futures up more than 3.5%, paring some of the past three days’ losses.
A large drop in US crude oil inventories last week according to the API report also lifted oil prices, with traders next turning their attention to the government EIA figures due later today.
Dollar seeks direction from Fed, yen firmer but aussie dives
FX markets are a lot steadier, however, as investors await the Fed policy decision at 18:00 GMT. Although it’s unlikely that the Fed will hike interest rates on Wednesday, the new regime at the US central bank has done away with forward guidance, increasing the risk of surprises.
Markets see about a 30% probability of a 25-bps increase in the Fed funds rate in July, as hawkish voices grew louder just prior to the blackout period. The re-escalation of the Iran war, combined with the solid US economy, provides the Fed with less reason to wait, especially as key inflation readings remain above 2.0% even after the recent decline.
Hawkish expectations have been supporting the US dollar since Kevin Warsh took over the Fed, with the Japanese yen, in particular, coming under heavy selling pressure. But the yen is enjoying some breathing space today, firming to around 163.55 per dollar after coming within a whisker of 164.00 yesterday.
That level could easily be breached if the Fed takes a hawkish turn today, potentially forcing Japanese authorities to intervene.
With most major currencies nudging higher against their US counterpart, the Australian dollar is bucking the trend, slipping to two-week lows following weaker-than-expected inflation numbers. The RBA is seen as less likely to be in a rush to hike rates further after Australia’s headline inflation eased to 3.8% in June.
Still, with the greenback mostly lower, gold is trading positive today, climbing above $4,035.
By XM.com
