MARKETS LIVE Flea stocks fall in last volatile session
- Main US indices down > 1%; banks are weaker down 1.7%, down 2.4%
- Weakest major S&P sector in technology; commodities, consumer staples
- flat dollar; gold up; drop in crude and bitcoin
- 10-year US Treasury yield down to ~1.98%
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CHIP STOCKS TUMBLE IN LAST VOLATILE SESSION (1222 EST / 1722 GMT)
Chip stocks fell sharply on Thursday, weighed down by a broad market decline after quarterly reports from Nvidia and Applied Materials.
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The Philadelphia Semiconductor Index (.SOX) is down nearly 2.5%, the latest of several volatile sessions in recent weeks as investors speculate on the timing of interest rate hikes expected by the Fed and worry about a potential war between Russia and Ukraine.
Nvidia (NVDA.O) fell more than 7% after the chipmaker forecast current-quarter revenue above analysts’ estimates but reported flat gross margins from the prior quarter. The company also reported a slowdown in sales of chips used specifically by cryptocurrency miners. Read more
Nvidia had climbed steadily in February ahead of its quarterly report. It remains down 16% so far in 2022.
“The stock reaction likely reflects a 20% rise in earnings, a modest 3% beat on data center and gross margins online,” Citi analyst Atif Malik wrote in a note following the Nvidia report.
The decline in Nvidia shares, despite an overall strong quarterly report, underscores recent investor skittishness in semis and other high-value growth stocks.
Applied Materials (AMAT.O) was down 1% after the supplier of semiconductor manufacturing equipment posted record quarterly revenue. However, weak guidance for the current quarter suggests that supply chain issues will hurt its business. Read more
In comments to analysts, Nvidia chief executive Jensen Huang also said business was limited by supply, but he said he expected that to improve.
After a 41% rise in SOX last year, many investors are wary of chipmakers that may add too much manufacturing capacity, raising the risk of a historically cyclical industry downturn.
CLAIMS UP, DEBUTS DOWN (1204 EST/1704 GMT)
Thursday’s data included jobless claims and housing starts that were less than stellar, but economists seemed unfazed.
The number of Americans filing new claims for unemployment benefits rose unexpectedly last week, but remained below pre-pandemic levels as labor market conditions continue to tighten and the first month-over-month increase reported by the Labor Department on Thursday did not change economists’ expectations for another month of strong job gains in February.
However, Thomas Simons, money market economist at Jefferies, is still bullish on labor: “Labour demand remains strong, job openings are plentiful and a week-long deviation from against the trend isn’t too much of a concern. Claims will continue to drop, but it won’t be in a straight line.”
And Oxford Economics attributed the rise to the Omicron wave and said it “is in the rearview mirror”.
Meanwhile, freezing temperatures dented homebuilding in January, with Commerce Department data showing housing starts fell 4.1% to a seasonally-adjusted annual rate of 1.638 million. units last month. Read more
Oxford Economics says the level of housing starts suggests upside risk to its outlook of a pace of 1.61 million in 2022 at least for the start of the year, despite January’s decline. The reasoning is that pent-up demand, need for supply, high backlog and relatively optimistic homebuilder sentiment will support new home construction despite ongoing supply-side challenges and significantly higher mortgage rates. .
Rubella Farooqi, Chief U.S. Economist at High Frequency Economics, also wrote, “A lack of inventory should be positive for construction activity, even as high input costs and labor shortages works and materials – remain headwinds for builders”.
IT’S TIME TO STUDY FOR MID-TERMS (1119 EST / 1619 GMT)
The midterm elections are now just over eight months away. With that, LPL Financial Research examines how many seats Democrats could lose.
According to LPL, a new president has historically lost around 30 House seats in midterm elections. They note that with Democrats holding a historically slim majority in the House, a swing of this magnitude would give Republicans control.
“Yeah, history would say the Republicans would probably take over the House and could very well win the Senate as well,” said Ryan Detrick, LPL’s chief financial markets strategist. , gaining nearly 30 seats in the House since Woodrow Wilson in 1914.”
What if the Republicans took both the House and the Senate?
“The good news is that one of the best scenarios for stocks is a Democratic president and a Republican-controlled Congress. In fact, the late 1990s saw the same scenario and it was one of the best times for investors,” added Detrick.
In any event, LPL provides some additional information about the midterm election year.
First, they say the mid-years saw the biggest intra-year pullbacks, down more than 17% on average, but the S&P 500 has rebounded more than 30% annually from at these hollows. “In other words, don’t panic if we get normal medium-term volatility, it could be an opportunity for longer-term investors.”
Finally, at the beginning of a medium-term year, stocks are historically quite low. It is only when the elections are over and uncertainty rises that a rally usually takes place.
“Every year is different, but perhaps the weakness at the start of 2022 shouldn’t come as a big surprise.”
RED SEA (1003 EST/1503 GMT)
Major Wall Street indexes are down at the start of trading on Thursday as escalating tensions between the West and Russia over Ukraine unnerved investors, with some disappointing earnings also weighing on the mood.
All major sectors of the S&P 500 (.SPX) are red, with financials (.SPSY) being the most affected. This, while the yield of the US 10-year Treasury returns below the 2% mark.
Tech (.SPLRCT) is also low. This follows reports from Nvidia (NVDA.O) and Applied Materials (AMAT.O), which put chip stocks among the worst performers of the day. The Philadelphia SE Semiconductor Index (.SOX) is down more than 2%.
Here’s where the markets stand:
SUMMON VOLCKER (0942 EST/1442 GMT)
“Volatility is the best watchdog for risk appetite and risky assets. We need a Volcker moment…where Vol means ‘theft’ – as in volatility.”
So argues Zoltan Pozsar of Credit Suisse in his latest “Global Money Dispatch” in which he argues that the Fed needs to take a radically different path to bring inflation down. Instead of raising the fed funds rate, it should raise long-term yields to drive down asset prices, from stocks to credit and especially housing.
Pozsar says the Fed can’t deflate commodity prices unless it dampens demand by raising the policy rate. It will cause a recession, so it’s a non-starter. But it can – and should – fight service inflation by lowering asset prices, which will also help boost labor supply.
To do this, the Fed will have to inject huge doses of volatility into the financial markets to drive up risk premia. End of political press conferences. Selling $50 billion of 10-year bonds without warning. Cease the jaws and market tips. Let the market guess.
Pozsar admits this is an “extreme” prescription, but insists that lower-risk assets and higher long-term rates won’t kill growth – it’s not a balance sheet recovery and 5% wage growth can cover higher mortgage repayments.
These are radical proposals. Would they work? It’s safe to say that uncorking volatility, ripping up 30 years of Fed communications strategy and opening the door to a potential asset price meltdown wouldn’t be without risk.
NASDAQ COMPOSITE: SURROUNDING ITS WAGONS (0900 EST/1400 GMT)
The Nasdaq Composite (.IXIC) has crashed almost 17% from its November high to its January 27 close. Since then, the tech-heavy index has managed to stabilize and work its way up around 6%. With this, Nasdaq’s daily Advance/Decline (A/D) line also managed to carve its way higher.
However, the index and measure of extent have some work to do in suggesting room for larger recoveries:
It should be noted that the Nasdaq A/D line peaked in February 2021. Following an extended divergence, the composite followed suit with its November 2021 high.
In testimony to the extent of the internal damage the broad Nasdaq suffered until its low in late January, as the composite hit its lowest levels since May last year, the A/D line fell to its lowest level since late 2018.
With their jerky rallies, the IXIC and the A/D line will still have to recover their descending 30-day moving averages. Since the sharp break of the A/D line at the end of November and that of the composite at the beginning of January, this moving average has capped strength.
Given that 30 DMA is now approaching and pressing both the IXIC and the A/D line, a resolution to the recent jerky action, one way or another, may soon be within reach. The IXIC’s 30-DMA could fall to around 14,250 at the start of trading.
If both the IXIC and A/D lines can break above the short-term moving average, this may suggest potential for a broad rally, particularly if the composite can recover its 200-DMA, which ended around 14,750 on Wednesday. The A/D line has substantial leeway to increase before reaching its 200-DMA.
Fresh lows in both metrics may suggest that bearish forces continue to have the upper hand. Read more
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Terence Gabriel is a market analyst at Reuters. Opinions expressed are his own.
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