US tech has an overdue bad day

“Investors are hugely overweight large-caps”

Nvidia Corp, Advanced Micro Devices and Broadcom were some of the big losers yesterday. ASML Holding NV tumbled 7.8%, the most since 2022, even after the Dutch company reported strong orders in the second quarter.

The dollar weakened and 10-year Treasury yields rose.

The Biden administration is considering using the most severe trade restrictions available if companies including ASML continue to give China access to advanced semiconductor technology, Bloomberg News reported on Wednesday.

Meanwhile, an anti-China stance is also at the top of the agenda for Republican nominee Donald Trump. In an interview with Bloomberg Businessweek, the former president questioned whether the US has a duty to defend Taiwan, a major chipmaking hub.

“Regardless of whether it’s a Democrat or Republican victory, there will always be a negative push toward China,” John Taylor, director of global multisector strategies at Alliance Bernstein, said in an interview with Bloomberg TV. “One is more brazen and the other is more behind the scenes but the outcome is essentially the same.”

The S&P 500 was down just under 1.5% whilst the Nasdaq was hit harder. The Dow Jones and Russell 2000 held their ground as the fall was led by big tech. Tim Graf, head of EMEA macro strategy at State Street Global Markets. “Investors are underweight smalls, hugely overweight large caps and rotating a bit.”

In the UK it’s been a good week so far for data.

The International Monetary Fund on Tuesday lifted its 2024 growth outlook for the UK to 0.7% from 0.5%, providing a further boost to the country’s new government.

Looking ahead, the Washington, DC-based IMF reiterated its forecast for 1.5% UK growth in 2025 in the July update of its World Economic Outlook.

The upgrades come after two years of stagnation, with the UK falling into a shallow technical recession in the second half of 2023. However, GDP growth in May came in above analyst expectations at 0.4%, while summer events including Euro 2024 and even Taylor Swift’s Eras Tour are expected to bolster economic activity further.

Investment bank Goldman Sachs earlier this month nudged its 2025 forecast for the U.K. economy 0.1 percentage point higher, to 1.6%. It cited the fiscal plans of the new Labour government led by Prime Minister Keir Starmer, which include planning reform and closer trade ties with the European Union.

Deutsche Bank on Friday joined Goldman in brightening its UK outlook, with economists saying in a note they now expect gross domestic product growth of 1.2% this year, well above their earlier 0.8% forecast.

The country’s GDP in May showed the strength of sectors across professional services and construction, Deutsche Bank said, with the Euros tournament expected to provide a further boost to hospitality and leisure.

Analysts at Jefferies, meanwhile, said in a recent note that the size of Labour’s parliamentary majority would make the UK appear “relatively stable,” and that in tandem with regulatory reform may raise the attractiveness of assets in the country.

It comes as the Bank of England is expected to start bringing down interest rates in the coming months. UK inflation released Wednesday hit the central bank’s 2% target in May, and remained fairly steady with an increase of 0.1% recorded for June.

Other economies given a 2024 growth upgrade by the IMF on Tuesday included the eurozone, which it lifted by 0.1 percentage point to 0.9%, Spain, up 0.5 percentage point to 2.4%, and China, up 0.4 percentage point to 5%.

It lowered its forecast for the US economy by 0.1 percentage point to 2.6%.

The organisation sees worldwide growth at 3.2% this year and said global activity and world trade were firmer, particularly due to strong exports from Asia.

However, it warned that the services sector was broadly holding up the disinflation process, complicating monetary policy decisions.

“Upside risks to inflation have thus increased, raising the prospect of higher-for-even-longer interest rates, in the context of escalating trade tensions and increased policy uncertainty,” the IMF said in the World Economic Outlook.

This outlook was backed up in Wednesday inflation figure, provided by the Office for National Statistics. The reading remained at the BoE’s target level, which it hit in May for the first time in three years.

After the data release, investors put the probability of a quarter-point rate cut next month at just over a third, having previously been evenly split. The pound climbed as high as $1.3044, its strongest level against the dollar in a year, and was recently trading up 0.5 per cent at $1.3028.

The Monetary Policy Committee has signalled it is getting closer to lowering rates from their current 5.25 per cent. However, such a move would hinge on policymakers being confident that underlying price pressures are fully under control.

A key concern has been stubborn services price growth, which is seen as an important gauge of underlying inflation. The latest figures showed services inflation holding steady at 5.7 per cent in June, ahead of analysts’ expectations for a decline to 5.6 per cent. “It’s the stability of services inflation at 5.7 per cent that’s the blow,” said Paul Dales at Capital Economics. “As a result, the chances of an interest rate cut in August have diminished a bit more.”

Next month we will see a negative reading fall off the 12 months for the year over year and given the interest rate decision is before that meeting, we don’t see a change for August. However, we will then have 2 good results as inflation falls below 2% and the Bank of England will know this. We believe this is the cushion they will need to make their first cut on September 19^th.

Oil prices were steady on Wednesday, rebounding from three days of losses due to a significant decline in US oil stockpiles. The American Petroleum Institute reported a 4.4 million barrel drop in US crude stocks, far exceeding the 33,000 barrel decline expected by analysts.

If confirmed by official data, this would mark the longest series of stockpile decreases since September.

Geopolitical tensions also supported prices, with a Liberia-flagged tanker attacked by Yemen's Houthis in the Red Sea. However, price gains were limited by China's economic slowdown, with Q2 growth at 4.7%, the weakest since early 2023, raising concerns about demand.

Brent crude oil futures were up just over $1, or 1.22%, at $84.74 a barrel by 15.00 GMT. US West Texas Intermediate crude futures were up $1.47, or 1.86%, at $82.26.

"China's weaker economic performance and rising expectations for a U.S. interest rate cut over the coming months have counterbalanced each other," independent oil analyst Gaurav Sharma said.

Gold prices hit a record high on Wednesday.

Spot gold was up 0.1% at $2,469.80 per ounce as of 1135 GMT, after hitting an all-time high of $2,482.29 earlier in the session. US gold futures gained 0.3% to $2,474.80.

"It seems like it's evident that the Federal Reserve is going to cut rates in September and that, coupled with the concept of the de-dollarization of how central banks have been buying more gold versus the US Treasury yields, is currently the catalyst that is driving gold to these highs," said Alex Ebkarian, chief operating officer at Allegiance Gold.

That’s it for the midweek update. An interesting third day of this week and one when the long awaited tech sell off started to materialise.

The question now is will the selloff continue to build momentum, or will the bulls look to buy the dip?

Stayed tuned to find out.

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