US tech takes a hit. Are cracks beginning to come to the surface?

The Nasdaq fell nearly 4% this week. It’s easy to say we all saw it coming, but we did all see it coming. Nvidia dropped almost 10% in a week but that’s what happens when a stock trades like a cryptocurrency.

In the UK, London's stock markets also closed in the red on Friday, affected by a significant global IT outage and a drop in UK retail sales.

The FTSE 100 fell 0.6% to close at 8,155.72 points, while the FTSE 250 index also saw a decline, dropping by 0.78% to finish at 21,067.68 points.

A software update from cybersecurity firm CrowdStrike caused widespread disruption across multiple sectors globally throughout the day.

The update led to system crashes at airlines, banks, hospitals, media outlets, and retailers.

CrowdStrike's CEO, George Kurtz, apologised for the incident, clarifying that the issue was caused by a defect in a content update for Windows hosts, and emphasised that Mac and Linux hosts were unaffected.

He assured that the issue had been identified, isolated, and a fix deployed.

The impact was severe, with reports indicating that each affected terminal would need to be restarted individually in "safe mode" to install the fix.

The problems began on Thursday when Microsoft investigated issues with its cloud services in the central United States, which led to flight cancellations.

By Friday morning, the disruption had spread globally, affecting nearly 1,500 flights by 1500 BST. Major US airlines, including United, Delta, and American Airlines, temporarily grounded flights.

European carriers Air France-KLM's KLM and Lufthansa's Swiss also faced significant operational challenges.

In the UK, the busiest travel day since the pre-Covid era was marred by chaos, with passengers stranded for hours. The rail network also experienced widespread issues, with FirstGroup's South Western Railway reporting non-functional ticket vending machines.

Other European and Asian airports, including Berlin, Stansted, Schiphol, Mumbai, and Hong Kong, also reported significant technical problems.

Australia's state-owned broadcaster ABC, commercial channels 10 and Sky News, and telecoms giant Telstra were among those affected.

In economic news, UK retail sales dropped more than anticipated in June, according to the Office for National Statistics. Sales volumes fell by 1.2%, following a 2.9% rise in May, surpassing analysts' expectations of a 0.4% decline.

The ONS reported declines across all main shop types, with department stores, furniture, and clothing shops seeing significant drops.

Over the second quarter, sales volumes decreased by 0.1%, and year-on-year by 0.2%, with the biggest falls in supermarkets and clothing stores partially offset by online shopping growth. Sales volumes remained 1.3% below pre-pandemic levels.

“June has been a washout for retail sales, with retailers yet to sustain two consecutive months of sales growth this year,” said Erin Brookes, European retail and consumer lead at Alvarez & Marsal.

“The poor weather in June saw disappointing sales of summer goods across food and clothing. This comes despite significant discounting and deflation in fashion retail, with volumes remaining stagnant.”

Additionally, consumer confidence in the UK remained low in July, according to GfK's latest survey. The consumer confidence index edged up by one point to -13.

While perceptions of personal finances over the past year improved slightly, expectations for the future declined. Opinions on the economy remained unchanged, and the major purchase index saw a notable increase, rising seven points to -16.

“July’s score is structurally better than the -48 that immediately followed the Truss-Kwarteng show, but also shows that British consumers took the reasonably inevitable UK election results in their stride,” said Clive Black, head of consumer research at Shore Capital.

“With no new shocks or surprises, we remain cautiously optimistic about the second half, especially the potential for gradual improvement on discretionary consumer goods demand.”

On London’s equity markets, London Stock Exchange Group declined 0.76% after its Regulatory News Service experienced issues on Friday morning, as part of the global CrowdStrike failure.

Segro saw a more significant drop of 1.84% after the real estate investment trust announced the sale of a portfolio of logistics warehouses in Italy for £275m. The portfolio, sold by the Segro European Logistics Partnership, consisted of four warehouses in Milan and Rome, with a total floor space of 338,745 square metres and generating a passing rent of €19m annually.

Segro holds a 50% interest in SELP, which owns €6.7bn of big-box warehouses and development land across seven European countries.

United Utilities Group fell 1.41% despite reporting a strong operational performance and affirming its financial guidance for 2024-2025. The company said it was confident in achieving a four-star rating from the Environment Agency's annual environmental performance assessment (EPA) for 2023, with expectations of maintaining such a rating for 2024.

Pharmaceutical giant GSK edged down 0.49% after it announced that the European Medicines Agency (EMA) had accepted its marketing authorisation application for Blenrep, in combination with BorDex or PomDex, for treating relapsed or refractory multiple myeloma.

On the upside, Hargreaves Lansdown rose 0.36% after the fund supermarket confirmed an extension of the deadline for a potential £5.4bn takeover by a private equity consortium led by CVC Capital Partners to 5 August.

The FTSE 250 firm had indicated a willingness to recommend a 1,140p per share offer, after rejecting an earlier approach.

Virgin Money UK shares increased 0.28%, following an announcement that its acquisition by Nationwide Building Society had received unconditional approval from the Competition and Markets Authority (CMA).

The acquisition would see Nationwide purchasing the entire issued and to-be-issued share capital of Virgin Money through a scheme of arrangement.

In Europe the STOXX Europe 600 Index ended the week 2.68% lower amid rising trade tensions between the US and China. Germany’s DAX dropped 3.07%, France’s CAC 40 Index lost 2.46%, while Italy’s FTSE MIB gave back 1.05%.

In the UK, the FTSE 100 Index declined 1.18%

The European Central Bank kept its key interest rates unchanged at 3.75%, as expected. It said it would not pre-commit to any rate path and emphasized that economic data would guide its decisions. ECB President Christine Lagarde said a move in September was “wide open,” adding that risks to economic growth were “tilted to the downside” and that inflation would fluctuate at current levels for the rest of the year before declining in the second half of 2025.

In the US the major indexes ended mixed in a week that saw a continued rotation in market leadership to small-cap and value shares. The narrowly focused Dow Jones Industrial Average outperformed, and value stocks outpaced growth stocks by 477 basis points (4.77 percentage points), as measured by Russell indexes—the largest divergence since March 2023, when growth shares outperformed by 654 basis points. The week was also notable for a widespread global disruption to computer systems early Friday due to an error in a vendor’s security update to some users of the Microsoft operating system. The problems seemed to have little impact on U.S. trading, however.

A major factor In the underperformance of growth stocks was a sharp decline in chip stocks on Wednesday, following news that the Biden administration had told allies it was considering severe export curbs if companies such as Tokyo Electron and the Netherlands’ ASML Holding continued providing China with access to advanced semiconductor technology. Chip giants Taiwan Semiconductor Manufacturing, Broadcom, and NVIDIA (the third-largest company by market capitalization) also fell sharply.

In Asia Japan’s stock markets lost ground over the week, with the Nikkei 225 Index falling 2.7% and the broader TOPIX Index down 1.2%. Technology stocks suffered on rising concerns about tighter U.S. restrictions on exporters of advanced semiconductor technology to China, including several Japanese chip makers.

Amid speculation about whether the Bank of Japan (BoJ) could hike interest rates at its July 30–31 meeting, at the same time as it set to provide details on the tapering of its massive bond purchases, the yield on the 10-year Japanese government bond fell to 1.04%, from 1.06% at the end of the prior week.

Chinese equities rose as investor sentiment was largely unaffected by weaker-than-expected economic growth in the second quarter. The Shanghai Composite Index was up 0.37% while the blue-chip CSI 300 added 1.92%. In Hong Kong, the benchmark Hang Seng Index retreated 4.79%, according to FactSet.

China’s gross domestic product expanded a below-consensus 4.7% in the second quarter from a year earlier, slowing from the 5.3% growth in the first quarter. On a quarterly basis, the economy grew 0.7%, less than half of the first quarter’s revised 1.5% expansion.

Other data also highlighted weakness in the economy. Retail sales grew a below-forecast 2% in June from a year earlier, down from a 3.7% increase in May, partly driven by lower autos and household appliances sales. Industrial production rose a better-than-expected 5.3% in June from a year earlier but slowed from May’s 5.6% increase. Fixed asset investment rose 3.9% in the January-to-June period from a year ago, in line with forecasts, though property investment fell 10.1% year on year. The urban unemployment rate remained steady at 5%, while the youth jobless rate dropped to 13.2%, the lowest level since December.

The Week Ahead.

After the Microsoft outage chaos of Friday, hopefully, it should be business as usual next week in what is a packed schedule of household names reporting.

Lloyds, Natwest, Centrica, Compass, BT, Vodafone, BAT, Unilever, easyJet and Informa are just some of the updates expected.

In brief, expectations are for banks, Compass, Centrica and the airlines to be good, telecoms (BT, Vod) less so with no one really sure what to expect from Unilever, which seems to be going through a corporate personality crisis.

It's a lot quieter for macro news in the coming week.  A Canadian interest rates decision, flash PMI data, US GDP and the Federal Reserve’s closely watched PCE inflation gauge are the events

In the UK, preliminary PMI data will be revealed on Wednesday morning, following the June updates that showed Britain's service sector saw growth slow to a seven-month low, while manufacturing output also unexpectedly slowed from May's near-two-year high.

On Thursday there will be UK car production and the CBI business optimism index and industrial trends survey.

US PCE inflation numbers on Friday always generate interest as is routinely reported it is apparently the US Fed's favoured inflation measure.

After the drop in US TECH this week, the surprising thing is that both the S&P and Nasdaq are pretty much still flat on the month.

However, with TPP’s active strategies positioned for a 5-8% monthly retracement where they move from here will be key.

Are cracks beginning to come to the surface in tech, or will the buyers come back?

One thing is for sure, it’s shaping up to be in interesting H2

Have a great weekend.

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