Weekly Comment: Micron Technology on, stock markets off (as is Starmer)

Market overview

There was a time when forecast-busting results from a tech stock deeply embedded within the artificial intelligence (AI) trade would typically have driven the wider sector, and global stock markets as a whole, higher. But in a sign that markets are becoming more discerning when it comes to the AI-trade, global equities finished the week lower despite memory chip maker Micron Technology reporting a 346% year-on-year (YoY) increase in Q3 revenues.

Memory maker

The reason behind Micron’s stellar numbers? Datacentre demand for the US$1tn+ company’s memory chips is outpacing supply. The results, along with management raising Q4 guidance by 16%, were enough for the share price to surge 16% on the day. Not so the wider market. The main US equity benchmark barely budged. Meanwhile, previous pacesetters, such as chipmaker Nvidia, finished lower, an indication perhaps that the AI-trade is broadening out to include areas of the supply chain that up until recently had been overlooked.

In all, not a good week for tech or for growth names for that matter. In the US, growth stocks ended the week down 3.4% (+0.9% YTD) compared to value stocks rising 0.3% (+16.3% YTD) and small caps 1.0% (+22.1% YTD). As for why growth was on the backfoot, that could be down to a re-evaluation of the outlook for interest rates.

Hawkish Warsh

Until relatively recently, US interest rates cuts were widely expected this year, especially with Kevin Warsh taking over as Federal Reserve chair in May— the common perception was that Warsh was nominated by President Trump because he would be likely to cut rates. Yet the tone of Warsh’s comments following his first rate-setting committee meeting as chair earlier this month were on the hawkish side. His promises to rein in inflation have suggested the next move in rates could well be up. Higher interest rates however reduce the current value of future profits for long-duration growth stocks. Cue share price weakness in the technology and other growth sectors.

With impeccable timing, one of the Fed’s favoured inflation datasets, the personal consumption expenditures (PCE) price index, highlighted the inflation problem. The PCE rose 0.4% in May. That comes on top of a similar increase in April. On a YoY basis, the PCE is up 4.1%, the highest level it has been since April 2023. Core PCE, which strips out food and energy costs, is up 3.4% on an annual basis, the highest it’s been since October 2023.

Oil on the slide

It’s not all bad news on the inflation front. Oil prices have fallen back to pre-conflict levels as more tankers have been able to pass through the Strait of Hormuz following the signing of a memorandum of understanding by the US and Iran. Soaring energy prices triggered by the conflict are the source of rising inflation numbers around the world. Should the ceasefire hold and a lasting peace deal be secured, the energy price shock should prove to be temporary which in turn would dampen the wider impact of the inflationary forces that the conflict has unleashed.

A conundrum

But how to square global equities’ weak performance, and in particular that of growth stocks, with that of government bond markets which saw yields fall during the week? All roads, it seems, lead back to AI. For without the positive distraction of the AI-trade, bond markets have been closely tracking the oil price throughout the Middle East conflict. When the higher-for-longer oil price scenario looked the more likely, bond yields rose to price in the higher interest rates that would be needed to bring inflation under control. It follows then that with oil prices moving decisively lower during the week, bond yields in the US and across Europe fell.

Even UK gilts got in on the act despite news that Sir Keir Starmer is to step down as Prime Minister. Other than former Manchester mayor Andy Burnham, no other candidate has thrown their hat into the ring which bodes well for a relatively smooth (and potentially swift) transfer of power. Even so, further political disruption is hardly ideal for bond markets. And yet, gilt yields fell. A sign that a change in government had already been priced in? Or an indication that wider inflation concerns rather than domestics politics have been the dominant theme driving bond markets?

Up until recently, AI had been the dominant theme driving stock markets. Last week, it seems, interest rates took centre stage with global stock markets playing catchup with their bond counterparts, just when the latter were reining in expectations of interest rate hikes. A gap had opened up between the two asset classes, which is now being narrowed from both directions. For stock markets then, last week’s drop in oil prices couldn’t have come at a better time.

Weekly market moves:

The MSCI All Country World Index (MSCI ACWI) ended the week down 2.1%, bringing the year-to-date (YTD) gain to 9.7%.

United States:

The main US stock market ceded some of its recent gains after it ended the week down 1.9% (+8.0% YTD). The blame for the weakness can be laid squarely at the feet of the technology sector and the AI-trade specifically. This can be seen by taking a look at the performance of the equal-weighted version of the main US benchmark (as opposed to the widely followed market-cap weighted iteration which gives Big Tech a larger weighting). The equal-weighted index was up over 1%.

A falling oil price helped US Treasuries shrug off higher inflation data. The 10-year Treasury yield fell nine basis points to 4.37% (up 20 basis points YTD); similarly, the 2-year Treasury yield shed nine basis points to 4.09% (up 62 basis points YTD).

United Kingdom:

UK large caps bucked the global trend to finish the week 1.4% higher (+7.7% YTD). Mid-caps, however, edged 0.2% lower (+4.8% YTD). Because of their more domestic focus, mid-caps were always more likely to be moved by the UK’s fast-changing political environment. At US$1.32, sterling was unmoved against the US dollar. Meanwhile, UK gilts were in buoyant mood with the yield on the 10-year maturity falling 11 basis points to 4.73% (up 26 basis points YTD) although, as previously mentioned, a retreating oil price may have had something to do with the decline.

Europe ex UK:

European stock markets outperformed by virtue of falling less than the global index. The MSCI Europe ex-UK Index posted a 0.3% weekly loss (+9.8% YTD). At the national level, Germany’s main benchmark shed 1.3% (+0.7% YTD), France’s 0.4% (+5.4% YTD), while Italy’s fell 2.8% (+17.2% YTD). Switzerland was the outlier, rising 2.9% (+10.0% YTD). Unlike sterling, the euro weakened against the US dollar, falling to US$1.14 compared to US$1.15 previously. Finally, it was a positive week for German bunds with the yield on the 10-year note declining 13 basis points to 2.85%. YTD, the yield is now flat.

Important information

This material is a marketing communication provided for information purposes only and does not constitute independent investment research. References to financial instruments are for general information purposes and are not subject to requirements applicable to independent investment research.

Any references to securities or financial instruments should not be regarded as a personal recommendation, or as an offer, solicitation or invitation to buy or sell any financial instruments. The views expressed are those of the authors at the time of publication and are subject to change. Past performance is not a reliable indicator of future results.

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