The Overnight Report: More Uncertainty Hits Tech

This story features EVOLUTION MINING LIMITED, and other companies. For more info SHARE ANALYSIS: EVN

By Chris Weston, Head of Research, Pepperstone

Good morning.

The world has been debating what could cause big tech and the AI-rated equity names to reverse lower on a sustained basis, and for some time, it’s been hard to make a clear judgment call on when that might be.

Some had talked up valuation as a key concern for the US and global tech plays, with calls that these names had hit peak gross margins, but with such broad-based confidence behind the sustainability of the rally, investors piled in, and positioning had become incredibly rich.

Well, it appears as though we may have our answer, and it comes from both the Trump and Biden camps, with both presidential candidates beefing up their rhetoric towards the scene and notably towards Taiwan, and companies (most notably ASML) who are providing advanced semiconductors technology to Taiwan. This matters, a lot, because Taiwan manufactures around half the world’s semiconductors and 90% of all advanced chips, and much of these chips are sold to US AI-related corporates.

The result has been a savage unwind of a very popular and crowded trade, with semis and AI-rated names taking a bath. This has resulted in the S&P500 Tech sector closing -3.7%, and the NAS100 -2.9% – the worst 1-day performance since Dec 2022.

US banks are on fire

Some have liquidated tech holdings, or at least reduced exposures and rolled into US staples, energy, and banks, where names like JP Morgan are on fire. But we’ve also seen increased interest from fast money players to take short positions in Nvidia, Broadcom, Marvell, and AMD, and that is new as traders have been loath to take bearish directional trades on these names for some time.

We can also see traders buying index volatility, with the VIX index gaining 1.2 vols to 14.48%, and the NAS100 VIX +2.11 vols to 20.46% – importantly, volatility typically begets higher volatility, as there are some huge hitters (namely pension and insurance funds) who weight their portfolio equity allocations based solely on the volatility in the index so when vol rises they reduce exposures, and that just compounds the issue and leads to further drawdown in the index.

We watch for the reaction now in Japan, notably in names like Tokyo Electron and in Taiwan, where one can expect some big moves in the chip plays. I would also expect the TWD (Taiwanese Dollar) to be sold hard when it opens at 11 am AEST. 

The question now is how much more has this move out of tech got to go?

In my thinking, the rhetoric on protectionist measures offers such limited visibility to efficiently price risk and with limited confidence to price the near-term future, it feels like this rich positioning has further to unwind. I, for one, am not a buyer of tech or the NAS100 at this time.

Pockets of positivity still plentiful

All is not lost though, there are pockets of positivity in equity notably in healthcare, with UnitedHealth adding 160 points into the Dow, and almost single-handedly helping the Dow close higher. We have seen demand for the JPY and CHF, suggesting some flight-to-safety-buying, but gold is -0.5% lower and there has been very little move in the US Treasury curve.

Trump playing his hand

Calmer heads would see the tactics being played by Trump as a pure negotiating tool. Revisiting the playbook, and as we saw in 2016 when Trump would talk tough on a range of protectionist measures, most notably towards Mexico.

What eventuated was that many of the calls were walked back significantly through his presidential years. The 60% tariffs highlighted to be placed on China’s imports, won’t settle at 60%, and will likely be far lower if they are seen at all.

We also hear that John Paulsen or Jamie Dimon are being lined up for Treasury Secretary and that, if one of these two market-respect individuals is appointed, then it more than offsets the hawkish appointment of JD Vance as Trump’s running mate.

Either way, if one was looking towards late August/early September to put on US election trades, then you’re re-evaluating that call, as the action is playing out, right here, right now.

Asia opening calls and impending event risk for the session ahead

As our equity opening calls attest to, Asia is in for a rocky start, and we watch to see if traders look to sell into the equity further when the respective exchanges open it will tell us a lot about the evolving sentiment.

By way of event risk for the session ahead, we see Aussie employment (11:30 AEST), where the consensus is for the unemployment rate to tick up to 4.1% (from 4%), with 20k net jobs created.

We also get UK jobs, with GBP attracting huge client flow of late, notably with GBPUSD trading into 1.3000.

We also see the ECB meeting statement, with Christine Lagarde speaking shortly after the meeting should get traders attention (due 22:15 AEST).

Clearly, we keep our eyes on headlines from the Republican National Convention with Trump due to step and talk to the party.

On the calendar today:

In Australia

-June unemployment

-Evolution Mining ((EVN)) Quarterly update

-Santos ((STO)) Quarterly update

Elsewhere

-Japan June trade balance

-ECB policy rate

-UK  May unemployment rate

-US Leading economic indicators

Corporate news in Australia:

-Fortescue’s ((FMG)) hydrogen ambitions have come unstuck; 700 people lose their job

-AFR reports CommBank ((CBA)), Westpac ((WBC)) and Telstra ((TLS)) are among 19 big companies cutting office needs by almost -200,000 square metres in the Sydney CBD since the pandemic

-ART is acquiring Qantas Airways’ ((QAN)) $9bn super fund

-Renewed take-over speculation about Iress ((IRE))

-Troubled a2 Milk contractor Synlait Milk ((SM1)) has withdrawn its full-year earnings guidance due to too many uncertainties

-Imricor Medical Systems ((IMR)) is raising $35m to obtain FDA approval for its heart rhythm treatment product

The Australian share market over the past thirty days

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

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