The Monday Report – 22 April 2024

Daily Market Reports | Apr 22 2024

By Greg Peel

Keep Calm and Carry On

It appeared there would likely be a big market-wide sell order hitting on Friday morning in the local market given the futures were down a disproportionate -55 points to only a small fall in the S&P500 overnight. That seems to have been the case.

But exacerbating the situation was news coming through Israel had attacked Iran, in retaliation for Iran’s attack which was retaliation for Israel’s initial attack on Iran’s consulate in Syria. It was looking dire, and at midday the ASX200 was down a full -150 points.

It then appeared Iran has granted Israel the last tit, which would not be met with a tat this time, and that neither side wanted further escalation. The index was able to recover half its losses by the close.

That still left an ugly session, which saw all sectors close in the red, and only energy outperforming with a -0.1% fall given oil price implications. Otherwise, falls ranged from utilities (-0.6%) to technology (-1.6%).

Standing out were a -1.1% drop for the banks and -1.1% for materials.

Among materials, gold miners took three of the top five index spots.

Bond yields had little to do with anything on the day. The ten-year fell -2 points to suggest there was no flight to safety of note.

As we headed into Friday night, US futures had been sharply down initially but also trimmed losses, there was a rush into US bonds but that eased through the night, and oil prices, and gold, closed only modestly higher.

Looking at Wall Street on Friday night, the signs were that the earlier war fears had subsided and indeed were it not for another scare among chipmakers, and tech in general, it could have been a positive session.

Once again noting Australia is not big in Big Tech or chips, our futures closed up 27 points on Saturday morning.

Tech Wreck

After posting an earnings beat, a big jump in profit due to its crackdown on password sharing, and a 16% increase in subscribers, Netflix shares fell -9% on Friday night.

The reason for the weak response was the announcement by the company it would cease disclosing subscriber numbers from next year, wanting investors to concentrate on profit.

Super Micro Computer is a company that builds the servers needed to run AI, and prior to Friday night its shares were up around 140% year to date. The company typically announces when its reporting date will be as the season begins, and in past quarters has taken the opportunity to comment on earnings growth, which has to date always been positive.

On Friday night, Super Micro announced its reporting date, and said nothing else. Reading between the lines, investors bailed, and the stock fell -23%.

The assumption of a weaker, or maybe not as hot, quarter followed weak earnings reports from ASML and TSMC earlier in the week. The chipmaking sector had already had one hiccup, but this was all too much. Chipmakers were slammed.

Nvidia fell -10%.

Suggesting the AI story might have gotten a little ahead of itself, all of the Big Tech stocks were sold, and the Nasdaq fell an outsized -2.1%.

The Dow rallied 0.6%.

The S&P500 fell -0.9% due to its heavy weighting towards tech but the S&P500 Equal-weight index closed flat, and the market saw more stocks higher on the day than lower.

In the Dow, the earnings report from American Express saw that stock jumping 6.5%. Signs are a younger generation now won’t leave home without it.

The S&P500 fell -3% for the week to be down -5% from its high. The Nasdaq fell -5.5% for the week.

It’s now incumbent upon the Big Tech names to save what could be a more extensive pullback when they begin reporting this week. Among the Mag7, Tesla kicks things off tomorrow night.

Part of the problem since Wall Street hit its highs, geopolitics aside, has been the growing fear there may be only one or even no Fed rate hike this year due to sticky inflation.

The issue with having only the blunt tool of rate setting at its disposal is the negative feedback loop that creates. The stickiest part of the CPI has been “shelter” – specifically rents – which reflect prevailing interest rates. Shelter costs had been contracting as the ten-year yield fell from 5% to under 4% at the beginning of the year, but with the yield now back up at 4.6%, rents are on the rise again.

Which implies inflation will remain stubborn or hotter, which means the Fed will remain on hold for longer.

This Friday night we’ll see the Fed’s preferred PCE measure of inflation for March.

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