The Overnight Report: TSMC Boosts AI Trade

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This story features RIO TINTO LIMITED, and other companies.
For more info SHARE ANALYSIS: RIO
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

US small caps and chip stocks pushed US markets higher on Thursday as oil prices sold off on a tempering of Iranian tensions.

After a fourth positive session on the Australian market, ASX200 futures are signalling a weaker opening for Friday's session.

Good Morning,

The Australian market rose for a fourth straight session led my major miners.

On Thursday, the ASX200 rose 0.4% to 8,851.90.

What happened overnight, NAB Markets Today Research

US equity markets made first gains in three days, with the AI trade receiving a welcome shot in the arm following Asian chipmaker Taiwan Semiconductor Manufacturing Co’s (TSMC) strong results. 

TSMC’s 8% earnings beat and strong guidance, expecting capex to be, “significantly higher” in the next three years, boosted the sector that has wavered in recent weeks on concerns over the extent of the capex spend on data centres and the associated funding.

While tech stocks powered a rise in US equities, the broader Russell 2000 outperformed for the tenth consecutive session with a 0.86% gain against the S&P’s 0.26% and Nasdaq’s 0.25%.

US weekly jobless claims for the week to 10 January came in lower at just 198k against a 215k consensus, with the prior week’s 208k revised to 207k. Continuing claims were also softer at 1884k after a revised 1903k in the prior week and against a consensus forecast of 1897k.

The four-week moving average eased back to 205k, the lowest in two years. For all the debate about the lack of hiring, which is evident in the NFP reports, unemployment claims continue to show no pick-up.

Two regional surveys for January printed stronger headlines, but their respective employment components were softer, underling the lack of hiring.

The Philadelphia manufacturing survey recorded a 12.6 reading at the headline, up from -10.2 in December and against a -1.4 consensus. The New York Empire manufacturing survey for January improved to 7.7 in January from -3.7 in December and against a 1.0 consensus.

US Treasury yields rose, while the curve flattened. US 2-year yields rose 5bps to 3.56%, while 10-year yields rose 2.5bps to 4.15% and remain within their 8bps range seen since early December. Meanwhile the US 3-year yield was unchanged at 4.78%. The US 2-10 and 2-130 curves have flattened by -12bps since the start of the year.

In the UK, November monthly GDP surprised to the upside with a 0.3% m/m rise against a 0.1% consensus and after a -0.1% contraction in October. September’s -0.1% was revised up to 0.1% while growth in the 3M to November was a stronger 0.1% against a forecast of -0.2%.

The anticipated rebound in auto production after the cyber outage at Jaguar Land Rover, and where auto production rose over 25%, added 0.18ppts to GDP. Services growth was also stronger at 0.3% m/m, reversing October’s -0.3% decline, with gains in professional services and communications.

The USD made small gains, with the DXY index up 0.2%. The AUD continued its recent outperformance with a 0.25% rise to 0.6702.

ANZ Australian Morning Focus, Commodities extract

Crude oil dropped sharply amid signs of easing tensions in Iran. Iran’s judiciary said it had ruled out a death sentence for an activist arrested during the unrest. President Trump says he was told that “killing in Iran is stopping”, adding he would be very upset if the regime’s crackdown continued. This reduced the likelihood of US intervention and possible disruptions to Iranian oil production and nearby shipping lanes. However, US pressure on Iran via other methods continues to increase. 

The US Treasury department announced sanctions on Iran’s Secretary of the Supreme National Security Council and 18 individuals and entities of what it says is a shadow bank network. 

Elsewhere, US forces seized another oil tanker near Venezuela as part of a quarantine on the sale of sanctioned oil. Separately, Trump told Reuters he believes it would be better for Venezuela to remain in OPEC. 

Global gas markets remained on edge despite easing geopolitical risks. Instead, concerns are building that rising the need for heating may boost demand as Asia is expected to see a blast of cold weather in coming weeks, according to the Meteorological Administration. Temperatures across Beijing and Shanghai could fall by -20C through Wednesday. 

In Japan, a nationwide warning cautioning against very low temperatures from 21 January has also been issued. This has already seen increased activity in the spot market. Japan’s Electric Power Co has been interested in March shipments, while Kansai Electric recently bought a shipment. 

In Europe, icy Siberian air is forecast to sweep the continent, pushing heating demand higher and potentially intensifying global competition for LNG cargoes.

Base metals were broadly on the defensive as traders took stock of the strong gains achieved in the first two weeks of the year. 

Copper has gained nearly 40% over the past year amid strong fundamentals. This week the market was reminded of the strong demand dynamics in China, with imports remaining near record highs. 

However, a surge in investor appetite for real assets such as commodities in recent weeks has raised concerns that recent gains have been driven by speculators.

Nickel pared recent gains despite the prospect of lower output from Indonesia. The Director General of Minerals and Coal, Tri Winarno, said the country will likely issue quotas between 250mt and 260mt of nickel this year. This compares with a 2025 target of 379mt. Indonesia accounts for about 70% of global nickel output. This level of reduction could create global shortages, keeping pressure on prices.

Iron ore remained steady despite signs of weakening fundamentals. Port inventories have ballooned to near four-year highs while steel output continues to contract. Traders think Chinese officials will front load fiscal spending early in 2026. This has led to the apparent restocking efforts by steel mills. This was evident in the import data released this week.

China’s iron ore imports for December climbed to 120mt, maintaining strong momentum from earlier in the year.

Silver fell after the US refrained from imposing import tariffs on critical minerals. Instead, Trump said he would be pursing bilateral negotiations and floated the idea of price floors. The decision followed a month-long review into whether foreign shipments posed a threat to national security. Fears of tariffs on silver have been greater a squeeze on supplies, with US imports surging and supplies in the London market drying up.

Broader market leadership could re-emerge, excerpt from Ninety One

High-quality businesses in software, IT services and information services were caught in the cross-currents of 2025, punished by fears that AI would erode their pricing power or displace their products.

Many now trade at or below market-level valuations despite recurring revenues, high switching costs and asset-light business models.

The irony is stark. Only a few years ago, these companies were expected to be the primary monetisers of AI.

Fundamentals haven’t changed; sentiment has.

For long-term investors, this creates the potential for attractive compounding from businesses that can grow earnings steadily, without relying on aggressive assumptions about the pace of AI adoption.

One area that the market may be underestimating is AI’s potential impact on pharmaceutical innovation.

If AI improves R&D productivity and accelerates drug discovery, major pharmaceutical companies could generate far better outcomes for every dollar of spend.

Yet this opportunity is not captured in the valuation of many of these stocks, which have been out of favour based on the view that they are not technologically driven.

Traditional defensives may also return to favour. In 2025, they were caught between a rock and a hard place in a momentum-driven market, lacking the excitement of AI exposure and suffering from dependence on squeezed consumers.

But in a more uncertain macro environment with a less dominant AI-theme, their defensive attributes should come back into favour.

The investment landscape entering 2026 is marked by contradictions. Weak consumer data coexists with the market bidding up highly cyclical AI infrastructure suppliers to defensive status, while some of the most reliable recurring-revenue businesses in corporate history sit discounted.

The great risk lies in the crowded trade: the conviction that the AI infrastructure wave will never crest. When the inevitable air pocket in capex arrives, the market will abruptly remember the cyclical nature of these businesses and high starting multiples will offer little protection.

Opportunity lies in mispriced resilience, not momentum.

True defence is not found in chasing momentum into cyclical extremes but in identifying where resilient cash flows are being offered at a discount because they lack a positive AI narrative.

When the market re-focuses on fundamentals, we would expect some of the perceived ‘AI losers’ to come to the fore.

Corporate news in Australia

-4DMedical ((4DX)) has raised $150m to accelerate US growth

-Hanes places Australian brands Bonds, Bras N Things, Sheridan and Berlei up for sale

-Rio Tinto ((RIO)) and Glencore consider ASX spin-off for coal assets as part of the potential $300bn merger deal

-Myer ((MYR)) is shuttering Sass & Bide including stores as it works through a reinvention strategy

-Waymo is looking at an Australian launch amidst talks with a Chinese carmaker as part of the global robotaxi expansion

-Amazon Web Services is looking to source copper for US data centres from Rio Tinto’s Nutons bioleaching technology from an Arizona mine

-Gas reservation scheme delays southeast LNG imports by at least six months

-TPG private equity is supporting Kinetic as one of the last bidders for Dysons

On the calendar today:

-EBR SYSTEMS INC ((EBR)) Conference Presentation

-LOTUS RESOURCES LIMITED ((LOT)) EGM

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

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