Global equities fell to a one-month low on Tuesday, with U.S. stock markets lacking direction as the sell-off in chip stocks deepened. However, the overall decline was tempered as investors rotated into other market sectors following a drop in oil prices. At the same time, rising expectations that the Federal Reserve could raise interest rates as soon as this week further dampened sentiment. As of writing, Dow futures rose 0.69%, S&P 500 futures gained 0.02%, and Nasdaq futures fell 0.89%. A popular exchange-traded fund tracking semiconductor stocks dropped 2.8% in pre-market trading. ETFs covering real estate, healthcare, and consumer staples outperformed the broader market.
Germany's DAX index fell 0.15%, the UK's FTSE 100 rose 0.44%, France's CAC 40 gained 0.10%, and the Euro Stoxx 50 declined 0.19%. Dutch chip equipment giant ASML Holding NV has now extended its weekly decline to 10%. Despite mixed market reactions following earnings reports from Barclays, LVMH, and Unilever, advancers on the pan-European Stoxx 600 index outnumbered decliners by more than two to one, pushing the index up 0.4%. The MSCI All-Country World Stock Index fell 0.5%, hitting its lowest level since June 29.
In the U.S. stock market, shares of Nvidia and Micron Technology were trading lower in pre-market action. Nvidia's stock had already fallen 5% overnight following reports that the company is discussing providing around $250 billion in financing guarantees for a large-scale data center project by OpenAI.
Asian Markets Bear the Brunt of the Sell-Off
Asian markets were the epicenter of Tuesday's global sell-off. With shares of South Korea's SK Hynix and Samsung Electronics plunging over 13% in Seoul, the regional benchmark index is approaching correction territory. The KOSPI index tumbled more than 10% to a three-month low, triggering a circuit breaker during the decline. It is on track for its largest monthly loss on record, surpassing even the performance during the 1997 Asian financial crisis. The index had more than tripled in the 12 months through June but has now retreated more than a third from its peak.
The ongoing volatility in chip stocks, which has persisted for weeks, continues amid growing concerns over AI investment spending. However, traders are rotating into consumer stocks and other sectors that typically maintain relatively stable revenues through economic cycles. Dorian Carrell, Head of Income at Schroders, stated, "You can see that the companies paying for AI investments—the big cloud computing firms—are not really participating right now because the market is worried about the cost and the leverage involved. Now, the market is starting to question the profitability of the semiconductor industry, especially Asian chipmakers." He added, "The overall AI narrative still has a long way to go, but this pace of profit growth is rarely sustainable in the long term. We think it's a healthy thing for the market to start re-examining these issues."
Vincent Juvyns, Investment Strategist at ING Groep NV, commented, "It is entirely reasonable for investors to reduce their semiconductor positions. This is indeed a good time to take profits and diversify. However, I still recommend clients stay invested, as the outlook for the industry remains quite clear."
Oil Prices Ease on US-Iran Truce
Falling crude oil prices also helped alleviate market concerns about inflation. Brent crude dropped 3% to below $86 per barrel. The global benchmark extended its decline for a third consecutive session as the United States and Iran extended their pause in hostilities. Market attention is now turning to talks between Tehran and Oman regarding the resumption of shipping through the Strait of Hormuz. Oil prices were also influenced by other supply factors. Reports indicated that the Caspian Pipeline Consortium (CPC) terminal resumed loading operations after a one-week suspension.
Despite the significant pullback in oil prices, energy supply risks remain elevated. Saudi Arabia reported that it intercepted drones launched by Iran-backed Iraqi militia targeting oil facilities. Meanwhile, Goldman Sachs data showed that oil flows through the Persian Gulf have now fallen to 41% of pre-conflict levels. Red Sea oil shipments decreased by more than 3 million barrels per day over the past week, partly due to Saudi Arabia diverting some exports via the Suez Canal and a significant reduction in Russian Red Sea shipments.
Bond Market Rally
U.S. Treasuries continued to rally ahead of the Federal Reserve's interest rate decision on Wednesday. Bonds found support as investors lowered their expectations for further tightening by the Fed over the next 12 months. The easing of tensions contributed to the yield on the 10-year U.S. Treasury note falling about 4 basis points to 4.64% on Monday, though short-term rates saw little change. Joel Rossier, an analyst at Danske Bank, noted, "With the uncertainty surrounding the Middle East conflict still present, the bond market appears to be cautiously avoiding over-correction."
Eurozone government bond yields tracked U.S. Treasury yields lower in early trading. According to LSEG data, the German 10-year bund yield fell 2.1 basis points to 3.105%. The Netherlands and Italy are scheduled to auction government bonds on Tuesday. The latter half of the week will also bring a series of important economic data, including preliminary July inflation figures and preliminary second-quarter GDP numbers. ING's Juvyns commented, "The pressure on yields in France, Belgium, and even the U.S. is not entirely related to the Middle East situation; there are structural factors at play."
Fed's Path Uncertain This Week
Juvyns does not expect the Fed to raise rates this week but cautioned that "investors cannot let their guard down, as the risk of stagflation has not disappeared." However, with inflation risks still elevated, money markets are pricing in approximately a 30% probability of a rate hike on Wednesday. Thierry Wizman, FX and Rates Strategist at Macquarie Group, stated, "The U.S.-Iran conflict, by pushing up oil prices, remains one of the most important factors influencing the global economic outlook and, consequently, the policy path of central banks." He added, "We expect the Fed to lean towards a hawkish signal this week."
Citadel Securities is among the institutions predicting a potential rate hike. The firm believes a hike would enhance the credibility of Fed Chair Kevin Warsh in the fight against inflation.
Focus on Potential BOJ Intervention
Expectations of a Fed rate hike continue to support the U.S. dollar. The euro remained below $1.14, trading at $1.1370. The dollar stood at 163.83 yen, with the yen only slightly above its four-decade low. The market is closely watching for potential intervention by the Japanese government, especially if the Bank of Japan holds rates steady this week, leading to further yen weakness. Wizman noted, "If the BOJ's communication is not hawkish enough, causing USD/JPY to continue rising, traders should expect official responses from Japan, including verbal intervention, rate checks, and even direct market intervention, which could occur on Friday."
Fitch Issues Its Most Direct Warning: AI Market Correction is a Major Credit Risk
Rating agency Fitch has warned that the artificial intelligence boom and the risk of a potential correction are becoming a major global credit risk. This heightens concerns about soaring tech valuations and unprecedented expenditure before future returns are determined. No other major rating agency has made such a direct statement thus far. In its third-quarter global risk outlook, Fitch stated that the credit environment remains primarily influenced by two short-term risks: increasing vulnerability to AI-related market adjustments and ongoing uncertainty linked to the US-Iran conflict. The agency reiterated recent warnings from global regulators that the AI boom is increasingly intertwined with economic growth and capital markets, particularly in the U.S., amplifying the risk of any large-scale sell-off. Fitch stated, "The scale of AI investment is so large that the economy and the entire capital market have a significant exposure to any such adjustment."
Key Stock Movers
Coca-Cola shares surged 2%. The beverage company's earnings beat market expectations, and it raised its full-year guidance. Adjusted earnings per share were $0.97, above the Refinitiv analyst consensus of $0.93. Revenue of $13.38 billion also exceeded the expected $13.16 billion.
Sherwin-Williams shares rose nearly 6% after its second-quarter results broadly beat Wall Street expectations. The company reported adjusted earnings per share of $3.70 on revenue of $6.79 billion, compared to the FactSet analyst consensus of $3.52 EPS and $6.60 billion in revenue. Sherwin-Williams also raised its full-year profit forecast.
Hilton Worldwide Holdings shares fell 2.7%. While the company's second-quarter profit and revenue met expectations, its current-quarter guidance fell short. Hilton provided a third-quarter earnings per share guidance range of $2.28 to $2.34, below the FactSet consensus of $2.43.
Johnson & Johnson shares rose over 2%. The company reached a settlement to resolve thousands of lawsuits alleging that its talc-based baby powder products caused ovarian cancer. Johnson & Johnson agreed to pay a total of $5.5 billion to settle all related claims.
Corning shares tumbled 16% after reporting mixed earnings. While its second-quarter profit and revenue exceeded analyst estimates, its current-quarter revenue guidance of $4.9 billion to $5.0 billion was roughly in line with the FactSet consensus.
Cadence Design Systems shares rose 3%. Second-quarter adjusted earnings per share were $2.11, surpassing the Refinitiv estimate of $2.05. Revenue was $1.58 billion, in line with market expectations.
Rambus shares fell over 4% despite reporting better-than-expected earnings and revenue. The company reported adjusted earnings per share of $0.77 on revenue of $207 million, compared to the Refinitiv analyst consensus of $0.72 EPS and $198 million in revenue.
Universal Health Services shares fell 3% after the company lowered its full-year earnings forecast. The updated adjusted EPS guidance for the current fiscal year (ending December) is $22.28 to $23.65, down from the previous range of $22.64 to $24.52.
Welltower, a healthcare real estate investment trust, rose 4.5% after raising its full-year guidance. The company now expects full-year normalized funds from operations (FFO) of $6.36 to $6.44 per share, above the FactSet consensus of $6.30.
Happen, formerly known as LendingClub, saw its shares rise over 6%. The company's full-year earnings per share guidance is $1.80 to $1.90, better than the FactSet estimate of $1.74. Full-year loan origination volume is expected to be between $12.2 billion and $12.6 billion.
Cincinnati Financial shares fell nearly 2% after missing second-quarter expectations. Operating earnings per share were $1.43, below the FactSet estimate of $1.84. Net written premiums were $2.64 billion, missing the analyst estimate of $2.66 billion.
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