An ASML-Shaped Bolt From The Blue

Where We Stand – Yesterday was, for a while, shaping up as a choppy, but rather directionless, day. That was until someone, somewhere, decided that we should all be treated to the release of earnings from semiconductor giant ASML around 15 hours early, which injected some life into proceedings.

To be frank, the results were rather grim, with Q3 bookings at 2.63bln EUR, under half the figure that consensus had foreseen. At the same time, the firm trimmed both margin and net sales guidance for the quarter ahead, potentially flagging downside risks for the tech sector more broadly, as earnings season progresses.

On top of these dismal earnings, AI ‘darling’ Nvidia also came under significant pressure, amid reports that the Biden Administration are mulling a cap on the sales of NVDA, and AMD, chips to certain nations in the Middle East.

These two factors combined saw stocks take a rather chunky lurch lower, with the market giving up earlier gains, and rapidly moving past what had been a solid day of corporate reports elsewhere, with Goldman, BofA, and Citi all having beaten expectations. On the day, the S&P closed 0.8% lower, while the Nasdaq slumped 1.4%.

Despite the intraday downside, I continue to view dips as buying opportunities, with said downside likely to prove shallow and short-lived in nature. Providing that banks prove a reliable barometer for earnings season more broadly, solid earnings growth, coupled with resilient economic growth, should continue to power the market higher. This is particularly the case with the forceful Fed put providing additional confidence allowing participants to remain further out the risk curve.

Elsewhere, yesterday’s session produced plenty of other catalysts leaving quite the ‘laundry list’ of themes to deal with this morning.

Crude, naturally, stole most attention, with Brent and WTI barrelling over 5% lower apiece amid something of a perfect storm for the bulls – reports that Israel wouldn’t target Iranian energy infrastructure in planned retaliation against Iran; continued fallout from China’s lacklustre fiscal stimulus, amid rumours that “nothing substantial” is on the way in terms of measures to boost consumption; plus, participants continuing to digest OPEC having trimmed global demand projections for the third month running.

While WTI has now fallen as much as 7% in just 2 sessions to kick-off this trading week, I still view short crude positions though a doubtful lens, particularly with the geopolitical situation remaining fluid, and the market having priced out a significant chunk of risk premium on the back of a sole ‘sources’ report. Crude bears would be well advised not to get too greedy here, and some profits from the short side could well be taken off the table in relatively short order. Complacency over developments in the Middle East is unlikely to serve participants well.

Speaking of China, though, authorities announced yet another press briefing, with the Housing Ministry, Ministry of Finance, and PBoC all set to attend a press conference on Thursday. Surely, these folk won’t make the same mistake for a third time, of hosting a presser, raising market expectations of additional stimulus, only to then deliver diddly squat! That said, the market’s bar in terms of stimulus expectations is so high at this stage, that it would probably be impossible to meet in any case. Risks, in my view, to the Chinese equity complex, continue to tilt to the downside.

On the subject of policy easing, data yesterday effectively cemented the case for a 50bp Bank of Canada cut next week, with headline CPI rising just 1.6% YoY in September, the slowest annual headline inflation rate since February 2021. With BoC Governor Macklem having recently hinted at the prospect of cutting in larger clips, and the Fed having opened the door to ‘jumbo’ cuts with their own 50bp cut in September, the BoC would likely lose what little credibility they have left if they weren’t to deliver a 50bp move of their own next week, particularly with the CAD OIS curve discounting around a 4-in-5 chance of such action.

Predictably, the loonie traded softer after the inflation figures, with USD/CAD advancing for a 10^th straight day, the worst run for the CAD in over 5 years, with the aforementioned slide in crude prices providing an additional headwind. Momentum clearly favours further upside, here, with participants likely now looking to the July highs around 1.3890 as the next upside target.

Other data out yesterday included the August UK labour market figures, which even the ONS admit aren’t worth the paper that they’re written on – ‘external sources suggest the Labour Force Survey is overstating underlying employment growth’ and ‘may indicate unemployment has fallen by less than the survey has suggested’ to use the statistical gobbledegook.

In layman’s terms, this means that the BoE are unlikely to put much weight on the data in determining future policy shifts, even if the report did show unemployment falling to 4.0%, its lowest level since January, and overall earnings growth at its slowest pace since November 2020. Today’s inflation figures are much more likely to move the needle in terms of the speed, and magnitude, of future Bank Rate cuts.

The German ZEW sentiment surveys aren’t suffering with accuracy issues and, in an even rarer development, actually beat expectations, with the index rising to 13.1, from a prior 3.6. The bulk of this rise, though, came as survey respondents sought solace in the idea of faster ECB rate cuts hence, in a somewhat counter-intuitive way, participants are only optimistic about the economic situation as they believe Lagarde & Co. will bail them out of it! Hardly a reason to be betting on a sustained recovery, or taking on long EUR positions, in my book.

Look Ahead – Mercifully, a considerably quieter data docket awaits today.

September’s UK CPI figures stand as the only significant data release, with headline inflation set to have fallen back below the BoE’s 2% target last month. Nevertheless, policymakers’ continued focus on signs of inflation persistence mean the core and services prints take on greater stature, though both are expected to notch chunky declines – to 3.4% and 5.2% respectively, as base effects fade from the data.

Otherwise, the data docket is barren.

Elsewhere, ECB President Lagarde is due to make remarks this evening, though with the ECB announcing their latest rate decision tomorrow, Lagarde’s comments shan’t make reference to the policy outlook.

Meanwhile, bank earnings season wraps up as Morgan Stanley report before the opening bell, with participants seeking a solid beat from MS after peers delivered upside surprises earlier in the week.