Market snapshot: chip stocks fall amid global bond sell-off

Semiconductor stocks resumed their roller-coaster ride and a global sell-off of bonds sent yields to multi-decade highs as investor sentiment sagged in the face of these twin concerns.

There is an increasing throng of those questioning the extraordinary levels of investment being ploughed into AI and all its associated offshoots, such as power equipment and data centres. Equally, the return on such capital spending may be beginning to emerge, but it is far too early to call whether the ultimate revenues will be sufficient. The outlook is equally confused by the fact that it is clear that most companies are now using AI in some shape or form, although for many this is resulting in an increase in productivity as opposed to additional revenue lines necessarily.

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As such, movements in the sector generally are volatile and uncertain. The latest lurch downwards was led by heavyweights such as NVIDIA Corp (NASDAQ:NVDA) and Broadcom Inc (NASDAQ:AVGO), which fell by 2% and 3% respectively, while Micron Technology Inc (NASDAQ:MU) dipped by 7% although in context the latter stock remains up by 198% in the year so far. 

Nonetheless, neither the debate nor the volatility is likely to subside, and share price moves could be exacerbated by the lower volumes traditionally associated with the height of the summer season. This theme was echoed in Asia overnight with South Korea at the eye of the storm, with the Kospi index falling by more than 5% due to weakness in its two largest constituents, Samsung Electronics Co Ltd DR (LSE:SMSN) and SK hynix Inc ADR (NASDAQ:SKHY), which fell by 7% and 8% respectively.

Meanwhile, selling pressure in bond markets continued apace. Persistent inflationary concerns are worsening due to elevated oil prices, which weighs especially on those countries with an extra reliance on energy imports such as the UK and Japan. With hopes fading once more of any resolution to the Middle East conflict as the US president said that there were currently no “talks or conversations” with Iran, the supply issue remains front and centre.

Quite apart from inflationary worries, there is an increasing sense of discomfort with the general level of government debt which has been rising steeply over recent years and of late has been heightened by more spending on lines such as defence. The latest sell-off has seen bond yields rise to highs not seen since around 2007 across some important hubs, such as the US, Japan, Germany and France. In the UK, the government sold a 10-year bond with a yield of 5.155%, up from 5.04% a month ago and itself also the highest since 2007. The US will later add to its $40 trillion (£30 trillion) debt mountain with the issue of a 20-year bond aiming to raise $16 billion and investors will again be demanding a higher level of compensation for participating in such a loan.

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The outlook is cloudy but for the time being the earlier outperformance of the main US indices continues to provide a strong buffer. Despite the current uncertainty, the Dow Jones has seen gains of 11% so far this year, while the more tech-focused benchmark S&P 500 and Nasdaq have added 12.4% and 13.1% respectively.

Given the general global weakness, the FTSE 100 displayed its defensive mettle in bucking the trend, although the index was unable to move far from the flatline. Some cautious buying within the mining sector provided some relief, while Smith & Nephew (LSE:SN.) shares fell by more than 3% after the resignation of its chief financial officer, who had been seen as someone largely responsible for the group’s margin improvement. The incremental gain leaves the primary index ahead by 8.1% in the year to date as its stability and cash generation continue to attract global investors in times of general uncertainty.

Elsewhere, the UK inflation rate rose to 2.9% in July, as compared to 2.6% in June, with the rise being in line with estimates given the 13% increase in the price cap on household gas and electricity bills coming into effect. Of course, persistent inflation is far from being just a UK concern. The economy has shown pockets of surprising resilience over recent months, while consumer defaults remain low and controllable as reported by the banks in their recent earnings season. This relative strength, alongside a wave of Merger and Acquisition activity has seen the more domestically focused FTSE 250 add 9% in the year to date, including a recent spike which took the index to record highs.