MIXED UPDATES FROM US TECH STOCKS UNSETTLE MARKETS AS BANK OF ENGLAND CUTS RATES

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Data Sourced from FE Analytics, and Bloomberg Finance LP

MIXED UPDATES FROM US TECH STOCKS UNSETTLE MARKETS AS BANK OF ENGLAND CUTS RATES

This week has been a difficult one for equity investors. The performance of US tech stocks over the last two years and the narrowness of that rally has generated a lot of concern about whether revenue growth and lofty valuations are sustainable. This week’s updates from US tech stocks have not been terrible. Revenue growth at Microsoft and Amazon only just fell short of expectations, while poor updates from Arm Holdings and Intel were offset by positive updates from Meta and Apple. But the jitters in markets, as seen in the big swing is Nvidia’s share price, show these worries are at the front of investors’ minds.

The news from central banks was less surprising. The cut, hold and raise from the UK, US and Japanese central banks were hardly a shock, but on the back of more evidence that the US economy is slowing there has been a big rally in developed market government bonds as markets see greater scope for rate cuts and some investors look to sidestep some equity market volatility.

RATES: CUT LIFTS UK MARKETS BUT BOJ HIKE CAUSES EQUITIES TO TUMBLE

The Bank of England reduced interest rates to 5% in its first cut in four years. The decision split the nine-member Monetary Policy Committee by five votes to four, but governor Andrew Bailey said investors should not see this to be the start of a rapid series of cuts. The Federal Reserve chose to keep rates on hold, however, it signalled that a cut is likely at next month’s meeting. The decisions were in line with market expectations as UK gilts and US treasuries added to gains from earlier in the week.

Meanwhile, the Bank of Japan caught markets slightly by surprise by increasing interest rates from 0.1% to 0.25%. Markets had been expecting an increase, but not so soon. The BoJ also said it is reducing economic stimulus by cutting it programme of Japanese government bond purchases by 50%. The rate hike helped accelerate the recent rise of the yen, however, the increase in the Japanese currency is expected to be bad for Japanese exporters and the broad Topix index fell sharply.

TECH: MARKETS SEESAW FOLLOWING MIXED EARNINGS UPDATES

There was more volatility for US equities as high-growth tech stocks were buffeted by mixed investor updates. Four of the Magnificent Seven US tech stocks reported this week. Microsoft and Facebook-owner Meta Platforms gave their updates on Tuesday and Amazon and Apple reported later in the week. Microsoft’s quarterly revenue increased by 29%, but this fell short of expectations causing shares to fall. Meta’s update was received more positively as advertising revenues grew slightly faster than expected.

Both companies intend to continue spending heavily to develop their AI capabilities and this helped lift micro chip designers and makers mid-week. Shares of Nvidia increased 12% on Wednesday, having fallen 7% the previous day. It was not all good news for semiconductor stocks. Shares in UK-firm Arm fell 10% as it said it expects sales to cool in the third quarter. Apple and Amazon’s updates were positive but fell short of expectations, and Intel is cutting jobs and investment spending after losing ground to other chip makers.

EQUITIES: BANKS FEEL THE EFFECT OF HIGHER INTEREST RATES

UK banks continue to benefit from higher interest rates. HSBC unveiled a $3bn share buyback plan as second quarter profits beat expectations as higher revenues from its life insurance and private banking businesses offset a small drop in retail lending. Barclays reported rising revenue from its investment banking operation in addition to an increase in retail lending. Standard Chartered also upgraded its full year forecast as revenue from its Asian wealth management business grew strongly. Positive updates have helped extend the recent outperformance of banking stocks in the UK.

The UK’s retail banking industry is dominated by HSBC, Barclays, Lloyds and Natwest. Last week digital bank Revolut took a big step forward in its efforts to challenge the high street banks after it gained its UK banking license, after a three-year wait. Revolut has previously said a UK listing was not a priority due to tougher listing rules in London. However, LSE overhauled it rules this week and cleared some hurdles to a potential Revolut IPO.

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