Chips are so hot right now. But not for the best of reasons. US House Leader Nancy Pelosi’s visit to Taiwan has angered the Chinese Communist Party and some observers are worried about the possible retaliation.
“China and Taiwan are jointly the source of half the semiconductor chips consumed by the world, and almost all of the latest high-tech chips. If China blockades Taiwan’s trade, the loss of chip supply will cripple manufacturing and technology infrastructure around the world,” says Carl Weinberg, chief economist at High Frequency Economics.
Little wonder there was sufficient bi-partisan support in Washington last month to pass the Chips and Science Act, designed to boost US semiconductor production.
And even setting geopolitical problems aside, the sector faces headwinds reckons Wells Fargo analyst Amit Chanda.
“As the US Federal Reserve aggressively raises interest rates to combat inflation, eventually leading to decelerating economic growth, we believe risks have increased for demand weakness to spread from low-end consumer personal computers and low-end smartphones to other semiconductor end markets within the technology economy at some point later this year or early next year,” says Chanda in a note.
Granted demand is currently fairly robust in pockets, notably within the cloud computing and data center sectors. But Chanda believes relatively high levels of inventory, combined with slower semiconductor sales growth as economic activity weakens, increasing the risk of an “inventory-led correction for the semiconductor industry”.
Evidence of this came recently, he notes, when the largest semiconductor foundry in Taiwan forecast that an inventory correction cycle would occur from the second half of 2022 through the first half of 2023.
The market has clearly anticipated some of these issues. The PHLX Semiconductor Index SOX,
was trading at 26 times its next twelve months (NTM) earnings forecasts at the start of the year. Having fallen 22.6% so far in 2022, the multiple is now down to about 16 NTM earnings.
But Chanda warns that until the downturn is properly reflected in profit forecasts investors will remain wary.
“Despite the contraction in multiples, most institutional investors continue to expect sell-side analysts to reduce consensus earnings-per-share estimates in the 15%-20% range before they feel comfortable revisiting semiconductor equities”
A cautious tone for markets sees S&P 500 futures ES00,
up just 0.1% to 4,159 and Nasdaq 100 futures NQ00,
adding 0.1% to 13,278. The dollar index DXY,
is down 0.3% to 106.19 as the 10-year Treasury yield TMUBMUSD10Y,
dips 2.4 basis points to 2.729%. WTI crude futures CL.1,
are up 0.6% to $91.21 a barrel and gold GC00,
is advancing 1.1% to $1,795 an ounce.
Shares in Lucid Group LCID,
are sliding 12.7% in pre-market trading after the electric-vehicle maker cut its production guidance for the year.
is down 2.2% to $22,800 after news of yet another crypto heist.
The British pound GBPUSD,
is up 0.2% to $1.2166 as traders await the latest decision from the Bank of England. The central bank may hike borrowing costs by 50 basis points to 1.75% as it strives to tackle UK inflation that is running at a 40-year high above 9%.
Earnings reports on Thursday include Nikola NKLA,
Warner Brothers WBD,
and Paramount PARA,
before the market opens, and Lyft LYFT,
and Shake Shack SHAK,
after the closing bell.
US economic reports released on Thursday include initial jobless claims and June trade balance data, both at 8.30 am Eastern.
In a rare piece of good news for the European air travel sector, Lufthansa LHA,
said it expected continuing high demand for tickets, pushing shares in the German carrier up 4%.
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