Weakness in Chip Stocks Weighs on Tech Stocks

Rich Asplund - Barchart - Mon Dec 19, 2022

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.06%, the Dow Jones Industrials Index ($DOWI) (DIA) is up +0.29%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.48%.

Stocks this morning are mixed, with the Nasdaq 100 falling to a 1-1/4 month low. Weakness in chip stocks is weighing on technology stocks and the overall market after Bloomberg Intelligence warned that “demand weakness beyond consumer devices creates a high risk of further cuts to chipmaker sales and EPS estimates.”

Stocks are garnering some support today on hopes that inflation is peaking, which would give the Fed and other global central banks some leeway on monetary policy. Also, a rally of more than +1% in WTI crude oil prices today is underpinning energy stocks

Higher global interest rates are bearish for stocks. Hawkish ECB comments today pushed the 10-year German bund yield to a 1-1/4 month high of 2.224%. That weighed on other global government bond markets as the 10-year UK gilt yield climbed to a 5-week high of 3.484%, and the 10-year T-note yield is up +9.9 bp at 3.581%.

This morning’s U.S. economic news was bearish for stocks after the Dec NAHB housing market index unexpectedly fell -2 to a 2-1/2 year low of 31, weaker than expectations of an increase to 34.

Morgan Stanley said a looming earnings recession "by itself could be similar to what transpired in 2008/2009," which could spark a new stock-market low that's "much worse than what most investors are expecting."

Today’s stock movers…

Chip stocks are under pressure today after Bloomberg Intelligence warned that “the potential for an economic downturn to push end-market demand weakness beyond consumer devices creates a high risk of further cuts to chipmaker sales and EPS estimates.” As a result, advanced Micro Devices (AMD), Broadcom (AVGO), Nvidia (NVDA), Microchip Technology (MCHP), Marvel Technology (MRVL), and NXP semiconductors NV (NXPI) are down more than -1%.

Catalent (CTLT) is down more than -4% to lead losers in the S&P 500 after KeyBanc Capital Markets downgraded the stock to sector weight from overweight.

L3 Harris Technologies (LHX) is down more than -3% after agreeing to purchase Aerojet Rocketdyne Holdings for $4.7 billion.

Meta Platforms (META) is down more than -3% after the company was hit by a formal complaint from European Union watchdogs for allegedly squeezing out classified ad rivals by tying the Facebook Marketplace to its own social network.

Walt Disney (DIS) is down more than -2% to lead losers in the Dow Jones Industrials after it lowered profit guidance on the opening weekend of its Avatar sequel to $130-$150 million from a previous forecast of more than $150 million.

Vertex Pharmaceuticals (VRTX) is down more than -3% after Jeffries downgraded the stock to hold from outperform.

U.S. casinos with exposure to Macau are moving lower today after JPMorgan Chase said the renewal of the casinos’ gaming licenses in Macau could prompt trades to book profits following recent rallies. As a result, Wynn Resorts (WYNN) is down more than -3%. Also, Las Vega Sands (LVS) and Caesars Entertainment (CZR) are down more than -2%. In addition, MGM Resorts International (MGM) is down more than -1%.

NRG Energy (NRG) is up more than +3% to lead gainers in the S&P 500 on signs of insider buying after SEC filings showed President and CEO Guitierrez bought $480,450 of his company’s stock.

A rally of more than +1% in WTI crude prices today is boosting energy stocks and energy service providers. Marathon Petroleum (MPC), ConocoPhillips (COP), Hess Corp (HES), Schlumberger (SLB), and Valero Energy (VLO) are up more than 1%.

Pentair Plc (PNR) is up by more than +2% after Stifel upgraded the stock to buy from hold with a price target of $57.

Tesla (TSLA) is up more than +1% after a poll of Twitter users showed they favored CEO Musk stepping down as head of the company.

Across the markets…

March 10-year T-notes (ZNH23) today are down -21 ticks, and the 10-year T-note yield is up +9.9 bp at 3.581%. A jump in European government bond yields is weighing on T-note prices this morning. The 10-year German bund yield climbed to a 1-1/4 month high of 2.224, and the 10-year UK gilt yield rose to a 5-week high of 3.484%. Strength in stocks this morning is also curbing the safe-haven demand of T-notes

The dollar index (DXY00) this morning is down by -0.09%. The dollar this morning is under pressure on strength in stocks, which has reduced liquidity demand for the dollar. Also, strength in EUR/USD todau is undercutting the dollar after hawkish ECB comments boosted the euro.

EUR/USD (^EURUSD) today is up by +0.26%. The euro is moving higher after today’s economic news showed German Dec IFO business sentiment rose more than expected to a 4-month high. Also, hawkish comments today from ECB Vice President Guindos and ECB Governing Council member Kazimir pushed German bund yields higher and strengthened the euro’s interest rate differentials.

The German Dec IFO business climate index rose +2.2 to a 4-month high of 88.6, stronger than expectations of 87.5.

ECB Vice President Guindos said the ECB would continue to raise interest rates at a "similar pace" to its last 50 bp rate hike until projections show that unprecedented Eurozone price gains are headed back to the bank's 2% target.

ECB Governing Council member Kazimir said he has "no doubt" the ECB will raise interest rates at its next meeting in February and that bringing inflation under control will require not only that rates move to levels that restrict the economy, but that high interest rates will stay there "much longer."

USD/JPY (^USDJPY) this morning is up by +0.04%. The yen today gave up an overnight rally and is slightly lower. Higher T-note yields today are weighing on the yen. The yen initially moved higher in overnight trade on speculation the BOJ may be closer to moving to a hawkish pivot. Kyodo news reported Saturday that Prime Minister Kishida might seek to revise a decade-old accord with the BOJ and consider adding flexibility to the central bank’s 2% inflation goal, potentially paving the way for an end to its dovish policy. However, the BOJ is expected to maintain QE and keep policy on hold when it meets on Tuesday.

February gold (GCG3) this morning is up +1.4 (+0.08%), and March silver (SIH23) is up +0.117 (+0.50%). Precious metals prices this morning are modestly higher. A weaker dollar today is bullish for precious metals. However, gains in gold are limited due by higher global bond yields. Also, hawkish ECB comments today signal higher interest rates in the future, which is bearish for metals prices.

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes.