Tech support

• Overseas currencies strengthened against the pound, with the Japanese yen up +0.8%
• UK bonds broadly gained, with UK index-linked bonds rising +0.4%

• Equities broadly weakened in sterling terms with Asia ex Japan falling -2.5% and European stocks slumping -2.8%
• The Brent crude oil price declined -2.8% in US dollar terms

Technology stocks suffered this week, with a perfect storm of events weighing on the sector.

Republican presidential nominee, Donald Trump, suggested on Tuesday that Taiwan should pay the US for military protection against China. Without US support, Taiwan may be more vulnerable to attack from China. In reaction to the comments, Taiwan Semiconductor Manufacturing Company (TSMC) suffered a -8% fall on Tuesday. However, the impact could reach beyond Taiwan - if TSMC’s manufacturing capacity were compromised, global chip supply would be severely impacted.

Meanwhile, President Biden announced that the US is considering further restrictions on exports of semiconductor equipment to China. This follows tightening of October 2022’s limits on exports of Artificial Intelligence (AI) processors in October 2023.

Markets reacted on Wednesday with US-listed shares of Dutch firm, ASML, which specialises in the developing and manufacturing of machines used to produce semiconductors, falling more than -7% and Japan's Tokyo Electron falling -7.4%. Measures to curb Chinese access to chip technology has already taken a toll on major Chinese semiconductor producers. Chinese state-owned Semiconductor Manufacturing International Corp (SMIC) has reported difficulty in increasing production yields of their AI chips for Huawei.

Adopting a tougher line on China poses risk of retaliatory measures, not to mention exacerbating trade tensions between the nations. US chip makers have also been negatively impacted by restrictions, seeing a decline in revenue since October's restrictions.

To end the week, a global IT failure on Friday grounded several major industries, including aviation, banking, payment and healthcare systems. CrowdStrike Holdings Inc., a major cybersecurity provider for Microsoft, is being held responsible. Microsoft and Crowdstrike shares were down -1.5% and -5.6%, respectively on Friday.

The Global Tech index declined c. -5% over the week, weighing also on the US Index, given its significant tech exposure. The sector’s strong year-to-date performance has made it more vulnerable to shocks, though structural support from drivers such as the AI revolution remain in place.

UK economic data continues to show signs of easing. Inflation remained at 2% in June - despite the UK leg of Taylor Swift’s tour pushing up hospitality prices! May-June labour market data was more mixed: unemployment remained at 4.4% and regular wage growth slowed to 5.7%, with private sector regular pay slowing to 5.6%. However, both payroll and survey data showed a rise in employment, with payroll data revised higher for the prior month. Lastly, poor weather meant that June retail sales were very soft, with sales excluding cars and petrol falling by -1.5% on the month, unwinding some of May’s 2.9% bounce.

Softer employment and inflation data could pave the way for the Bank of England to cut interest rates. While no action is expected at the August Monetary Policy Committee meeting next week, the Monetary Policy Report, published at the same time as the announcement, is likely to hint at a September rate cut.

With UK inflation easing, economic activity is expected to strengthen in the second half of the year. While the King’s Speech outlined a long list of bills that the new Labour government wishes to pass, it is the autumn budget that is likely to have the biggest impact on the outlook for activity going into next year. However, current budget forecasts underestimate the amount of funding needed for government spending, and new figures must be confirmed by December. Given the likely need for additional funds, tax increases look increasingly possible, which could marginally weigh on activity.

China’s third plenum took place last week, a major meeting held once every five years setting the long term policy agenda of China’s ruling Communist Party. Hopes of a stimulus announcement were low going into the plenum, which is more focused on multi-year objectives than near-term policy, but the Politburo meeting later this summer could herald new stimulus measures for the Chinese economy.

The report published after the plenum revealed a number of policy objectives. Fiscal discipline and containing local government debt risk remains a key focus, with party leaders also recognising the need to reform local and central government spending and revenue division. The party continue to support private sector enterprise, State Owned Enterprises reforms and opening up China’s market to foreign enterprise. Lastly, liberalisation of residency restrictions, known as the hukou system, has been proposed, along with land and urbanisation reform. The report also discussed increasing the social safety net, and pension provision.

 

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