Wall Street suffered a third day of declines on Thursday after better than expected US growth figures failed to entirely cushion it from heavy sell-offs for chip stocks in Europe and Asia.
In a volatile session, the Nasdaq Composite swung between early losses of 1.8 per cent and subsequent gains of 1 per cent before closing down 0.9 per cent. On Wednesday the tech-heavy index suffered its worst day in 18 months, dropping 3.6 per cent.
The rollercoaster performance came after the US economy expanded at a 2.8 per cent annualised rate in the second quarter, beating forecasts and allaying concerns about slowing global growth.
Buoyed by the GDP figures, traders once again shifted into small-cap stocks, extending a strong recent run for the previously unloved asset class. The rotation out of Big Tech into small-caps began earlier this month after lower than expected June inflation figures boosted investors’ confidence that the US economy remains on track to achieve a “Goldilocks” scenario, where inflation slows without triggering a recession.
The Russell 2000 index of smaller companies rallied 1.3 per cent but the S&P 500 closed down 0.5 per cent following a 2.3 per cent drop on Wednesday.
US chipmakers, rattled by a combination of disappointing earnings, geopolitical tensions and the rotation to smaller stocks, led the index moves and ultimately ended the day lower, with Nvidia down 1.7 per cent and AMD off 4.4 per cent.
UK-based Arm Holdings lost 5.4 per cent as European and Asian tech stocks also tumbled. The Stoxx Europe 600 Technology index lost 2.7 per cent, with Dutch chipmaking equipment manufacturer ASML, Europe’s largest tech company, down 3.8 per cent. In Seoul, shares in SK Hynix slid 8.9 per cent, the biggest drop since March 2020, as investors took profits on concerns about its high valuation and the possibility of slowing artificial intelligence investment by big tech groups.
The sharp declines in Europe and Asia marked a reversal of the frenzy over tech stocks — and those associated with AI in particular — that has contributed the bulk of equity gains this year. They also underscore the harsh punishment being meted out by investors to companies that fail to hit earnings targets.
“We’d seen such strong earnings reports coming into this season that the market was unprepared for bad news . . . Now we’re seeing indiscriminate selling,” said Barclays head of European equity strategy Emmanuel Cau, who added that thin summer liquidity may be exacerbating market moves.
“Everyone’s on holiday, plus you have all this noise and angst around US politics and slowing growth in Europe and China,” Cau added. “Bad news is bad news again and earnings are no longer helping.”
Expectations that the Federal Reserve will soon lower borrowing costs have triggered a shift away from high-flying big tech companies and into unloved corners of the market such as smaller stocks.
US Treasuries extended a recent rally driven by interest rate cut hopes and a clamour for safe assets. The US two-year yield, which falls as prices rise, reached 4.36 per cent, its lowest level since early February. It picked up to 4.43 per cent following the release of the stronger than expected US GDP figures.
Alphabet fell 3 per cent, adding to Wednesday’s 5 per cent decline after concerns over rising AI-related capex spending outweighed the company’s solid second-quarter earnings.
The “response to a strong report underlined that optimism in markets over the outlook for tech has created a high hurdle for companies to clear”, said Mark Haefele, global wealth management chief investment officer at UBS.
German chipmaker Infineon Technologies fell 6.5 per cent on Thursday, BE Semiconductor lost 14 per cent and Switzerland-based semiconductor group STMicroelectronics dropped 13.7 per cent after lowering its 2024 sales estimates. The continent-wide Stoxx Europe 600 fell 0.7 per cent to its lowest level since May. France’s Cac 40 fell 1.1 per cent and London’s FTSE 100 rose 0.4 per cent.
The Topix index of Japanese stocks, which had rallied to an all-time high this month, fell 3 per cent, wiping out its gains for July and settling at a five-week low. South Korea’s Kospi index, which is heavily weighted towards tech stocks, fell 1.7 per cent.
The Japanese semiconductor bellwether Renesas dropped 14 per cent — the shares’ biggest full-day retreat since March 2019 — after disappointing market expectations on profits. Other Japanese semiconductor groups, including Advantest and Tokyo Electron, also fell sharply.
The abrupt retreat of the Topix in recent days coincides with the yen’s continuing surge against the US dollar and what currency traders said is now turning into a rushed exit from the so-called carry trade, in which speculators cheaply borrow yen to invest in higher-yielding assets elsewhere.
Since weakening to ¥161.6 against the dollar on July 10, the yen had strengthened just under 5.7 per cent to ¥152.53 on Thursday. The currency weakened to ¥154.11 after the US GDP data.
Traders said part of the yen’s rapid reversal was driven by suspected currency intervention by the Japanese authorities this month. But rising expectations of a rate-cutting cycle in the US are now driving the yen even higher.
Masashi Akutsu, chief Japan equity strategist at Bank of America, described the recent combination of equity and currency volatility as a “summer storm”, with its centre in the US. Profit-taking on the large tech stocks had been a dominant theme, he said in a note to clients.
“While some of this rotation may be unwound in the future, it is unlikely to be completely reversed as long as Fed rate cuts are being anticipated,” he said.