Susannah Streeter, Chief Investment Strategist, Wealth Club: “The global tech sell-off appears to have started to stabilise, but investors remain super-cautious, nervous that high valuations could be chipped away at again. Even a fresh easing of the energy crunch, with oil prices dipping further, isn’t lifting sentiment much. The Footsie has had a flat start with investors searching for a sense of direction. Losses are still being nursed from the big tech names who’ve sucked up investors' savings this year.
SpaceX burns off steam
SpaceX has come down to earth with a bump, burning off most of its post-launch steam. The sell-off may have been partly triggered by the confirmation that it was planning a bond sale, expected to be around $20 billion. Issuing debt at such a heady valuation raises questions about cash flow for this hugely capital-intensive venture.
Chipmaker valuation concerns
There are concerns that risky trading has led to a surge in valuations, with South Korean chipmakers hit particularly hard in the sell-off this week, which has spread to other markets. A warning from South Korea's Financial Supervisory Service warned about the popularity of leveraged, single-stock exchange-traded funds, which track memory chip companies. There’s also nervousness about whether there could be too much supply in the market for memory chips. Although South Korean giants SK Hynix and Samsung have recovered in trading today, valuations are still sharply down on last week.
Tech results set tone for Nasdaq
The skittishness has spread, bringing down Micron Technology which plunged 13%. Investors are nervously awaiting its results update for the third quarter. The Nasdaq is expected to open slightly higher after the two-day rout, but the big question is whether this correction has passed or if it is a pause before a further fall. Micron is expected to post eye-watering revenues of around $25.5 billion, a 280% year-on-year increase. But given how high expectations have shot up about mega revenue hauls stretching far into the future, any weakness in outlook could set off another round of selling. Growing expectations that the Federal Reserve will hike interest rates this year have also unnerved investors, given that higher rates reduce the value of future earnings, which so much of these heady valuations are based on.
Brent crude falls further
The FTSE 100 hardly shifted in early trade, as a decline in oil prices has weighed on the listed energy giant. Brent crude, the benchmark, is heading back towards the level it was before the crisis erupted. It’s currently trading around $76, just 7% higher than pre-war levels. With tanker traffic rising through the key Strait of Hormuz and big oil-producing nations increasing output, it’s lifting hopes that energy shortages will be eased more quickly.
However, economies still won’t have felt the full effects of the surge in prices in the Spring feeding through. There are also concerns that tolls could be imposed on the Strait of Hormuz, given that Iran and Oman are in discussions about how to manage the waterway going forward. This would add to shipping costs for the longer term and add to pressures for importers.
Speculation swirls about Streeting as Chancellor
Meanwhile speculation continues to swirl about the direction of UK economic policy if Andy Burnham gets the keys to Number 10. Rachel Reeves, seen as a stable figurehead at the Treasury by investors, looks set to be ousted. Wes Streeting, the former Health Secretary, is seen as the frontrunner to replace her. Amid the ongoing rumours, the pound has lost ground, trading under $1.32 against the dollar. However, this is also likely to be due to the strengthening of the greenback amid expectations of rate hikes from the Fed.
From any new Chancellor, financial markets would initially be looking for stability and signs of action aimed at stimulating sustainable growth, and Streeting is likely to initially try to project reassurance and a business as usual attitude aimed at reassuring investors and keeping a lid on high government borrowing costs.
Streeting is unlikely to have much scope for broad-based tax cuts, particularly if the government remains committed to fiscal discipline, given that there’s so little leeway in public finances. Although he is likely to be seen as a more pragmatic chancellor, there is still concern that he would seek to raise revenue through changes to property or wealth taxation, which could stymie much needed investment.
If Streeting can convince investors that extra public investment is being directed towards projects that genuinely improve productivity and expand the economy's potential, markets may be prepared to give the government greater leeway. He has been a strong advocate for NHS modernisation and digital transformation and is likely to demand that government departments make efficiency drives to trim budgets and overall spending.
Welfare spending is set to come under intense scrutiny under a new Chancellor. He does look more likely to pursue reforms aimed at increasing labour market participation; markets may view this positively, particularly given concerns about economic inactivity and the long-term cost of welfare commitments.
The UK has struggled for years with weak productivity, underinvestment and sluggish economic expansion. Although Burnham's supporters argue that a more interventionist approach, focused on infrastructure, skills and regional development, could help unlock stronger growth across the country and Streeting would find it hard not to toe the PM's line. However, there will be concern that this will be prioritised; the dial won't move enough on tax relief to incentivise investment.”
|
