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Monday, March 4, 2024

Wall Street Lunch: Chips Under Pressure

Wall Street Lunch: Chips Under Pressure


Listen below or on the go on Apple Podcasts and Spotify

Wall Street cautious on semis with ‘draconian’ export curbs. (0:15) P&G (PG) reports strong organic sales. (3:15) Copper rises with China on track for 2023 growth target. (4:08)

This is an abridged transcript of the podcast.

Our top story so far

Chips continue to dip. Nvidia (NVDA), AMD (AMD), and Intel (INTC) remained under pressure as several Wall Street firms weighed in on the impact of the Biden Administration’s new export controls on AI-linked chips to China.

Citi analysts said they believe the scope of the new thresholds set forth by the Biden administration will make it “difficult” for Nvidia to sell to China. This time around, it will require more than just networking modifications made on the previous A800 and H800 products that were sent to China previously.

Citi maintained its Buy rating on NVDA but lowered its price target to $575 from $630, saying it is “de-risking” its fiscal 2025 and 2026 estimates.

Morgan Stanley analysts, led by Joseph Moore, also lowered their price target (moving to $600 from $630).

They wrote that “While export controls have been widely expected given recent press reports, this is at the more draconian end of expectations, in our view, and the selloff in the stock… seems warranted.”

Staying with China, President Xi Jinping announced the launch of a Global AI Governance Initiative.

The measures outline China’s proposals for the development, security, and governance of AI.

China’s Foreign Ministry spokesperson said that the core components of the initiative include upholding principles of mutual respect, equality, and mutual benefit in AI development and opposing drawing ideological lines or forming exclusive groups to obstruct other countries from developing AI.

In today’s trading

The markets started with a broad risk-off move on concerns of an escalation in Israel-Hamas that could include conflict with other nations.

But that has been typical with recent selling spurred by Mideast concerns; the bears are losing steam.

The major indexes are down, but off their lows. The S&P is down less than -0.5%.

Rates were initially lower, but longer rates have resumed their climb. The 10-year Treasury yield (US10Y) matched its recent high and is knocking on the door of 4.9%. That would mark a jump of more than 30 basis points since just last Friday and the highest levels since 2007.

More housing data arrived this morning. September housing starts rose less than anticipated, but building permits saw a smaller-than-expected decline.

Wells Fargo economists said builders “continue to ride the tailwind of resilient single-family demand as they find success using incentives to sell homes in the higher mortgage rate environment.”

“Meanwhile, multifamily starts picked up for the first time in four months, driving the bulk of September’s gain.”

But they “find it unlikely that this level of activity can be sustained.”

Back to Israel, the shekel (USD:ISL) remained at 8-year lows against the U.S. dollar, above the psychological 4 level. Strategists are divided on the path of the shekel, with Citi saying that the currency is likely to underperform with the level of uncertainty and Goldman arguing that flows from other nations can support it.

Moving to the latest on earnings

Procter & Gamble (PG) smashed expectations with a 7% gain in fiscal Q4 organic sales vs. +5.8% consensus. Pricing was up 7% during the quarter, and the effect of a favorable mix was +1%, while volume fell 1%. The organic sales gain was led by a 10% jump in the Healthcare segment, with prices up 6%.

Morgan Stanley (MS) reported Q3 net interest income that fell short of expectations, and its provision for credit losses was higher than expected. Its Institutional Securities business revenue fell from a year ago on muted M&A activity and a less favorable fixed income market.

Travelers Companies (TRV) Q3 core EPS dropped from a year ago on higher catastrophe losses and net unfavorable prior-year reserve development, while the year-ago results included favorable prior-year reserve development. Those factors were partly offset by a higher underwriting gain and higher net investment income.

In other news of note

Prices for copper and other base metals are moving higher as data from China indicated the country’s economy is faring better than expected in Q3.

China’s economy grew 4.9% in the latest quarter compared with a year earlier, a slowdown from the 6.3% annual rate of growth in Q2 but in line with expectations and on track to meet the government’s official full-year goal of 5% expansion.

Copper prices have dropped ~4% YTD. Goldman Sachs said this week it expects industrial metals markets will remain vulnerable to incremental softness in the near term due to deteriorating demand and the impact from higher interest rates.

And in the Wall Street Research Corner

The world’s largest publicly traded companies—Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG) (GOOGL), Amazon (AMZN), and Nvidia (NVDA)—have added a total of $2.4 trillion in market cap since September 2023.

The five tech titans now represent $9.1 trillion in market cap, an advance of 36% over the past year, according to venture capital firm Accel.

Looking outside of Wall Street’s trillion-dollar players, cloud computing tech companies have also climbed the market cap ladder since last year. Shares of Oracle (ORCL) and Adobe (ADBE) both increased their market caps by at least 75%.

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