Global Markets Report - 26 May

Australia

Australian shares are uncertain this morning following big gains for US tech stocks. While the clock keeps ticking for US leaders to resolve the debt ceiling crisis, shares of chip manufacturer Nvidia soar.

ASX futures were relatively unchanged as of 6:00am on Friday, having gained 2 points or less than 0.1%.

US stocks closed mostly higher Thursday, as chip maker Nvidia lifted the technology sector after posting breakout first-quarter results.

Nvidia’s strong outlook came from the booming demand for artificial intelligence and boosted the Nasdaq Composite to a 1.7% gain with its own 24% rise.

Meanwhile, the S&P 500 advanced 0.9% and the Dow Jones Industrial Average shed 0.1%.

In commodity markets, Brent crude oil dropped 2.7% to US$76.25 a barrel while gold backtracked 0.9% to US$1,940.22.

Australian government bonds were higher, with the 2 Year yield increasing to 3.58% and the 10 Year yield rising to 3.70%. US Treasury notes were also higher, with the 2 Year yield leaping to 4.53% and the 10 Year yield climbing to 3.82%.

The Australian dollar declined to 65.01 US cents from its previous close of 65.42. The Wall Street Journal Dollar Index, which tracks the US dollar against 16 other currencies, ticked up to 98.13.

Asia

Chinese shares ended lower, with market sentiment weighed by the country’s weak economic recovery, worries over local government debt and a stalemate in the US debt ceiling talks. Media and software stocks dragged on the market. Mango Excellent Media dropped 1.0% and Beijing Kingsoft Office Software retreated 2.1%. Among risers, chip makers reclaimed some gains after prior declines. Hygon Information Technology rose 5.4% and Semiconductor Manufacturing Electronics (Shaoxing) added 0.9%. The Shanghai Composite Index closed 0.1% lower at 3201.26. The Shenzhen Composite Index dropped 0.2% and the ChiNext Price Index was 0.05% lower.

Hong Kong stocks fell in the last trading day of the week amid concerns over China's weak economic recovery, its long-term growth and the stalemate in US debt ceiling talks. Most shares on the HSI fell as tech companies led the losers. The Hang Seng Tech Index dropped 2.25% with JD.com declining 3.8% and Meituan dropping 3.4%. Automakers were lower amid BYD Co. and Great Wall Motor's spat over emissions as well as XPeng's disappointing Q1 earnings. XPeng dropped 9.3% and BYD Co. was 5.4% lower. The Hang Seng Index ended 1.9% lower.

Japan's Nikkei Stock Average rose 0.4% to close at 30801.13, led by semiconductor and electronics-related companies following Nvidia's post-market earnings and guidance. Nvidia's outlook on surging demand for AI chips has been much more optimistic than expected, said Yeap Jun Rong, market analyst at IG. Among Japan’s best performers were Advantest, which jumped 16%, Ibiden, which climbed 9.3%, and Sumco, which added 3.7%.

India's benchmark Sensex index gained 0.2% to end at 61872.62, reversing earlier losses amid cautiousness triggered by the stalemate in US debt ceiling talks. Consumer goods stocks led gainers. Among the index's best performers were Jubilant FoodWorks, which added 3.2%, and Bajaj Auto, which rose 2.7%. Losers included Tata Motor, which declined 1.9%, and Wipro, which dropped 1.4%.

Europe

European stocks dropped amid continued uncertainty over prospects for a US debt ceiling deal. The pan-European Stoxx Europe 600 declined 0.2% while the French CAC 40 and the German DAX both lost 0.3%.

"Fresh selling has engulfed markets, with the risk-off move becoming even more firmly entrenched thanks to a lack of debt ceiling progress," IG analyst Chris Beauchamp wrote.

The United Kingdom’s FTSE 100 closed down 0.7%, dragged by oil-exposed stocks, extending the previous session's losses as investors looked for positive news regarding US debt ceiling negotiations, Beauchamp explained. "By the sound of the comments coming out of Washington it is still too early to hope for a deal this side of the weekend," he added.

Johnson Matthey led a long list of fallers in the British index, down 3.2%, followed by retailer Frasers and Imperial Brands, down 3.1% and 3%, respectively. BP and Shell fell 2.4% and 2.2% as Brent crude oil slipped 3% after Russia downplayed hopes of more production cuts.

North America

US stocks closed mostly higher Thursday, as chip maker Nvidia lifted the technology sector after posting breakout first-quarter results.

Nvidia’s strong outlook came from the booming demand for artificial intelligence and boosted the Nasdaq Composite to a 1.7% gain with its own 24% rise.

Meanwhile, the S&P 500 advanced 0.9% and the Dow Jones Industrial Average shed 0.1%.
"What is the oil of the future? Semiconductors," said Michelle Cluver, a portfolio strategist at Global X. "Artificial intelligence is a major theme driving markets right now."

Chip makers tied to the AI-frenzy rose across the board. Advanced Micro Devices gained 11%. American depositary receipts for Taiwan Semiconductor Manufacturing, which manufactures Nvidia chips, added 12%, its largest one-day percentage increase since 2008.

While shares of information-technology firms shot 4.5% higher, the sector's biggest one-day pop since November, none of the 10 remaining sectors in the S&P 500 gained more than half a percentage point.

A slate of economic data showed US economic growth and inflation remain hot, adding to fears of persistently tight monetary policy from the Federal Reserve.

Gross domestic product, personal consumption, and core personal consumption (the Fed's preferred inflation gauge) all came in hotter than expected for the first quarter. Jobless claims increased slightly last week but remained at historic lows.

The looming US debt ceiling deadline has already rattled short-term bonds and is starting to cause worry among investors in other corners of the market. On Wednesday, Fitch placed the US' triple-A credit rating on "negative watch," citing "increased political partisanship" around the debt limit.

Shares of energy, healthcare and utilities firms all fell more than 1% on the day. Brent crude oil's 2.7% retreat to $76.26, after settling at its highest value since the start of May on Wednesday, dragged down oil and gas stocks.

Policy makers and analysts are warning of a market calamity should the limit not be raised in time. That said, stock benchmarks have largely shrugged off the risk. Marko Papic, chief strategist at the Clocktower Group, said markets are trading in line with how negotiations have unfolded.

"I'm pleasantly surprised with how well negotiations have gone, and how well the market has taken it," he said. "But I'm still cautious."

Consumers are less concerned about the debt ceiling than in 2011, causing investors to see less risk of politicians taking hardline stances, Papic said. That has reduced the severity of potential fiscal cuts, he added, helping stocks trend higher even as the government nears the date by which it may be unable to pay its bills on time.