Weekly Update 10/17/2023
Earnings Season!
Stocks Turn Positive After Strong Retail Sales
TSLA & NFLX Earnings Tmrw!
Nvdia Tumbles as U.S. Tightens Restrictions
Military Industrial Complex: U.S. biggest military contractors soar through Israel-Hamas War
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—Market Madness—
Stocks turn positive after strong retail sales data: Stock market news today
Stocks turned positive in midday trading on Tuesday after retail sales data smashed expectations and earnings season picked up steam.
The Dow Jones Industrial Average (^DJI) inched 0.3% higher, or about 100 points, after falling roughly 130 points at the open. Contracts on the benchmark S&P 500 (^GSPC) and the tech-heavy Nasdaq 100 (^NDX) also recovered from earlier losses, up around 0.3% and 0.2%, respectively.
The 10-year Treasury yield somewhat eased, but still jumped roughly 9 basis points to trade around 4.81%. The 10-year yield hit a 16-year high of 4.89% on Oct. 6.
Retail sales rose 0.7% in September from the previous month, more than double Wall Street’s estimates for 0.3% growth, the latest data out Tuesday showed. The surprise reading reflects continued resilience in the American consumer despite predictions of a slowdown.
In earnings, Bank of America (BAC) reported a 10% rise in profit, echoing last week’s strong showing by peers. Goldman Sachs (GS) is another highlight in Tuesday’s third quarter reports, with Lockheed Martin (LMT), Johnson & Johnson (JNJ), and United Airlines (UAL) also on the docket.
Earnings season is still in its early days, but there are already encouraging signs that corporate America could be seeing an end to the recent earnings recession. Tesla (TSLA) and Netflix (NFLX) lead out tech sector results on Wednesday, giving more insight into the toll taken from higher borrowing costs.
Read more: What a Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards
Meanwhile, the Middle East conflict still weighed on the market as investors assessed the chances of it breaking out into a wider war. The rising geopolitical tensions in the Middle East could drive a global recession, leading investors have warned.
News that President Joe Biden plans to visit Israel on Wednesday and then travel to Jordan has eased some worries driven by a looming Israeli ground offensive on Gaza, seen as a red line for its Arab neighbors.
Oil prices steadied as the US intensified its diplomatic efforts and as hopes grew that the US will ease sanctions on producer Venezuela. Crude oil futures (CL=F) held above $86 a barrel, while Brent crude futures (BZ=F) traded at about $90 a barrel.
How to Create a Company | Elon Musk’s 5 Rules
Biden to cut China off from more Nvidia chips, expand curbs to more countries
WASHINGTON (Reuters) -The Biden administration said on Tuesday it plans to halt shipments to China of more advanced artificial intelligence chips designed by Nvidia and others, part of a suite of measures aimed at stopping Beijing from getting cutting-edge U.S. technologies to strengthen its military.
The rules, described by senior administration officials in a press briefing on Monday evening, restrict a broader swathe of advanced chips and chipmaking tools to a greater number of countries including Iran and Russia, and blacklist Chinese chip designers Moore Thread and Biren.
The new measures aim to hamper China’s military development by closing loopholes in regulations released last October and will probably be updated “at least annually,” according to Commerce Department Secretary Gina Raimondo.
The goal is to limit China’s access to “advanced semiconductors that could fuel breakthroughs in artificial intelligence and sophisticated computers that are critical to (Chinese) military applications,” she said, stressing the administration was not seeking to hurt Beijing economically.
The United States and China are locked in a years-long technology war, but the sweeping curbs released last October further escalated tensions between the superpowers.
The Biden administration said on Tuesday it plans to halt shipments to China of more advanced artificial intelligence chips designed by Nvidia and others, part of a suite of measures aimed at stopping Beijing from getting cutting-edge U.S. technologies to strengthen its military.
The rules, described by senior administration officials in a press briefing on Monday evening, restrict a broader swathe of advanced chips and chipmaking tools to a greater number of countries including Iran and Russia, and blacklist Chinese chip designers Moore Thread and Biren.
The new measures aim to hamper China’s military development by closing loopholes in regulations released last October and will probably be updated “at least annually,” according to Commerce Department Secretary Gina Raimondo.
The goal is to limit China’s access to “advanced semiconductors that could fuel breakthroughs in artificial intelligence and sophisticated computers that are critical to (Chinese) military applications,” she said, stressing the administration was not seeking to hurt Beijing economically.
The United States and China are locked in a years-long technology war, but the sweeping curbs released last October further escalated tensions between the superpowers.
CHINA-ONLY CHIPS HIT
In a statement following publication of the rules, Top AI chip designer Nvidia said it complies with regulations and does not expect “a near-term meaningful impact on our financial results.”
The company has made chips such as the A800 and H800 that walked right up the line of the previous rules to continue selling to China, and AMD, also impacted by the rules, has said it plans a similar strategy.
Nvidia’s business has soared since the imposition of last year’s rules because its China-only chips are still better than alternatives. The Silicon Valley firm is currently selling almost every chip it can procure as worldwide demand outstrips supply, but would be hurt in the long term as Chinese chip firms seek to fill any voids left by U.S. companies.
Nvidia’s A800 and H800 chips will be hit by the new regulations, due to a change in chip parameters aimed at capturing a greater number of chips.
But the rules will exempt most consumer chips used in laptops, smartphones and gaming, though some will be subject to licensing and notification requirements by U.S. officials.
“The fact is, China, even after the update of this rule, will import hundreds of billions of dollars of semiconductors from the United States,” Raimondo said, emphasizing that the goal of the measures was not to hammer U.S. companies.
The previous rules imposed a two-pronged test that measured both a chip’s computing performance and its ability to communicate with other chips, an important measure in AI supercomputers where thousands of chips are strung together to chew through huge amounts of data.
Nvidia and Intel created special chips for the Chinese market that retained the powerful computing capabilities but limited communications speeds to stay inside the previous rules.
Biren and Moore Thread, whose U.S. suppliers will now face a tough licensing requirement before shipping products to them, are both Chinese startups founded by former Nvidia employees in China and aim to compete with the U.S. AI chip giant.
The rules released on Tuesday eliminate the communication speed limits and focus on computing performance, which will have the effect of halting sales of Nvidia’s A800 and H800 chips for the China market, according to a senior administration official.
U.S. officials on Tuesday added a new measure to restrict chips that exceed a certain level of “performance density,” a measure focused on how much computing power can be packed into a given amount of silicon, a senior administration official said.
The senior administration official said this rule was meant to prevent companies from trying to work around restrictions on full chips by using a technology called “chiplets,” where firms could try to join together small pieces called chiplets into a large chip that violates the rules.
Reuters reported in July that chiplets have become a core part of China’s technology strategy to advance its chip industry, and analysts have said that Chinese companies could use the technology to evade U.S. restrictions.
Military Contractor Stocks Have Skyrocketed Since Israel War Started
Shares of some of the U.S. biggest military contractors have soared since the beginning of Israel’s war against Hamas, with companies such as Lockheed Martin reporting a 10 percent increase in their stock values.
The war between Israel and Hamas started after the Palestinian paramilitary group launched an unprecedented attack by land, sea, and air on Israel on October 7, catching Israeli intelligence by surprise.
The attack killed at least 1,300 Israeli civilians and soldiers and saw at least 150 people being kidnapped by Hamas militants. Afterwards, Israel declared war against Hamas and started heavily bombing Gaza. The enclave’s authorities said that death tolls in Gaza City had reached 2,670 by Monday.
The attack and the following war have sent the stocks of American defense companies soaring. Raytheon Technologies were valued at $69.77 on Friday, October 6, one day before the Hamas’ attack, but surged to $73.35 by October 10. The stock prices had slid down to $73.35 as of Monday, October 16, according to data from Google Finance.
Stocks for Boeing were valued at $187.38 on October 6 and had surged to $195.13 by Wednesday, before sliding down to $184.91 on Monday. Those for Lockheed Martin were valued at $400.73 on October 6 and, as of Monday October 16, were worth $443. On October 10, Barron’s investment magazine reported that the company had added $23 billion to its market capitalization after Hamas’ attack.
General Dynamics’ stocks were worth $219.94 on October 6 and $243.04 on October 16. Those for Northrop Grumman were valued at $423.24 on October 6, but $490.15, just 10 days later, on Monday.
Lockheed Martin and Northrop Grumman reported the strongest stock gains in more than three years, Forbes reported. The news outlet added that analysts say the trend wasn’t expected to last.
While these gains in the stocks of defense contractors spike after big events such as the Hamas’ attack, when Wall Street suddenly focuses on the security industry, “history shows […] those increases generally stall and are not sustainable,” Bernstein analysts led by Douglas Harned wrote in a note to clients on October 11.
Russia’s invasion of Ukraine represents a clear example and precedent in this case. In the first week of trading after the war between the Russians and Ukrainians began on February 24, 2022, the iShares defense ETF surged by 5 percent. Shares for Lockheed Martin and Northrop Grumman rose by as much as 20 percent, according to Forbes. However, in the following six months, despite the war still being ongoing amid the counteroffensive by Ukraine, the value of the sector had dropped by nearly 20 percent.
—REAL ESTATE WORLD—
China Bet It All on Real Estate. Now Its Economy Is Paying the Price.
When China’s housing boom seemed like a one-way bet, Gary Meng’s parents bought an apartment from China Evergrande, the country’s biggest developer. Soon the company called with another pitch: to manage their wealth.
It was a good deal with little risk, the family thought. Evergrande had global recognition and was a politically important company at the heart of China’s growing economy. They invested all their savings.
Then the unthinkable happened. In 2021, Evergrande defaulted, representing the start of a real estate meltdown that has shaken China’s economy, felled some of its biggest companies and left home buyers waiting on more than a million apartments. Last week, another embattled real estate company, Country Garden, said it had run out of cash, signaling that the worst may be yet to come. The companies have a combined $500 billion in debt and face critical hurdles in the coming weeks.
Beijing’s ability to slow the collapse is now in doubt as consumers continue to show a lack of interest in buying real estate, even during a recent Golden Week holiday, usually a bumper period for sales.
The housing crisis has presented an acute challenge for China’s political leadership: It is trying to wean the country off its decades-long dependence on real estate to drive economic growth, but doing so is deepening a crisis of confidence. Financial markets are questioning the future of China’s economic miracle, and households are abandoning their faith in the Chinese Communist Party’s promise of a better economic future.
“In the past, I believed in the government and the party and the country,” said Mr. Meng, whose family invested $300,000 in Evergrande’s wealth management arm and is still owed $194,000. Warned by the police not to file a complaint with higher levels of the government, Mr. Meng said that trust had been tested. “Now I can only say that I am quite bitterly disappointed,” he said.
Economists, investors and central banks around the world are warning of the risks to China’s financial stability, calling on Beijing to act to stabilize the housing crisis. The International Monetary Fund’s chief economist, Pierre-Olivier Gourinchas, said last week that China’s real estate crisis was undermining confidence and causing financial difficulties.