Early Morning Call: Equity markets, currencies hesitant while US debt ceiling talks resume

Equity market overview

Equity markets started the week on the front foot in Asia. Japan’s Nikkei traded above 31,000 points, for the first time since August 1990. The Hang Seng and China mainland indices also trader higher.

PBoC

As expected, the People'a Bank of China (PBoC) kept its benchmark lending rates unchanged for the ninth straight month. China's one-year loan prime rate (LPR) stayed at 3.65% and its five-year LPR remained at 4.30%. In a Reuters poll of 26 market watchers conducted last week, 23 predicted no change. But now some economists would like to see some easing measures.

Over the past month, a series of macroeconomic data showed the country's recovery could be losing momentum. NBS and Caixin manufacturing PMI fell back below 50, imports shrank by nearly 8% last month, and last week’s data showed that industrial production, retail sales and fixed asset investments all missed expectations.

In Europe, indices are hardly changed at open, as investors expect debt ceiling talks to resume, less than two weeks before the June 1 deadline after which Treasury expects the federal government will struggle to pay its debts.

Earnings

After the €355 million of last year, Ryanair this morning posted a €1.43 billion profit, a near record. The low-cost carrier flew a record 168.6 million passengers in the year through March 31, nearly 20 million more than its previous annual record reached before the pandemic.

For the next 12 months, Ryanair is optimistic but cautious. It is optimistic because it sees robust demand for the summer. And cautious as recent Boeing delivery delays may slightly affect the group's growth targets. Ryanair stuck to its after-tax profit forecast for the current year, forecasts it raised in January after stronger than expected Christmas traffic and fares.

Tech

There is a new episode in the tech feud that opposes the US and China. The Cyberspace Administration of China (CAC) announced yesterday that some of Micron Technology products have failed its security review. According to the regulator, "the review found that Micron's products have serious network security risks, which pose significant security risks to China's critical information infrastructure supply chain, affecting China's national security."

No further details were provided by the CAC, but it said it would stop Chinese operators from buying from the company.

Even though it doesn't look as dramatic as the sheer drop that started in October 2020, Zoom Video Communications stock has lost another 40% over the past twelve months. It is now back to levels of a time when the word Covid wasn't familiar to the vast majority of us.

Zoom's future looks very challenging with the arrival of AI. Its main competitors already have a plan to make use of artificial intelligence. A couple of months ago, Microsoft said it would integrate ChatGPT into its video software Teams. A year ago, Alphabet was already talking of implementing AI-powered innovation in Google Workspace.

To have a chance to compete, Zoom would need to drastically increase its R&D spending. Microsoft R&D spending reached $7Bln last quarter. Google spent $11.5Bln while Zoom's R&D spend was $193Mln.

The Street expects Zoom earnings to fall about 5% to 99 cents per share. Revenue is anticipated to rise by less than 1% to $1.08Bln, which would be the slowest pace of sales growth in Zoom's history.

NVIDIA is set to report first quarter (Q1) earnings on Wednesday after the closing bell. The street anticipates earnings of 92 cents per share, a 32% drop compared to Q1 2022. Revenue is also expected to fall, by 21% to $6.52Bln.

Earlier this year NVIDIA launched a new processor, a new graphic card. Alphabet also revealed earlier this month that NVIDIA H100 GPUs would in part power its AI purpose-built A3 supercomputers.

NVIDIA stock has more than doubled since the beginning of the year and is closing in on its all-time high set in November 2021. But will it get there? Some investors are now worry the group will not be able to sustain this steep trend. One figure illustrates these concerns. NVIDIA's ROCE, the Return on Capital Employed, has fallen from 32% five years ago to 16%. It remains above a ROCE average of 16% in the sector, but nonetheless points to diminishing returns.

On Thursday, the market awaits reports from several actors of the US retail sector: Gap, Dollar Tree, Costco Wholesale and Best Buy.

Last week, Walmart, Target, and Home Depot gave us a good idea of their customers' behaviour, in a context of high inflation and interest rates which are now at their highest levels since September 2007.

Walmart and Target both said sales trends in the US are getting worse. Shoppers spent less especially on discretionary goods. DIY giant Home Depot saw a 4.6% decline in sales in the first three months of 2023, with March being the weakest month of the quarter. This is a worrying trend if we consider that spring is peak season for home improvement.