Update Equities: Rate-cut hopes and tariff delays propel sentiment
This week was marked by macroeconomic data releases and geopolitical developments. Positive news for international trade relations included the announcement that the US would delay by 90 days the implementation of new tariffs against China. Both sides have also shown continued willingness to reach an agreement by mid-November.
However, the primary driver of positive market sentiment was the release of new US inflation data. It appears that despite higher tariffs, inflation remains stagnant. On a year-over-year basis, consumer prices rose by 2.7%, the same as in the previous month. This has fuelled hopes that the Federal Reserve will cut rates in September. The prospect of imminent Fed rate cuts pushed both the broad-based S&P 500 Index and the tech-heavy NASDAQ 100 to new record highs.
By the end of the week, investor attention shifted to Alaska, where US President Donald Trump is meeting with Russia President Vladimir Putin. While the hope for an immediate ceasefire in Ukraine remains low, the possibility of a diplomatic resolution to the conflict has created a positive market mood. Positive outcomes from this meeting could be a potential catalyst for further gains in European equities. In contrast, shares in the defence sector initially came under pressure following the confirmation of the meeting.
The earnings season is coming to an end. Overall, the results have been positive, as the majority of companies met expectations for both revenues and earnings. However, there was notable caution in the guidance companies published for the remainder of the year, particularly given the uncertainty surrounding the actual impact of the ongoing tariff discussions. Another trend observed during this earnings season was the market's pronounced negative reaction to even minor misses of estimates, which was more severe compared to previous quarters. At the same time, positive reports that were better than expected did not guarantee significant share-price increases. This highlights the existing market uncertainty and suggests that current valuation levels carry downside risks.
At the start of the week, chip manufacturers were in the spotlight. This was due to the announcement that the US companies Nvidia and AMD will surrender 15% of their revenues from artificial intelligence (AI) chip sales in China in exchange for export licenses. This move marks a turning point, as it is the first time in history that a government has demanded a percentage of the profits of a publicly traded company in exchange for such permits. The levy is expected to pressure the margins of chip manufacturers. More crucially, the US government's actions could set a precedent for taxing critical US exports in the future.