ASML's Disappointing Performance and the Impact on the Tech Industry
Yesterday, a press conference held by ASML's CEO Fouquet did not manage to reassure investors. This came after a significant drop in the company's share price on Tuesday due to disappointing orders, which wiped out approximately EUR 50bn of market value. Shares fell another 5% on Wednesday, causing some large fluctuations during the day. While ASML's continued decline did negatively affect the Dutch AEX stock index on Wednesday, it did not have the widespread impact on other chip stocks and tech-heavy indices as it did on Tuesday in the US and Wednesday in Asia. During these days, the total loss of chip stocks in the US and Asia amounted to USD 420bn.
Bloomberg's Asia Pacific Semiconductors Index saw a 0.5% loss overnight, but the composite index in the US remained broadly flat yesterday (+0.2%). Nvidia was one of the best performers, aligning with ASML's assertion that it still sees strong demand for AI-related chips and the machines to manufacture them. However, the demand outlook in other segments is more subdued.
The weaker outlook for chips in the automotive sector, due to lower than expected demand for EVs, is an example of the latter. This news has been frequently reported in the EU recently. More broadly, it's not just EV sales that are struggling. Reports of weakness in the German car sector were accompanied yesterday by the Franco-Italian car maker Stellantis. The latter's results showed that shipments had dropped by 20% year-on-year in Q3 due to falling orders from the US (-36%), EU (-17%) and China (-30%).
Impact on Chip Manufacturing Plans and the Economy
The weak demand environment has also led to the postponement of US' Intel's plans to open two chip factories in Europe, in Germany and Poland, by two years. This setback hinders the EU's ambition for more strategic goods production and has contributed to weaker orders for ASML than previously expected. This is in stark contrast to TSMC's revenue jump in Q3 as it capitalizes on the AI wave. According to Fouquet, customers are not cancelling orders, but rather delaying them. This aligns with the narrative that we're currently in a cyclical downturn, but the outlook should improve somewhat next year.
However, it's no secret that China's economy is underperforming and the recovery doesn't seem to be taking off. The efforts by the PBOC and Politburo to support the economy by effectively lowering the costs and increasing the opportunities of lending credit are unlikely to sufficiently boost the economy, in our view. Furthermore, measures announced in Thursday's unusual press conference by China's housing minister, on support measures for the property sector to boost lending for stalled projects, are unlikely to change this narrative.
Upcoming Summits and Meetings
Today marks the start of a two-day Nato Defence Ministers summit and the European Council meeting. In a preview, new NATO Secretary General Mark Rutte stated that NATO allies should "move further and faster to meet the growing threats we face" and "this requires more forces, capabilities and investment to meet the ambitious targets set by our defence plans". This implies that many EU governments would need to step up their efforts, even to meet the longstanding targets of 2% of GDP defence spending.
At the European Council meeting, heads of state will discuss Ukraine, the Middle East, competitiveness and immigration. In relation to the war in Ukraine, EU leaders are expected to discuss the Russia sanction regime, potential actions regarding increasing Russian LNG imports, and support for Ukraine. While the US recently announced a new USD 425mn aid package including air defence capabilities, munitions and vehicles, the EU will discuss financial support.
Sanctions, Loans and Migration
By the end of October, G7 countries are expected to decide on the 'terms' of a USD 50bn loan to Ukraine. The EU and the US are supposed to contribute USD 35bn. The loan is expected to be repaid using the profits from frozen Russian assets in the EU and the US. The freezing of assets is part of the sanction package that has to be reviewed and approved by all EU member states every six months. The US, suspecting that one of the EU member states could withdraw its support for freezing the assets, wants the EU to extend the sanction renewal timeframe from 6 to 36 months before it agrees to participate in the USD 35bn part of the loan. All countries but Hungary approve, as Orbán claims he won't take part in a deal with the Biden administration that the running candidate Donald Trump doesn't want.
If Hungary cannot be persuaded to agree to the sanction framework review, the loan would still proceed, but US involvement would likely be significantly smaller. This would mean that the EU, including Hungary, would have to bear a larger share of the USD 35bn loan. The money for the loan would be raised on behalf of the EU and guaranteed by the EU budget.
In terms of migration, an increasing number of countries are calling for stronger border controls and faster deportations, and are open to discussing paying foreign countries to accept migrants sent 'back' by the EU. The Italian deal with Albania, in which Italy sends migrants intercepted on the water to Albania to be processed there under Italian jurisdiction, will likely also be promoted.
On the other side of the Atlantic, US September retail sales and industrial production figures will be released. Retail sales by the control group are expected to have increased by 0.3% compared to August, and industrial production to have contracted by 0.2% month-on-month. The Fed's Goolsbee will speak at 17:00.
Bottom Line
The global tech industry is experiencing a period of uncertainty, with ASML's disappointing performance and the postponement of Intel's chip manufacturing plans in Europe. Meanwhile, geopolitical issues such as the war in Ukraine and migration continue to pose challenges for EU leaders. As we look towards the future, it's clear that strategic decision-making and collaboration will be key to navigating these complex issues. What are your thoughts on these developments? Feel free to share this article with your friends and engage in the discussion. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
