News & Insight • Weekly Newsletters

02 August 2024 | William Buckhurst | Charlie Todd

That Was The Week That Was

MACRO

• Markets enter a sharp correction as weak economic data points towards a recession
• After Fed Chair Jerome Powell suggested larger rate cuts “was not something we’re thinking about right now”, weak US employment data in July – adding just 114,000 jobs rather than the 175,000 expected – encouraged traders to increase bets on Fed rate cuts later this year
• The Bank of Japan raised interest rates for only the second time since 2007. The key rate was increased from 0-0.1% to 0.25%. The central bank also forecast that inflation would hover around its target of 2% in the coming years. It laid out a plan to halve its bond buying over the next two years
• The Bank of England cut rates by 0.25% to 5% - its first cut since March 2020
• Oil prices fell on weak US data whilst gold hit an all-time high of $2,500 – apt timing during the Olympics!

COMPANY NEWS

Focus this week was on the US technology sector. The volatility has been rather extreme as the market wrestled with political noise, US recession fears and capex spend (as we mention later). The favoured trade in the hedge fund world of long tech and short yen showed signs of being unwound with Japanese exporters, such as Toyota falling.

• Microsoft beat on the top and bottom lines, but the shares fell as growth of the closely watched Azure cloud computing services failed to meet expectations
• Amazon shares also fell as, although profits were up and well ahead of analysts’ expectations, margins at its cloud division fell as capex rose significantly during the quarter
• A very solid print from Apple as the services business looks like it will be a $100bn revenue business this year. iPhone sales fell (but not as much as the market was expecting) and iPad sales were good Berkshire Hathaway admitted to trimming their position
• Meta had very good numbers as the cash flow continued to come through. Continued capex is flagged
• Intel had horrendous results which is a big blow to the re-shoring efforts of the UK government. Most metrics missed expectations, the dividend was halted and 15,000 employees are due to lose their jobs
• L’Oréal reported that like-for-like sales rose 5.3% and net profits rose 8.8% despite a slowdown in China
• Problems at Diageo continue as it reported its first global drop in annual sales since Covid. The volume of drink it sold in the 12-months to 30^th June fell by 5%
• Toyota have benefited from the weak Yen, however with the tide turning (stronger yen) results missed slightly and the shares fell. The competition in the automotive market is very strong, particularly from the electric vehicle manufacturers in China but the Toyota management believe the hybrid approach is best
• Shimano is a brilliant Japanese company that specialise in bike gears, brakes and fishing reels. With the Olympics taking place – and a few British triathletes and cyclists winning medals – we thought we would mention the results, which were good. Olympic fishing anyone?!
• Merck reported quarterly revenue and profits ahead of expectations and raised guidance but its shares fell sharply on the back of lighter-than-expected sales of its cancer drug Gardasil
• Rio Tinto’s underlying EBITDA (earnings before interest tax depreciation and amortisation) rose 3% to $12.1bn in good results, while unit cost increases impacted. Rio continues to invest in growth projects like the Oyu Tolgoi mine as acquisition targets were fully valued
• Volex showed the market promising signs with 9% organic growth as its acquisition of its Turkish business had been going well
• Shell came out on top again versus rival BP, as cash flow and revenues came in higher than expectations
• UK aviation giants, Rolls-Royce and Melrose both had decent numbers and highlighted supply chain issues. Rolls shares responded favourably to the cash flow generation and the dividend whereas shares in Melrose fell as revenue guidance was trimmed
• Moderna (Scottish Mortgage’s third largest holding) fell by around 20%, then a further 8% the day after as it slashed its forward revenue guidance due to a more competitive landscape for respiratory vaccines

TECH SPEND

With the majority of the mega-cap US technology shares having now reported quarterly results, the capex spend on AI is enormous. Microsoft disclosed spending $19bn on capital expenditures in the June quarter, which was higher than many analysts had expected. Google’s parent company, Alphabet, spent $13bn while Facebook and Instagram owner, Meta, predicted that their AI spend for the year will come in at $37-40bn. 

Management teams sent a clear message that the risks of spending too little are too great. Meta CEO, Mark Zuckerberg, said on a podcast this week: “Because the downside of being behind is that you’re out of position for the most important technology for the next 10 to 15 years.”

The resounding winner is Nvidia who is experiencing unprecedented demand for its memory chips - or Graphic Processing Units (GPUs). Nvidia CEO, Jensen Huang, said during an on-stage conversation with Meta’s Zuckerberg that the social media company had installed around 600,000 of its latest AI chips. “They operate on a bigger scale than almost anyone else,” he said to which Zuckerberg replied with a smile: “we are good customers.”

SCHOOL’S OUT FOR SUMMER

Rachel Reeves, the new Chancellor of the Exchequer, finally confirmed that VAT on private school fees will come into force from January 1^st 2025. 

Reeves also announced that private schools would have to pay full business rates from April 2025. Previously they were eligible for charity relief of 80%. 

Anti-forestalling measures have been introduced such that any fees paid from 29^th July 2024 (ie the date the rules and draft legislation were published) pertaining to the term starting in January 2025 onwards will be subject to VAT.

THIS WEEK IN HISTORY

1869: The world’s first oil tanker "The Charles" departs the United States for Europe carrying 7,000 barrels of oil

2018: Apple becomes the first American publicly listed company to reach $1 trillion in value

MARKET DATA

 As of 2^nd August 2024. Source: InFront

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