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Stocks and bond yields have surged on rate optimism this day and week, due to expectations that the Federal Reserve will reduce its interest rate increases designed to combat inflation.
Markets are seeking to recover from last week's sharp sell-off. Investors also anticipate positive economic data this coming week.
This week the markets have been on a tear as investors welcomed news that inflation data may indicate the Federal Reserve will start to reduce rate hikes sooner rather than later. Historically, such good news has been an encouraging sign to investors and often leads to further gains in asset values in the long run.
Recent years, however, there has been a distinct shift at work. The Federal Reserve and its counterparts in Europe and Japan have increasingly become market players instead of simply referees.
On Thursday, stocks in both Europe and the US experienced a strong rally as central banks in those countries increased interest rates following Federal Reserve Chair Jerome Powell's remarks last week that there could be further rate increases this year. As a result, global bond yields decreased and the dollar appreciated against both euro and yen, sending stocks higher across both regions.
On Thursday, European stocks surged after the European Central Bank raised its benchmark interest rate for a third time this year to reflect an improved economic outlook and lower inflation risks. This helped push the Euro Stoxx 50 index up by 1.67% to reach a new 1-year high.
This surge in stocks reflects expectations that corporate earnings will remain strong. Many major companies, such as Salesforce and Spotify, have reported stronger-than-expected profits; both are cutting their workforces by around 6% to reduce expenses.
Investors anticipate the economy to expand faster than anticipated this year, which would keep pressure on the Federal Reserve to postpone further rate increases. Thus, this positive trend is likely to persist through the remainder of this year.
However, there could be a potential downside for stocks and investors as the economy faces difficulties in regards to unemployment, the financial sector, and housing market. These factors all play an important role in driving earnings; if the economy struggles to maintain its growth momentum it could negatively impact corporate profits and cause further market declines.
Though an earnings recession remains a serious threat, it may be milder this year than many had originally anticipated due to lower expectations for an economic slowdown and lower mortgage rates. If this turns out to be true, investors could enjoy an unexpectedly strong first half of 2023.
Bond yields are an indicator of investor expectations for interest rates. The higher a bond's yield, the more investors may favor that security over other instruments. Typically, bonds with longer maturities tend to offer higher yields than those with shorter durations.
Bond prices can be affected by the speed at which interest rates rise. That is why investors who own long-term government bonds should keep an eye on their yields and how they may shift as the market shifts.
William Merz, head of capital markets research at U.S. Bank Wealth Management, recommends monitoring rates ahead of a potential Fed move. He states that it's wise to anticipate rate direction ahead of an upcoming change in policy.
Merz observes that "in many cases," the market anticipates the Fed's monetary policy decisions ahead of time. Typically, these moves aim to tighten monetary conditions and suppress inflation.
As the economy continues to strengthen, inflation expectations have also gone up. This has given the bond market a boost as investors become more confident in Fed plans for future rate increases.
Although the bond market continues to gain strength, it's essential to remember that higher rates can have an impact on stocks as well. That is because shares of companies with high valuations may become less appealing to investors.
Due to slower earnings growth, companies will need to pay a lower price-to-earnings multiple. This could cause equity prices to decrease even if their businesses are performing well.
Though bond yields may have reached their highest levels yet, investors must wait and see whether the Fed will take a more assertive stance soon and how that might impact stock prices.
Warren Pierson, managing director and co-chief investment officer at Baird Asset Management, believes that bond yields should continue to decline as inflation trends slow and the economy grows stronger. This would be beneficial for both bond and stock markets alike.
Pierson expresses optimism about the bond market, yet he doesn't anticipate it to break from its recent pattern. Instead, he anticipates that 10-year Treasury note yields may peak around 3.5% later this year before beginning to decline.
On Friday, tech stocks propelled the markets to a strong day. The Standard & Poor's 500 rose 1.9% while the Nasdaq composite finished 2.7% higher - marking its highest close in three weeks.
The surge in technology stocks has been propelled by expectations that the Federal Reserve will stop raising interest rates. This comes after a series of rate hikes last year, which proved particularly damaging to tech-heavy Nasdaq and S&P 500 indexes.
Inflation continues to decline, giving investors hope of a possible Federal Reserve slowdown on its aggressive rate hike campaign. This may explain why tech-heavy Nasdaq and S&P 500 stocks have seen gains of 7% and 15% so far this year, respectively.
Another factor contributing to the market rally is investor enthusiasm for risk. After last year's earnings season wasn't as bad as many had feared, and with some positive outcomes so far in 2023, investors feel more secure betting on more riskier assets.
Some of the biggest tech names have seen remarkable progress so far in 2023, such as Facebook-owner Meta and Google parent Alphabet. This marks a marked improvement from last year when many tech firms struggled to increase advertising revenue.
Tesla (TSLA) shares have appreciated after the electric vehicle maker reported better-than-expected earnings for the second quarter. Elon Musk expects sales to surpass two million this year.
Finally, chip stocks have appreciated after Microchip Technology reported Q2 adjusted earnings of $1.46, which beat the consensus estimate of $1.44 and projected Q3 EPS between $1.54-$1.56. This has given chip companies like Nvidia (NVDA) and Applied Materials (AMAT) a boost.
These stocks have been a major driver of the stock market's recovery in 2023 and they appear set for continued success. It's important to remember, though, that rising interest rates could prove detrimental for some tech stocks with high P-E ratios such as Tesla, Nvidia and security software companies.
Emerging market stocks have rallied this day and week on hopes of a U.S. slowdown in interest rate hikes and China's economic reopening. The MSCI EM Index was up 0.5% Monday after three weeks of losses, with Chinese stock markets leading the charge.
The rally has gained steam as investors bet that the Federal Reserve will reduce its pace of rate hikes this year. Inflation data indicates price pressures remain elevated and labor market strength remains strong, which supports a pause in rate increases from the Fed but could also push bond yields higher.
A weakening dollar, which has helped lower emerging market currency prices, is also supporting emerging market assets. The MSCI Emerging Markets Index is down 4.4% against the US dollar since January compared to a 5.5% drop for S&P 500 stocks - marking the largest inverse relationship Morgan Stanley Research has observed between these asset classes over 30 years.
Although the equity market has seen a recent uptick, valuations remain fairly high. The 14-day relative strength index for the MSCI EM Index has reached its highest level in nearly seven months - prompting some traders to worry that gains may become excessive.
Morgan Stanley Research remains bullish on Asia equities. They believe the region has emerged from a 10-year bear market and is entering a new phase.
Investors can anticipate earnings growth to surpass the S&P 500 in February 2021 and then trough before it in October 2022. Asian equities have been under pressure throughout this cycle, but are expected to outperform in 2023.
With inflation and rates still muted, there are opportunities for developing countries to outpace developed nations this year. Particularly, the energy sector should benefit from elevated global fossil fuel prices.
Another key opportunity lies within technology, with battery and solar industries on the rise. These sectors could be among the pioneers of decarbonizing global energy infrastructure while decreasing costs for consumers.
The US has recently blacklisted China's Inspur Group Co., a company used by Intel and IBM, which could hinder its progress in artificial intelligence (AI).
On Thursday, the Commerce Department added Inspur and 28 other Chinese companies to its Entity List due to allegations they engage in activities hostile to US national security interests or foreign policy. This list also includes genetics firm BGI and chip developer Loongson.
Beijing-based server maker Inspur Group Co. is one of the newest additions to this list; it's a key partner of Intel, IBM, Cisco and Tsinghua University as well.
Inspur has reaped the rewards of China's government policies that aim to transition away from foreign technology and promote domestic innovation. Furthermore, Inspur is a partner in IBM's Open Power program, granting them access to some of IBM's high-end server technology through licensing rights.
Furthermore, the company has earned a well-deserved reputation for producing servers and hyperconverged kit that meet the Open Compute Project specifications - an essential step for many data centers and cloud environments to take. Furthermore, their hyperconverged kits can run stacks from VMware, Nutanix or Microsoft.
At the end of March, Inspur had a 10% market share in China. Their clients range from hyperscalers to large enterprise customers who maintain their own IT infrastructures.
Analysts at Huatai Securities say the company has an impressive track record for providing computing power and data resources essential to Chinese artificial intelligence (AI). It is one of the primary providers of underlying computing capacity needed to train chatbots - which have become an integral part of Chinese internet usage.
However, a US blacklisting of Inspur will impede its access to AI technology from US sources and thus slow down its progress in this area. As a result, Inspur's shares declined on Friday in both Shanghai and Hong Kong.
Inspur is one of the few companies with direct connections to China's military. Its computers, mobile mapping systems and communications networks are utilized by the Chinese military; its main customers include the China Academy of Engineering Physics and China Air-to-Air Missile Research Academy.
Since the dawn of computers, Inspur has always been on the cutting edge when it comes to AI and cloud computing. This has earned them recognition from national champions such as Cisco Systems Inc., IBM Corporation and many US firms.
The company excels in many areas, but one of the most impressive is its transparency when sharing data and technologies with US competitors. This is particularly evident at Inspur's massive IT operations centre in Hong Kong where engineers have access to cutting-edge facilities like state-of-the-art laboratories and virtual reality labs. As such, Chinese firms have plenty of chances to learn from each other's best practices and innovations to boost their competitiveness on a global stage.
In blacklisting Inspur, the US government has targeted a Chinese server maker that partners with Intel and IBM. To prevent access to U.S. technology that could be utilized for China's military modernization efforts, Inspur was added to an entity list by President Barack Obama on March 15th.
Inspur, whose stock price has plummeted 10% this week, has been at the center of an investigation over its connections to China's military and use of US-made technology. Headquartered in Shenzhen, Inspur also has a presence in Hong Kong where its shares are listed.
As China's government pushes for more Chinese-made technology and less US technology in its tech sector, companies like Inspur are turning to local partners for assistance in remaining competitive. Recently, Inspur has formed a relationship with Cisco Systems and is working together on data center, networking and Internet of Things (IoT) technologies at Cisco's Silicon Valley headquarters.
Another key partner is Intel, with whom Inspur recently inked a deal for its fourth-generation Xeon Scalable processors. These chips are ideal for cloud, big data and edge computing applications such as artificial intelligence (AI), machine learning (ML), high performance databases (HPDs), security solutions and telecommunications business needs.
These Intel Xeon Scalable processors will power Inspur's next-generation of servers, a 2U 2-way rack product designed for cloud computing that offers high network bandwidth, large memory capacity and excellent computing performance. Plus it includes an impressive SSD drive equipped with Intel's Optane storage technology which offers industry-leading speed and low latency for applications requiring extreme durability.
According to Inspur, the Xeon Scalable processors are ideal for their new Smartrack solution that they have been developing in California over the past year. This server cabinet solution has already been adopted by some of China's biggest tech brands such as Baidu and Alibaba, along with Qihoo.
It's an example of Inspur taking advantage of the technology produced at Intel's Silicon Valley facility to create and sell its own products in China, where it is the leading server manufacturer. This strategy could prove successful over time.
In an effort to reduce dependence on American technology, China has encouraged state-owned firms to purchase domestic brands of computers and servers in a move referred to as "De-IOE," or "de-mainframe." This trend has become known informally as "de-mainframe."
China's e-commerce businesses and banks are continuing to upgrade hardware and software on foreign mainframes, leading Chinese IT companies such as Inspur to win contracts at an increasing pace. These firms provide technologically advanced systems which are less costly to run and easier to maintain than their foreign counterparts.
According to DigiTimes' report, Inspur has an impressive sixty percent share of the Chinese cloud computing and data center products market.
Recently, Inspur launched a program to assist Chinese companies transition their databases and middleware from HP (NYSE:HPQ), Oracle (NASDAQ:ORCL) and IBM to its Tiansuo K1 server. This high-performance, small and low-power server is being designed to replace mainframes and traditional servers in financial services, telecommunications and government departments across China.
This program has enabled Inspur to secure large contracts from clients such as China's national bank, oil company, agriculture ministry and state-owned oil drilling firm. Furthermore, Chinese web portal Baidu and online shopping giant Alibaba use Inspur-made servers for their data centers.
One Chinese analyst observed that Inspur's success has prompted the government to create a network of organizations dedicated to import substitution in the IT industry, led by the China Server System Industry Alliance which is overseen by the Ministry of Industry and Information Technology.
The CSSIA strives to foster the development of an independent Chinese IT supply chain in server operating systems, hardware and middleware. A number of companies were invited to join this initiative, such as Inspur and other Chinese hardware and software makers.
Though these initiatives aim to reduce reliance on American technology, they also have the potential to disrupt global supply chains. That is why it is so essential for companies like Inspur to maintain strong relationships with their US suppliers.