ECB certain to cut, as the chip boom continues

There are two key events today, the ECB meeting and this evening’s Netflix results. Both events are highly anticipated, and the market has big expectations: the ECB will cut rates and signal a new more dovish phase, while Netflix is set to announce a stellar quarter of earnings growth and news about future revenue streams.

We don’t think that the market is wrong to assume that the ECB will turn super dovish, or that Netflix will kick off the start of tech earnings season in style, however, we do think that there is no room for error. The market has fully priced in just over two 25bp rate cuts from the ECB by the end of the year, and there are another 4.5 cuts priced in after that. Bloomberg’s ECB Speak index has fallen to one of its lowest levels, which suggests that ECB officials are now more dovish than they were during the peak of the pandemic. This also suggests that ECB officials are singing from the same hymn sheet, as the typically hawkish German ECB members also shift to a dovish stance.  This compares to the Fed, although Fed members have generally spoken in more dovish tones, they are hovering somewhere around neutral. This fits with the switch from expecting a 50bp rate cut at the November Fed meeting to expecting a 25bp rate cut.

What next for the euro

The ECB has little choice but to cut. Germany’s economy is continuing to show signs of struggle. German investor confidence was weaker than expected this week, and a number of Eurozone economies have extremely low levels of inflation. As we lead up this meeting, EUR/USD has made a fresh 2-month low and is back trading around $1.0850. There is a lot of expectation already priced into the market, however, momentum is to the downside for the euro, and a dovish tilt from the ECB could exacerbate the euro even more.

Netflix results on the ticket

US shares rose on Wednesday and the Dow Jones made a fresh record high. Nvidia rose by 3.3%, recovering from the tech sell off earlier this week. US stocks look frothy, but momentum is to the upside, and we continue to think that any sell off will be used as a buying opportunity. Bank stocks have delivered stellar earnings results, and the S&P 500 banking index made a fresh record high on Wednesday. Futures markets are pointing to a slight decline in the main blue chip US index on Thursday morning as we lead up to the Netflix earnings release after the market closes. It is early days in the earnings season, yet the outlook looks rosy and is supportive of US stocks. The same is not true for Europe, where earnings season has been patchy with some notable under performers, including ASML and LVMH, which is hindering the performance of European shares vs. US shares.

Waiting for Chinese GDP

Elsewhere, China stocks had another volatile day and are now a touch lower, after another government briefing failed to deliver the fiscal goods that markets have been waiting for. However, all eyes will be on the Q3 GDP report from China that will be released on Friday. The market expects growth to have moderated to 4.5% from 4.7%. The cuts to monetary policy only happened at the end of Q3, so we don’t think that they will impact this data. However, a weaker reading than expected could trigger another localized stock market sell off, as it would highlight the need for fiscal stimulus from Beijing that does not seem forthcoming.

The AI boom continues for TSMC

Also, we mentioned that Nvidia staged a recovery rally on Wednesday, and there could be further to go, after Taiwanese chipmaker TSMC reported stellar earnings for Q3. Revenues and gross margins beat expectations. YoY comparisons are strong, gross profit is higher by 38%, operating income is higher by 58%, and wafer shipments are up by 15%. It also released strong guidance for Q4, with sales expected to be between $26.1bn and $26.9bn, gross margin is expected to be 57% - 59%, which are both better than expected. The company says that it is down to the strong AI boom, which is continuing to boost sales. ASML, the Dutch maker of chipmaking equipment, reported weak results for Q3, however, this is not a sign that the AI boom is weakening. ASML’s weakness was driven by the non-AI segments of its business.