Why are chip stocks selling off, and reasons for the UK’s outperformance

Today was meant to be about banks, but instead it’s all about chip stocks. This is good news for European indices, since Europe and the UK are tech-lite, but it is weighing heavily on Asian markets and the Nasdaq is pointing to a lower open later today. 

South Korea’s Kospi in the headlights 

The Kospi is at the harsh end of the sell off and is lower by more than 5% on Tuesday. Micron, the US memory chip maker, fell below the $1000 mark on Monday, which seems significant as we lead up to earnings season. 

Rotation away from US tech 

SanDisk was lower by nearly 6% and Nvidia also fell nearly 2%. The sell off dragged US blue chip indices lower, and if we continue to see a sell off then we would expect to see further index declines for the US, since the AI trade is linked to more than 50% of the index. The tech sector was the weakest sector in the US at the start of the week, however, this allowed consumer stocks and real estate to play catch up. 

So, why are chips selling off? 

There are three reasons. Firstly, there are concerns about the cost of the AI infrastructure build out and the pace of capex spend as we move towards Q3 earnings reports. Secondly, there are also big concerns about competition from China. More memory chip makers are expanding production in China, which could lead to more price volatility in chip stocks around the world. Thirdly, the CEO of Broadcom, a major chip producer and semiconductor design house, said that trading action is becoming speculative, hinting that the AI trade is a bubble. 

Chip sell off set to continue, but hyperscalers could benefit 

Pre-market price action suggests that the sell off in chip stocks may continue into Tuesday. However, this does not mean that the AI trade is over, or that the AI bubble is bursting. Instead, it could be a recalibration within the AI trade. If chip stocks are getting cheaper, then the hyperscalers should benefit. Alphabet, Microsoft and Meta also swerved the sell off on Monday, and we could see hyperscalers become more attractive as we move to the end of the year. 

Oil prices lower 

Elsewhere, the focus will shift to the banking sector later today as JP Morgan leads a plethora of earnings releases around lunchtime UK time. The oil price is in retreat today and Brent crude is down more than 1%, although it remains elevated above $105 per barrel. Global bond yields are also lower. 

Some good news for the UK 

The Gilt market and the FTSE 100 are outperformers on Tuesday. UK yields are falling sharply across the curve, and the 10-year yield is lower by more than 5bps. The FTSE 100 is being led higher by the financial sector, which is rallying as we await US bank earnings. The hope is that strong US bank earnings will reinforce the idea of a strong US economy and boost the wider equity landscape. Banks in the UK are also reacting to the growth upgrade from the IMF this morning. 

The UK economy is expected to expand by 1.3% this year, led by the tech sector, although growth could pull back next year to 1.2% due to stubbornly high energy prices and elevated interest rates. This is significantly lower than the 1.6% rate the OBR predicts for 2027. The IMF also praised the UK’s efforts at stabilising the national debt, and said that it was leading the G7 in its efforts at fiscal stabilisation. 

Chancellor warned about giveaway, and scraps idea of equalising capital gains tax  

The main Budget news today is that the FT is reporting that Chancellor Healey has rejected the idea to equalise capital gains tax with income tax. This is a very good decision, and suggests that Healey and Burnham are standing up to some in their party who want to penalise entrepreneurs and hurt growth while they do it. 

This is a sign that Healey has listened to concerns about the environment for wealth creators in this country, and we will be watching to see if there are other sensible pro-growth measures in the Budget. It is also a sign that the big budget plans will be leaked in the coming days and weeks before October 28th. 

The IMF is also having its say on the Budget. It warned Healey against cost of living support at this month’s budget. It urged him to increase spending sparingly, which may not go down well within the Labour Party, however, it could go someway to easing inflation concerns. This is boosting the pound, and GBP/USD is the second best performing currency in the G7 today. GBP/USD is still at a low level, and the first level of resistance is $1.3250.