Key takeaways

• South Korea’s economy is powered by chips
• Record quarter for the Nasdaq
• What to expect in Q3
• Magnificent 7 underperforms
• A broadening out of the rally
• A strong US economy has ramifications for the world
• Kevin Warsh’s Portugal speech crucial for sentiment
• Dollar continues to rally into payrolls

All set for the second half Markets ended Q2 on a high note, with strong gains once more for US stocks on Tuesday. Since Tuesday’s trades will be settled on Wednesday, the price action could be a sign that there is still life in the AI trade even after the monster rally last quarter that added $2 trillion of value to Micron, Intel and AMD.

South Korea’s economy is powered by chips

On Wednesday, South Korea’s Kospi index slipped by 1.7%, suggesting a pullback at the start of Q3, after a stunning rally in Q2. SK Hynix, the chip maker, is embarking on a dual listing in the US on July 10th, where it aims to make $30bn. We expect this to be easily absorbed by the market, and today’s loss may be short lived. South Korea’s chip making continues to power the economy, trade data for June showed that semiconductor exports rose by 200% compared to a year ago. Export value was $100bn, which makes South Korea only the fourth country to reach this milestone.

Record quarter for the Nasdaq

There were further gains for US semiconductor names and memory chips on Tuesday. SanDisk rose by more than 10%, and Nvidia rose 2%, although it has been a laggard vs. other chip names in recent months. The Dow Jones had its best first half of the year in 6 years, while the Nasdaq closed out its fourth best quarter ever. Futures are lower on Wednesday, suggesting a quiet lead up to payrolls on Thursday.

What to expect in Q3

These moves are unusual, so should we expect them to continue? A lot will depend on how economic data evolves in the US, and earnings growth. If the hyeprscalers announce further larger capex spending when they report Q2 results later this month, the rally in semiconductors may continue. Analysts also expect AI infrastructure companies to contribute 60% of S&P 500 earnings growth this year.

Magnificent 7 underperforms

One of the most striking features of the first half of this year is the contrast between the performance of the Magnificent 7 and the performance of some of the less well known chipmakers who benefit from their AI capex plans. On aggregate, the Magnificent 7 saw their stock price slump 10% in June, its worst monthly performance in more than a year. This compares with a 45% gain for Marvell Technology, and a 25% gain for SanDisk last month. The Magnificent 7 face multiple headwinds, including the rising cost of the AI build out, however, whether the stocks can recover in Q3 will depend on earnings reports that will be released later this month. The Magnificent 7 are expected to be a major driver of income growth for the broader S&P 500. Some analysts expect the Mag 7 to post income growth of 25% in 2026, compared with an 11% growth rate for the S&P 500 overall. If the stocks have sold off even with these high earnings estimates, then it suggests that there is a high bar for these mega cap tech stocks to wow investors.

A broadening out of the rally

While there is rotation within the tech sector, the past month has also seen a broadening out of the US stock market rally. Real estate and biotech stocks have also performed well, along with European banks. Growing signs that the US economy is continuing to gather momentum is a key driver of US indices, but also for global indices, and the MSCI All World Index rose by more than 10% in the past quarter.

A strong US economy has ramifications for the world

As always, a strong US economy has ramifications for the world. This week’s jobs data will be crucial information for traders. The NFP report is expected to show 113k non-farm payrolls were created last month, later today, we will get more labour market data, including the ADP employment report and the ISM manufacturing employment index. So far, the signs are positive. JOLTs job openings data for May was stronger than expected at 7.59 million.

A robust labour market contradicts the narrative that AI is killing jobs, in fact, evidence is growing that US companies that are adopting AI heavily are growing their headcounts significantly. While lower level jobs are being reduced, there are more jobs focusing on higher value tasks that generate more revenue. This is likely to boost productivity in the US, especially if this trend persists. Analyzing the US jobs data that is due on Thursday will be important for traders and investors. Kevin Warsh, the new chair of the Federal Reserve, has stated that he thinks a rebound in productivity will keep inflation low in the long term. For now, the US CPI rate is running above 4%, which means that the Fed is wary about inflation concerns. If we get a strong payrolls report this Thursday, it will be a reminder that price growth is elevated because of a strong US economy, rather than the energy price shock.

Kevin Warsh’s Portugal speech crucial for sentiment on Wednesday

Kevin Warsh is speaking today at the ECB’s central bankers’ conference. He will speak at 1400 BST. This is the main event on Wednesday, and it will be one of his first major international appearances as Fed chair. His remarks have the potential to move financial markets, and the content of his speech will be crucial for the direction of US interest rate expectations. Currently, there is an 80% chance of a rate hike this year. As we lead up to Warsh’s speech, Treasuries are selling off, the 2-year US yield rose by 8bps, and US Treasuries were major underperformers on the sovereign bond markets on Tuesday. US 2-year yields are higher by 18bps since the last Fed meeting. Thus, it may take a hawkish Warsh and a strong payrolls report to push Treasuries higher.

Dollar continues to rally into payrolls

The dollar has also rallied into this report, over the past month the Dollar index is higher by 2.2%, which is a huge move in FX terms. Although gains have slowed in the past week, it suggests that the change at the helm of the Fed has had a major impact on Treasuries and the dollar. USD./JPY is also in focus, after the yen sunk to a new 40-year low on Wednesday and USD/JPY remains above $162.70. Japan is in a tricky situation.

The slow pace of rate hikes keeps bond yields artificially low, and the threat of intervention has stopped a disorderly decline in the yen. While the yen has weakened in recent months, it has not capitulated. The question as we move into Q3, will the yen finally crack? If it does, how far could it fall? Some are looking for USD/JPY to rise to 170 or more. However, if it does this it could spark a currency crisis, and even an economic crisis, which central bankers will want to avoid. Thus, as we move into a holiday-shortened week, US economic data could have a major impact on Japanese fiscal and economic stability.

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