TSMC Profit Surge Tests AI Spending Confidence

Summary

TSMC reported stronger-than-expected quarterly profit and announced further US investment, keeping the AI sector firmly in focus as investors questioned whether heavy spending on artificial intelligence will continue delivering returns. Wall Street closed higher after softer US inflation data and strong bank results supported sentiment. The US dollar remained under pressure as expectations for a near-term Federal Reserve rate rise eased, while Brent crude stayed elevated amid continued Middle East tensions. The UK economy returned to modest growth in May, led by the services sector.

Equities

The FTSE 100 fell 0.1% to 10,515.9 on Wednesday, ending a three-day run of gains as mining and energy shares moved lower. The FTSE 250 added 0.2%, extending its winning streak to five consecutive sessions.

Barratt Redrow closed 4.3% higher on Wednesday after announcing plans to return £400 million to shareholders through a share buyback programme instead of dividends. The wider housebuilding sector also strengthened following the announcement. Watches of Switzerland gained 3.8% after several brokers raised their target prices for the retailer.

B&M European Value Retail closed 5.4% lower on Wednesday after reporting a 2.3% decline in first-quarter like-for-like sales across its core UK business. Mining shares also weakened, with Anglo American falling 3.4% and Glencore losing 2.4% as metals prices eased. Energy stocks moved lower alongside softer oil prices, while precious metals miners also came under pressure.

In the US, Wall Street finished higher on Wednesday after another day of softer inflation data and a strong start to the second-quarter earnings season. The S&P 500 closed 0.38% higher, the Nasdaq Composite gained 0.62% and the Dow Jones Industrial Average rose 0.29%.

PayPal surged 17.2% at Wednesday's close after Reuters reported that Stripe and private equity firm Advent International had jointly offered to acquire the payments company for $60.50 per share, representing a substantial premium to its previous closing price.

BlackRock climbed 6.6% on Wednesday after reporting quarterly profit above analysts' expectations, while Morgan Stanley ended 0.4% higher after also beating earnings forecasts. Analysts now expect S&P 500 companies to deliver annual earnings growth of almost 24% for the second quarter, reflecting a stronger-than-expected start to the reporting season.

Fresh US inflation figures also remained in focus. Producer prices unexpectedly fell in June following the previous day's softer consumer inflation report, reducing expectations of a near-term interest rate increase by the Federal Reserve. Markets now place only a small probability on a rate rise at this month's policy meeting, although investors continue to monitor the potential inflation impact of renewed conflict in the Middle East and disruption around the Strait of Hormuz.

Forex & Commodities

The US dollar steadied early on Thursday after falling to its lowest level in a month, as investors continued to digest softer-than-expected US inflation data. The dollar index edged up to 100.5 after sliding over the previous two sessions, while the euro remained close to a one-month high at $1.147. Sterling also held near a two-month high at $1.354, supported by optimism that the UK's next prime minister could appoint a fiscally conservative finance minister. The Japanese yen traded little changed at 162.1 against the US dollar.

Fresh US economic data has strengthened expectations that the Federal Reserve will leave interest rates unchanged at its meeting later this month. Producer prices unexpectedly recorded their largest monthly decline in 14 months, following weaker consumer inflation and slower jobs growth reported earlier this week. Markets now see only a small chance of a July rate rise, although expectations remain for one further increase before the end of the year. Investors will also watch US retail sales later today, alongside speeches from Federal Reserve Vice Chair Philip Jefferson and Dallas Fed President Lorie Logan for further policy signals.

Spot gold slipped early on Thursday to around $4,029 per ounce after climbing in recent sessions. While softer US inflation had initially supported precious metals, renewed conflict between the US and Iran revived concerns that higher energy prices could keep inflation elevated and leave the Federal Reserve with scope to tighten policy again later this year.

Oil prices eased slightly on Thursday as traders locked in profits following a strong rally, although Brent crude remained close to a one-month high at $84.51 a barrel and US West Texas Intermediate traded near $79.37. The market continues to assess the impact of renewed US military action against Iran, reduced shipping through the Strait of Hormuz and the risk of further supply disruption. Goldman Sachs said Brent crude could rise above $110 later this year if Gulf exports remain constrained, while South Korea's central bank added to the week's monetary policy developments by raising interest rates for the first time in three and a half years to tackle inflation.