Chip prices are erratic due to the US-China conflict.
The Philadelphia Semiconductor Index closed higher on Thursday despite a large decline in trading volume on Wednesday. U.S. chip equities saw notable volatility on Thursday. Nvidia and Broadcom were the two companies that contributed the most to the index. The United States was reportedly proposing stricter export restrictions on advanced chip technology to China, which caused chip stocks in Asia to drop earlier in the day.
The foreign direct product law could be implemented, according to a report by Bloomberg News about U.S. President Joe Biden’s administration. This would allow the United States to prevent the sale of a product if it was made with technology developed in the country. The worldwide semiconductor market may be significantly impacted by the possible adoption of this regulation, especially those businesses who produce their goods using cutting-edge American technology. The threat of tighter limitations on the sale of vital chip-making technology to China caused investors to react negatively, which resulted in a sell-off in Asian chip equities.
The Global X Asia Semiconductor exchange-traded fund closed down 1.74% on Thursday, with declines in major holdings including SK Hynix, Tokyo Electron, Taiwan Semiconductor Manufacturing Co (TSMC), and Samsung Electronics. This decline reflects broader concerns about the impact of U.S. export controls on the Asian semiconductor industry, which is heavily dependent on advanced technology and equipment sourced from the United States. The potential for tighter export controls adds to existing pressures on the industry, which is already grappling with supply chain disruptions and geopolitical tensions.
The Philadelphia Semiconductor Index had fallen 6.8% on Wednesday, marking its weakest day since March 2020. The sharp decline was driven by fears of the potential impact of new export controls on the profitability and operations of U.S. semiconductor companies. On Thursday, the index opened up 1.7%, fell more than 1% at its lowest point, and eventually closed the session up 0.5%. Broadcom and Nvidia provided the biggest boosts, with their stocks rising 2.9% and 2.6%, respectively. Their gains helped offset declines in other stocks such as Advanced Micro Devices, which closed down 2.2% after falling more than 10% on Wednesday in its biggest sell-off since October 2022.
Some analysts saw Wednesday’s sell-off as an opportunity for bargain hunting. Vedvati Shrotre at Evercore ISI noted that the near-term probability of the trade curbs being implemented was low, suggesting “near-term weakness as a unique buying opportunity.” Shrotre’s analysis suggests that the market reaction may have been overdone and that the fundamentals of many semiconductor companies remain strong despite the regulatory uncertainties. Vivek Arya at BofA also cited current volatility as an “enhanced opportunity in companies with best profitability,” highlighting the potential for investors to capitalize on the market’s short-term fears.
However, Daniel Morgan, portfolio manager at Synovus Trust, anticipated more volatility ahead with upcoming chip company earnings and both U.S. presidential candidates, Donald Trump and Joe Biden, taking a tough stance on trade. “What you were seeing is buying on the weakness and then investors coming to the awareness that this is going to be a recurring concern as we head into the reporting season, that companies with a high level of sales exposure to China may be hurt,” said Morgan, based in Atlanta, Georgia. His comments underscore the persistent risks that geopolitical tensions pose to the semiconductor industry, particularly for companies with significant exposure to the Chinese market.
Morgan pointed to an almost 11% tumble in shares of ASML on Wednesday as an example of worries about chip companies with significant exposure to China. Despite strong results from ASML, the biggest supplier of computer chip-making equipment, investors were concerned because roughly half of its sales came from China. Morgan noted that while investors were worried about Trump implementing tariffs when he was president, chip companies have since survived and performed well. This historical context suggests that while regulatory actions can create short-term volatility, the long-term growth prospects for the semiconductor industry remain robust.
Thursday’s volatility may also have been influenced by investor fears that U.S. presidential candidate Donald Trump would discuss trade in a speech scheduled for later in the day, according to Gene Goldman, chief investment officer at Cetera Investment Management in El Segundo, California. “He may suggest more tariffs, which is a concern for technology companies,” said Goldman. The potential for increased trade tensions and tariffs adds another layer of uncertainty for the semiconductor industry, which is already navigating a complex and challenging environment.
TSMC, the world’s largest contract chipmaker, has already faced pressure from comments made by Trump earlier in the week, accusing Taiwan of taking “about 100% of our chip business” and suggesting that the U.S. should be compensated for its defense. On Thursday, TSMC experienced significant declines in Asia, shedding T$1.7 trillion ($52.1 billion) in market value over two days. However, its U.S. traded shares closed up 0.4% on Thursday, likely helped by the company’s raised full-year revenue forecast due to surging artificial intelligence (AI) related demand for chips. TSMC’s performance highlights the dichotomy between short-term market reactions and the underlying strength of the semiconductor industry’s growth drivers, such as AI and advanced computing.
In Europe, ASML shares closed down 3.6% on Thursday, while its U.S. listed shares ended down 0.9%. The company’s performance reflects the broader market concerns about the impact of U.S. export controls and the potential for increased regulatory scrutiny on the semiconductor industry. ASML, as a key supplier of advanced lithography equipment used in chip manufacturing, is particularly vulnerable to changes in trade policies and export regulations.
In Asia, South Korean memory chipmaker SK Hynix slid 3.6%, and Japan’s Tokyo Electron slumped 8.75%. These declines underscore the global nature of the semiconductor industry and the interconnectedness of supply chains across different regions. The potential for tighter U.S. export controls not only affects American companies but also has significant implications for semiconductor manufacturers and suppliers in Asia and Europe.
Because of the ongoing effects of regulatory actions and geopolitical concerns on investor morale and market performance, the trading environment for chip stocks is still very unpredictable. In order to meet the increasing demand for cutting-edge technologies, companies in the semiconductor sector must strike a balance between maintaining innovation and regulatory compliance. Investors, on the other hand, need to be alert and flexible, seeing the opportunities and risks that come with operating in a market that is changing quickly.
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