Weekly Key Insights: Geopolitical Risk and ASML’s Disappointing Results
Semiconductors and ASML: Riding the Long-Term Wave
ASML, a key player in the semiconductor industry, recently faced a setback with lower-than-expected orders in Q1 and a less promising revenue outlook for Q2. However, astute investors should zoom in on the bigger picture—the sustained, long-term surge in semiconductor demand.
While short-term fluctuations are inevitable, ASML stands to gain from the widespread adoption of semiconductors across diverse applications. The long-term trajectory remains promising, propelled by powerful factors such as artificial intelligence (AI), the energy transition, and the growing trend of localized chip production.
The sector has experienced a dip of over 10% from its record high in March, largely due to concerns over delayed Federal Reserve interest rate cuts and China's economic slowdown. But here's where the excitement lies: the potential for a tech-led market rebound. And the driving force behind it? None other than the hottest theme of the year—artificial intelligence. Despite the market's initial reaction to recent earnings, companies have indicated strong demand for their AI chips. Analysts, too, maintain an overall positive sentiment towards the semiconductor sector, projecting favorable growth in the middle to long term.
Middle East Tensions Keep the Oil Market on Edge
Last week, we witnessed a seesaw battle in crude oil prices, largely influenced by the ongoing situation in the Middle East involving Israel and Iran. Traders have been grappling with the challenge of assessing the appropriate level of risk premium needed to account for the current state of affairs.
All eyes remain fixated on the Middle East, eagerly awaiting the next turn of events. Brent crude oil has been hovering around the $90 per barrel mark, with the price range spanning from $92 to $86 in the past month alone.
The International Energy Agency (IEA) raised its global oil demand forecast to 1.2 million barrels per day by 2024, while OPEC+ analysts predict 2.2 million barrels per day. The prospect of tighter market conditions in the second half of the year places significant emphasis on the OPEC+ June meeting. During this crucial gathering, the group will decide whether to maintain the current production restraint of approximately 2 million barrels per day.
On Friday, brent futures momentarily soared above $90 following news of a retaliatory strike by Israel, intensifying concerns about a broader conflict that could disrupt oil supply. However, the gains were short-lived as the market quickly shrugged off the attack without significant impact.
The tailwinds bolstering oil prices consist of a combination of OPEC+ supply constraints, geopolitical tensions, and heightened demand expectations. Yet, this volatility also presents opportunities for traders to capitalize on fluctuations in either direction.
We believe crude oil already incorporates a risk premium. Thus, the chances of an abrupt surge to $100 per barrel remain limited unless a genuine supply disruption occurs. In a worst-case scenario, the market could witness an increase in supply from the US Strategic Petroleum Reserves or from OPEC producers capable of ramping up output, thereby providing support to the overall supply.
Taking a technical perspective, both WTI and Brent are poised to resume their upward momentum, potentially reaching the $90 and $93 levels, respectively.