Daily market update: HSBC, tech rally, Lloyds, Mobico, TSMC

Another day, another record closing level for both AI chip giant Nvidia and the tech-heavy Nasdaq index in the US, says Russ Mould, investment director at AJ Bell.

Investors who have held their nerve are cleaning up, yet the drums of worry are banging louder each day.

Concerns around excessive valuations, elevated levels of government borrowing, uncertain economic growth, and political turbulence are omnipresent. There are a multitude of factors that could trigger a market pullback, but for now it is another day where there are more bulls than bears.

The FTSE 100 was an outlier, weighed down by a double dose of bad medicine from the banking sector. HSBC removed the share buyback carrot that has been keeping investors excited. It is using cash that might otherwise have funded buybacks to pay for the buy-out of Hang Seng Bank. Lloyds also disappointed investors with a new twist to the motor finance scandal.

Defence stocks slipped after Donald Trump said Israel and Hamas had agreed the first phase of a ceasefire plan. This might simply be a small bout of profit taking after a strong run for the defence sector. Russia’s invasion of Ukraine in 2022 drove more investors to look at defence stocks and a subsequent heightening in geopolitical tensions in other parts of the world led various governments to spend more money on military and intelligence capabilities.

Shares in JD Wetherspoon and Fuller’s got a small boost on news that ministers are supportive of a hospitality industry-led plan to extend pub opening hours. Reports suggest this will form part of Labour’s drive for economic growth, although what it does for corporate productivity is another matter if people have been out drinking late.

The business formerly known as National Express continues with its reinvention as a more geographically diversified transport operation. Mobico has won a big contract in Saudi Arabia, giving a much-needed boost to a share price that has been steadily moving lower over the past four years.

HSBC

Like a toddler who has been told they can’t have another biscuit, HSBC shareholders are stamping their feet on news they won’t be getting any share buybacks for the next few quarters. The bank plans instead to put its cash towards buying out minority investors in Hong Kong lender Hang Seng Bank.

This is a key plank of HSBC’s wider restructuring plan. However, given it is a tidying-up exercise it is unlikely to excite the market too much, particularly as Hang Seng has been hit by a property slump in Hong Kong.

Chief executive Georges Elhedery’s plan to reshape the business has moved with pace since he took charge just over a year ago, with the company winding down certain investment banking operations in the US and Europe and pulling out of certain markets. The bank has made generous capital returns, which are about to get a fair bit less generous, and there has been a positive sector backdrop with most banking shares enjoying strong gains over the past year.

In the context of a continuing pivot towards Asia, HSBC’s latest deal has logic. But along with the recent exit of chair Mark Tucker, the poor reception to it represents perhaps the biggest challenge Elhedery has faced at HSBC to date.

Lloyds

Investors in Lloyds will have choked on their cornflakes after the bank warned it might have to put aside a ‘material’ amount of extra money to cover motor finance compensation.

Shares in the bank jumped yesterday after the FCA indicated the average payout for victims of car finance mis-selling could be less than expected. Investors took the view that Lloyds’ £1.2 billion existing provision should be enough to cover its bill, and that it was able to move on from the matter.

There was a suggestion from various analysts that £1.5 billion might be a potential total bill. Lloyds now says an additional ‘material’ provision looks likely. The term ‘material’ might not apply to £300 million – it could be a much greater figure.

That news has wiped out most of yesterday’s gains and reinstated a sense of uncertainty.

TSMC

There is no real sign of a slowdown in AI-driven demand in the latest numbers from TSMC. The chip manufacturing giant may have seen a slight easing in demand month-on-month but year-on-year the levels of growth are still impressive for a company of its size.

It means the quarterly outcome should come in ahead of analysts’ forecasts and bang in the middle of the guided range given alongside second-quarter numbers.

Warnings around the risks posed by the AI boom from the likes of the Bank of England do not seem to be landing with investors for now. TSMC’s market positioning puts it in an enviable situation, with a dominant share, but there are risks if the infrastructure demands associated with AI were to drop off in a significant way.

Appetite for more traditional chips, used in computers and smartphones, is much softer thanks to the uncertain economic backdrop, so, without the artificial intelligence driver, TSMC’s numbers would not look as healthy.

TSMC’s position at the nexus of a key geopolitical hotspot is another consideration for investors but, for now, it looks to be smooth sailing for the business.