Borrowing costs outweigh strong chip earnings as French debt stress spreads

Samsung Electronics projected a 783% jump in third-quarter operating profit to 107.4 trillion won on Thursday, and its shares lost 2.4% ^[7]. TSMC, the world's largest contract chipmaker, reported record third-quarter revenue of T$1.49 trillion, up 50% from a year earlier, and its shares fell 1.35% ^[8]. Results of that size usually lift a stock. On Thursday investors priced the cost of money first. Three ECB policymakers issued fresh inflation warnings the same day ^[5], and markets were 80% priced for a Fed rate rise in December ^[21].

According to the CNA report, money spent on AI equipment could lift semiconductor and memory earnings ^[22]. Broadcom is looking for $50 billion of financing, and SpaceX plans to issue $30 billion of investment-grade debt and raise $10 billion in loans to buy chips from Nvidia, according to Wall Street Journal and other media reports ^[4]. SpaceX's bonds and loans come to $40 billion ^[14]. Add Broadcom and the two plans reach $90 billion ^[15], about $10 billion more than Samsung's entire quarterly operating profit at the report's conversion of $80.17 billion ^[16]. Oracle is also reported to be raising money for chips, though the reports did not give an amount ^[4].

Nvidia is a major shareholder in SpaceX ^[4], so the seller of the chips owns part of a buyer that is borrowing to pay for them. Nigel Green, chief executive of deVere Group, warned of a dangerous loop in which Nvidia bankrolls the customers who buy its products ^[13]. "The AI build-out started on cash," Green said. "It's increasingly running on credit, and credit changes the risk profile entirely." ^[12]

In Europe the strain runs through government debt, as worries over French finances reach Italian and Greek bonds and parts of the banking sector ^[2]. In Paris, the CAC 40 is more than 12% below its August record high ^[17]. "At this stage, the markets would be most comforted by monetary intervention," said Kiran Ganesh, a multi-asset strategist at UBS Global Wealth Management, referring to ECB bond buying ^[3]. "But I think what we learned in the euro zone crisis in 2011, is that monetary authorities will turn to the fiscal authorities first to get their house in order," he said ^[3].

The view has weak points. Wednesday's strong auction of US 10-year debt pulled benchmark Treasury yields back from 24-year peaks, so buyers still turn up at these levels ^[9]. Goldman Sachs analysts wrote in a note: "We expect a second Fed hike in December, though we see a strong chance the Fed ultimately concludes further tightening is unnecessary." ^[11] The ECB could also buy bonds before France acts on its budget, against Ganesh's expectation ^[3]. I think borrowing costs will keep setting the tone until one of those happens. The view is wrong if Samsung and TSMC shares start rising on results like these while sovereign yields stay where they are.