Morning Bid: In the AI alphabet, cash is king

A look at the day ahead in European and global markets from Wayne Cole.

The story so far in Asia has featured hyperscalers and Fed Chair Warsh, the former slugging tech shares and the latter boosting bonds. 

Alphabet is the villain of the piece as its shares shed 10% after hours, or a cool $396 billion in market value. Revenues came in line but net income missed as did EPS, though that was in part due to paper losses on stock holdings (looking at you SpaceX). Investors seemed particularly spooked by a negative cash flow of $9 billion as capex surges, and analysts suspect this quarter will be even worse.

Microsoft, on the other hand, generated almost $19 billion in free cash flow, helping lift its shares 2.9% after hours as the market rewarded those able to fund their own capex.

The Alphabet miss has dominated in Asia with Nasdaq futures down more than 1% and tensions running high before Amazon and Intel report later in the session. 

Samsung hasn't helped as its stock slid 5% despite breaking earnings records for everything and pledging a shareholder return program of up to 110 trillion won, which is getting up to "googol"-like numbers. Huge hyperscaler capex is clearly great for equipment makers such as Samsung, but only as long as the hyperscalers can afford, and fund, that capex. 

As for Warsh, markets took his press conference as dovish overall. There was much talk of how the Fed's "monetary medicine" was working, and how good he felt about inflation and how the economy was neither too hot nor too cold. All of which saw 2-year yields drop about 6 basis points late in NY, while the long end has joined the rally in Asian time. The probability of a December hike remains around 78%, but Fed fund futures have trimmed out about 10 bps of tightening from next year.

An added wrinkle was Warsh's surprise announcement that one of the eight FOMC meetings next year would be for formulating "strategy" with no policy decision. Warsh said this would happen in the fall, so analysts are picking October. In 2028, two of the FOMC meetings would be for strategy, reducing policy setting meetings to just six.

This will mean gaps of 12 to 13 weeks between meetings, increasing the importance of each policy decision. It also plays merry hell with Fed fund future pricing, as individual monthly contracts revolve around meeting dates. 

Yes, the Fed could change rates between meetings, but usually that's a sign of extreme circumstances or policy error. It seems odd to so limit the Fed's options in such volatile times, but it does fit with Warsh's whole anti-guidance, leave it up to the markets view. As one wag said, it's a new era of "forward silence".

Investors will be hoping the ECB doesn't follow that lead when it meets today, and offers at least some clues on whether it will hike in December as many are betting.

Key developments that could influence markets on Thursday:

- ECB meeting

- Euro zone consumer and business confidence for October

- US Q3 GDP, September personal spending and PCE inflation

- Earnings include Amazon, Intel, Caterpillar, Bristol-Myers, Eli Lilly, Merck and Starbucks

(By Wayne Cole; Editing by Kate Mayberry)