Newsmakers and market movers, this is "The Pulse" with Francine Lacqua. Good morning and welcome to "The Pulse," I'm Tom Mackenzie at the Bloomberg Tech Summit in central London. European stocks are mixed with bonds extending a global sell-off, as traders weigh a slower pace of U.S. interest rate cuts. Secretary of State Antony Blinken makes an 11th visit to the Middle East as the U.S. renews its push for a ceasefire between Israel and Iran-backed militants. Shares in SAP jumped the most since July as cloud revenue soars. We'll speak to the CEO of another tech giant shortly as we hear from Christophe Fouquet, the CEO of ASML.
Let's check in on the markets. A reassessment in terms of the Fed's next steps leading to that global bond sell-off we saw a marks jump in yields yesterday across U.S. Treasuries. Here's the read across your equities space. U.S. futures pointing lower 0.2 percent after modest losses yesterday. Nasdaq 100 futures pointing to a drop of 50 points. European stocks off by 0.2 percent across the Stoxx 600. On your yield space at the front end, the U.S. two-year Treasury currently at 4.04, just one basis point in the session today. 150.96 on the Japanese yen, we have seen softness in the currency, down 5% the last 30 days as we build up to that election over the weekend. Brent 73.88, down 0.5%. Gold up again 0.5%, another positive day at 2733 per troy ounce.
Wall Street veteran Ed Yardeni says the best outcome for U.S. equities would be an impasse that leaves neither party with a dominant position. He spoke on the Treasury market calling for U.S. 10-year yields to rise to 4.5% but says they could reach 5% if either party wins a sweeping victory.
I think if we do get a sweep by the Democrats or the Republicans, it almost doesn't matter, either way we will have wider deficits, more debt accumulating and possibly inflationary consequences.
For more, let's bring in Bloomberg's Valerie Tytel to get an assessment of how the markets are digesting these evolving views on the bond market. Is it a worry over deficits driving the Treasury market or the commentary from FOMC officials?
It was interesting to hear from Ed Yardeni in that video saying it doesn't matter who wins the election, either way the deficit will grow and 10-year yields could reach 5% if we get a sweep by either party. Even today we are still ticking higher in the yield, now up over 12 basis points in the 10-year sector, but questions over what drives this, is it the Trump trade, the Fed speakers yesterday, this worry about deficits? My next chart, I want to show you how this Trump trade has evolved since the end of September. This blue line is the betting odds of a Trump win. You can see they have granted higher, predicting more of a chance of a Trump win. We are seeing stronger dollar and U.S. yields had higher. Perhaps it is the Trump trade leading the markets at the moment. We're now 14 days from that U.S. election.
Indeed the countdown is on. The Trump trade seems to overshadow the views from some of these FOMC officials. How has the Fed pricing adjusted? We have the likes of Apollo coming up saying maybe the Fed just pauses in November. How is that kind of expectation being built into market views?
It was interesting to hear from Torsten Slok talking about a November pause. If you look at the pricing, we are still easing and taking out expectations for a Fed cut. Just a few weeks ago we were pricing two back-to-back 25 basis point rate reductions. We are now pricing in only 40 basis points of cuts throughout year-end, 22 basis points for this meeting in November and only 17 for that meeting in December. The expectation is as we get this hot spring of U.S. data, perhaps the Fed doesn't need to cut as aggressively.
If November is not in the balance, December certainly is. Valerie Tytel with the breakdown across markets and how things are being adjusted around Fed expectations. To the corporate conversation, the earnings story now. SAP getting a boost in the session today helping nudge the DAX into positive territory. SAP jumping more than 5% on the back of the earnings story on their third quarter that came in roughly in terms of cloud revenue for the biggest software maker by market cap in Europe. SAP's Q3 revenues coming in an increase of 25%. The other tailwinds for SAP on the fact that they have this forward view 12 months into the future, in terms of commitments around bookings and that increased 25% as well. Interestingly, SAP also raised their outlook for cash coming through in terms of the longer term for the year, up to four billion euros on that front. Cloud revenues by the way are guided up to 27% at the high-end. The CEO saying yesterday around 30% of the demand coming through in the third quarter from their customers did have that AI link, customers wanting those AI analytics services that SAP provides. And the CFO telling me today he sees that gradually improving in the months and quarters ahead. This is a company that has seen its market cap increased by 100 billion euros year to date. That is proving some problems in terms of market weight on the DAX bumping up against that 15% cap that is imposed by German authorities. The CFO telling me he would like that removed. The stock up more than 50% here today. SAP with that outward look in terms of demand in cloud services, as they push further into the subscription model from the licensing model, and that is starting to pay off. We will hear from some of that conversation with the CFO of SAP, I was speaking to him earlier, take a listen.
We would like to see that 15% cap disappear because it strangulates demand in Germany but we are focusing on the large pools of capital available in the United States. There is a lot of runway for us to grow and attract boom investors. We would like not to exit Germany but to the contrary attract capital into Germany and on that front I have to agree the 15% cap in the DAX is not very helpful.
The CFO of SAP speaking to me earlier saying he wants to attract more capital into German markets, he is not considering delisting and listing in the U.S., he wants that capital attracted into Germany but wants that cap at the very least adjusted as the market cap of that company is plus 260 billion euros right now. Let's pivot to the news out of Qualcomm, of course the chipmakers so essential particularly to those non-Apple iPhones. The news from Bloomberg that they have unveiled a new smartphone chip. This is an adjustment to its own designs. Premarket this, just off 0.3%. We will see how that changes through the session but an update and reminder of the fact that Qualcomm is trying on some measures to be less dependent on the architecture and designs from Arm, and we will hear from the Arm CEO later today from the technology summit.
Some other stories making news this Tuesday. China on track to become the largest market for Russia's pipeline gas this year, after Europe cut imports following the invasion of Ukraine. Bloomberg indicates Russia exported 26 billion cubic meters of Russian gas to China in the first nine months of 2024, nearly 40% more than a year ago. The U.K. is to loan Ukraine 2.3 billion pounds to purchase military equipment paid for by profits generated by frozen Russian assets. The funding comes as part of a wider $50 billion package from G-7 nations and the EU announced in June. G-7 allies have collectively frozen $280 billion of Russian central bank assets, with the majority in Europe. Italy passed a new law to overcome a court ruling that blocked the prime minister's plan to send asylum-seekers to Albania. 12 migrants were returned last week after a court said they originated from countries that cannot be recognized as safe. At least cabinet approved a list of 19 so-called safe countries to allow the plan to continue. The new CEO of Prosus says adjusted profit at its commerce division is expected to surge 950% this fiscal year. He told Bloomberg he is deploying artificial intelligence across the business as he reshapes a complicated business legacy. We will hear more from him later on in the show.
Let's bring you that conversation live with the CEO of ASML, Christophe Fouquet, speaking to Bloomberg's Tom Giles. We can listen in now after that surprise cut to the outlook from ASML.
But last week you had to do some expectation resetting in terms of bookings, in terms of your outlook for 2025, and how long the chip recovery will extend. You said on the call today, without AI the market would be very sad if you ask me. That definitely spread some sadness in the market and the stock price. Could you give us a sense, when you talked about the new expectations, you focused on a couple of things. Customers like Samsung and Intel, but also China, so I'm wondering if you could give us a sense of on balance, how much of your resetting expectations was related to changes in China versus weakness in the large customers I mentioned.
Last week we said a few things. The first thing we said was that we still see AI as a huge opportunity for the industry, and we still see upside on the short-term. AI has been with us now for a couple of years and has created a lot of excitement. Like all our peers in the industry, I believe that AI will bring tremendous support for this industry. That is the first thing. Long-term, AI will build up a real strong opportunity for the industry. In the short-term, you are aware, not everyone is surfing yet on the AI wave. Some companies have been doing well, TSMC, because they are providing first the product, second the process that will manufacture the product, so they are very strong. I'm sure you will see that in the weeks to come, very strong demand. What we also said is that not every semiconductor manufacturer is involved in AI. Some of them are doing chips for more traditional applications, mobile, PC, automotive. That part of the market is not recovering as quickly as we hoped. It has recovered, so we see progress, and people are reporting that but it is slower than a lot of is expected. That concerned quite a few companies, all the companies that today are not directly benefiting from the AI boost. That is the split of the market we see today.
Does that mean we shouldn't expect full recovery until 2026?
That is always difficult to say. It is something we watch every quarter. Last week, people were maybe disappointed we didn't give more heads up, but that is something we just keep watching. The last three months for example we have seen that people are starting to push the brake. When do they push the accelerator again we don't know because when you become cautious it usually takes a bit of time before you look at the longer-term again. But long-term, we see growth, we see tremendous opportunity. Which means that at some point in time, this has to come. 2025 by the way we still see as a growth year for the industry, for ASML. The growth is not as high as a lot of people expected, but still a growth year. We also expect 2026 to be a growth year but it is too early to quantify that in high precision.
I want to talk a little about China. At one stage they accounted for almost half of total revenue. You shared with the market that we have to think about China in its historical perspective, where it accounted for something more like 20% of total revenue for the company. I'd like to get a sense from you of how much of that changing viewpoint on China is coming from weakness internally versus limits on what Chinese manufacturers can buy given export controls.
First, a step back. If you look at China, we just talked about AI, it is very advanced manufacturing and chips. China for a few years now is focusing on what we call mainstream semiconductor. We used to talk about the IoT, all those chips you have in all the products making those products smarter, that's the type of chips China is basically manufacturing today. One part of the reason for that is the restrictions that have been applied on EUV, as you know, which are preventing China to move to advanced mode. The focus of China is on mainstream semiconductors. The demand for that has boomed in 2021, 2022. As a result the demand in China has boomed as well. 2021, 2022 was the time if you recall where demand was extremely high and ASML was struggling to deliver tools to everyone. Therefore we could not deliver a large part of demand in China. Backlog in China grew. 2023 the rest of the market softened. We got tools we can ship to China. Same in 2024. The level of business we had with China in 2023 and 2024 was more of the reserves of the nondeliverable capacity in 2021 than anything else. We always explained that our quarter at 50% of the business in China was not normal. This was a peak resulting from a lack of delivery before. The normal business in China is around 20-25% and that is the normal demand related to mainstream semiconductor and I think we go back to this number over time.
But there is something artificial about the way we think about China as a purchaser of equipment like ASML's in the sense that many countries around the world, the U.S. principally, have been exerting export controls. Are those controls going to become even more stringent? For example, China is not able to buy your most advanced machines, is it possible those restrictions could extend to the DUV level which is used for more mainstream products?
Yes, if you go back to the root cause, the prime motivation of export control it was to prevent China to have access to advanced technology. By not having it in China, we pretty much stopped the ability of China to go beyond the five maybe three main nanometer node. But fundamentally by not having EUV, we have placed China 10 to 15 years behind when it comes to advanced technology. We always talk about China. We usually forget to mention that while restrictions have been applied on China, a lot of work has been done with other players in the industry, Intel, TSMC, Samsung on the most advanced EUV technology as we know it today. There has been a lot of work done every single day to continue to widen this technology gap and EUV is a key element to do advanced technology. Intel has proven to the world without EUV, life was getting impossible. That is also true for China. This limits part of the activity there.
Based on your interaction with the prime minister of the Netherlands, with the foreign ministry, is it your expectation that the restrictions will become even more limiting on China's ability to purchase machinery like ASML's?
If you look at the geopolitical landscape, it's clear the United States will continue to apply pressure on their allies for more restrictions. The discussion we have with the Dutch prime minister, with European political leaders, at the end of the day, we are a European technology champion company. The question is what is right for the Netherlands, what is right for Europe, and as a result what is right for ASML? So what restrictions make sense when it comes to national security which has been the prime argument, and where does it stop, because a lot of the focus in China today is on mainstream semiconductor. And this is very different from AI. That is the discussion we have. The pressure will continue to be there, because if you look at the landscape, that's what it is. But I think the discussion will get more sophisticated over time. The stakes will become higher. I think a country like the Netherlands, all of Europe where again we belong to, we're more and more going to discuss what makes sense for us.
Does it make sense for the European Union to work in such close concert with the U.S. in making it difficult for China to get access to these machines? At what stage, and do you find yourself wishing that the Dutch government, and maybe the EU government would push back harder on some of the restrictions the U.S. would like you to impose?
As a European citizen, Dutch resident, noncitizen as you know, I'd like to know that they do what is right for Europe and the Netherlands. That's the most important thing. We always said at ASML, we don't make the law, I'm not a politician I don't know half of what they know. And there may be good reason to restrict. And if there is a good reason to do so, and our government believes that, we will go with it of course. What is very important is to have the discussion with them, so they understand what we do, maybe understand the industry better and they are better equipped to decide what is good overall for the European countries and Netherlands.
Based on your interaction with your customers in China and globally, is it your perception that the motivations for export controls are truly about national security interests and regional security versus economic competition? In other words, how much is this about keeping China from becoming economically more competitive with the rest of the world versus these are legitimate security threats?
You almost have a rhetorical question here. What you see happening is more and more people are asking themselves this exact question. If you look at the press, there is a real debate happening. Is it really about national security? We know that there is a strong economic competition between the U.S., Europe, China. We see it everywhere. People question how much of that has a play in the decision. The other debate you start to see which is related is, does it help us, or does it hurt us? A lot of companies in the U.S. start to question, is that a good thing for us? That is the key debate to have because at the end of the day, we need our governments to do the right thing for their people. I think those debates are far more active, far more lively than they were two years ago and I think it is very good, because it brings us to a more rational discussion and more balanced decision moving forward. We can only welcome debate in such complicated issues.
I want to bring things a little more local to the Netherlands where ASML discussed with the Dutch cabinet it wants to operate successfully in the country. Your predecessor said if the Netherlands shuts down and we cannot get immigrants or foreign students, then fine, you should accept the consequences. The Dutch government to its credit set up a task force and will spend billions of euros in the Eindhoven region to keep ASML at home. Is that enough particularly in a world where there is a coalition led by a far-right lawmaker that is looking to implement the strictest ever anti-immigration policies. The cabinet is working on areas to restrict labor migration. You are dependent on labor from not just domestic but around the world. How concerned are you about the forces at work bringing this anti-immigrant rhetoric and policy to the Dutch government?
Here also you should take a step back. This is almost an issue for Europe. It is happening in the Netherlands and many countries as we speak. It's happening in the U.S. What we tried to do in our discussion, every government wants to have companies like ASML in Europe, in the Netherlands. Everyone wants that, the more, the better. But to have a company like this, you need a few things: access to capital, people, energy, you need a place to build your factory. All those conditions have to be there. If you want to compete with other countries, China, the U.S., whatever, you need those conditions but those conditions have to be as good as possible so you can be competitive, because this industry is extremely competitive. And no one should ever take any success for granted. Of course, the story of ASML is great but only after 40 years of very hard work. This is something you have to preserve. We need all those conditions to be there. The Draghi report was a good way to summarize what the entire industry in Europe thinks. And our government has to work on that. Of course, there is a bit of, immigration is the topic of the day, that is the way to get people's attention. What we have said is we have built our company with more than 100 nationalities. Bringing talent from everywhere has been a natural condition for success and this has to continue. The good news is I think people are listening. When you get down to business, people are more reasonable than when they run a campaign or try to get elected.
Does it make sense for ASML to consider locating or relocating some operations outside of the Netherlands as a contingency measure to ensure that you have access to those ingredients you mentioned that over 40 years have made ASML a great company?
The threshold to do that is pretty high for us. We are developing extremely sophisticated machines. The technology in fact is a combination of many technologies that we have to bring together. Our supply chain is 80% of it around the Netherlands, Germany, France, Italy, very close. Our engineer, our R&D is fully in Netherlands, we have a center in the U.S. but for the large part it is in the Netherlands. Because of the complexity of our tools, you want to keep research and development close to your manufacturing center. What you may not realize is every two years, we make a new step on our machines. We have to improve them every couple of years. Every two years we build new machines. And we have to teach our manufacturing people very quickly to build those new machines. There has been a long-lasting principle at ASML that we want to keep R&D and manufacturing together and we would like to do that in the Netherlands because this is where we are. The threshold to change that I think is very high. I will say new things like geopolitics give us even more reason to stay in the Netherlands, so we can build this strong relationship with the Dutch government, with the European countries around us to also get the support of those governments in our activities.
It's not really being considered to locate some operations elsewhere?
We have operations elsewhere, but we will only grow those operations based on the activity we have in the different countries. We don't at all consider to move a large part of our operation outside of the Netherlands. Not at all.
The European Union has tens of billions of dollars plan to expand local manufacturing capacity with the goal of doubling output from the region to 20% of the global market by 2030. In your estimation, is this a realistic expectation, and what are the hurdles the region needs to overcome? This is the idea of increasing the region's capacity to be a bigger producer of chips to the global market.
