A reversal in chip stocks: The reports causing the sector to fall
A Chinese company has begun mass production of essential chip-making technology. The fear: this is just the first step toward an independent chip supply chain. Nvidia's default insurance costs surged following reports that the company may take on massive financial obligations.
Chip stocks that were trading higher in pre-market trading shifted to sharp declines for two main reasons — China and Nvidia.
The first is a report that a Chinese company backed by the state has begun mass production of locally made DUV lithography machines for the first time. DUV lithography machines are essentially the "machines that print" the tiny circuits on silicon wafers from which chips are manufactured. This is a technology considered essential for the production of advanced chips.
The second is that Nvidia's financial risk is rising in the CDS market following reports of massive AI deals.
Beijing reduces alternatives
ASML erased gains of more than 2% recorded before the market opened, and dragged down the stocks of Applied Materials, Lam Research, and KLA as well. Earlier, the sector enjoyed optimism following the easing of tensions in the Middle East and a report that Nvidia is discussing financing of about $250 billion for an OpenAI data center project.
According to the report by The Information, the Chinese company, based in Shanghai, managed to set up production lines for DUV machines using development teams from other local companies. If the report proves to be true, it is a significant advancement in Beijing's efforts to establish an independent chip supply chain and reduce dependence on Western technology.
It seems that the export restrictions imposed by the USA and the Netherlands on China actually accelerated the development of the local chip industry — the sanctions imposed by the USA on exports to China were intended to curb China's technological progress by blocking access to ASML's advanced machines.
If the reports about local production of DUV machines prove to be true, the meaning is that Beijing has succeeded in accelerating the development of local alternatives.
From the investors' point of view, this is a particularly problematic scenario: Western companies may lose their revenues from the Chinese market, while the geopolitical goal of curbing China's technological progress will not be achieved.
Guarantees for OpenAI
According to Bloomberg, the cost of insurance against default on Nvidia's debt jumped today by the sharpest rate since CDS contracts on the company began trading, following reports that the company is considering huge financial commitments to finance artificial intelligence infrastructure.
The price of protecting Nvidia's debt for five years rose by about 0.14 percentage points and reached about 0.82% per year — the sharpest daily increase since active trading in these contracts began in November.
The reason for the concerns is reports that Nvidia may provide guarantees of up to $250 billion for an OpenAI project, which will allow it to rent computing power from data centers in the USA. In addition, the company announced an initiative with the parent company of the Korean chip manufacturer SK Hynix in the amount of more than $500 billion.
The investors' fear is that Nvidia, beyond being the main chip supplier of the AI revolution, is starting to take on more direct financial exposure to its customers' projects. That is, instead of just selling chips and collecting payment, the company may help finance the construction of the infrastructure that will create future demand for its chips.
