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Market Movers

European shares ticked up in early trading on Friday but lack any real momentum and were still heading for weekly declines of around 2-3%. The FSTE 100 looks set to end the week down by around 2% at 7,600, whilst DAX is looking like it will finish 3% lower after hitting a record high last week. US stock markets were mixed – the Dow Jones down and the Nasdaq jumping 1.7% on Nvidia’s +25% blowout after that earnings upgrade. MSFT picked up on the coattails with a near 4% gain, GOOGL +2%, AMD +11%...poor old Intel fell 5%. SPX rallied 0.88% on big tech, still down for the week, NDX up slightly for the week.

 

Ai Bubble?

Wedbush: "For any investor calling this an #AI bubble ... we would point them to this NVDA quarter and especially guidance which cements our bullish thesis around AI and speaks to the 4th Industrial Revolution now on the doorstep.” Yes but there has been such an enormous decoupling between the stock’s price action and any fundamental price to earnings type valuation …key is who else is there? No one has quite the same product in terms of the hardware and software stack and until they do no one is ordering from anyone else…FOMO meets MOMO meets TINA – there is no alternative (to Nvidia) – for now.

And just remember how hard it can be to time things in markets – just ask Cathie Wood, not one to be shy of overvalued momo trades, she closed her NVDA stake in January just before the AI-juiced rally... betting on innovation and missing the biggest innovator there is...never go full Cathie. Meanwhile she’s still got crazy high Monte Carlo ‘simulations’ for Roku and other garbage.

Overall – June rate hike expectations are firming, US 2yr note above 4.5%, 10yr up to 3.822%, up 40bps in a fortnight, dollar strengthening hard for a third week ... financial conditions tightening...Nasdaq rally will push rates up. Here’s BofA to sum up: “...market telling you real rates may need to rise another 100-150 bps from here to pop ‘baby bubble’ in AI.”

 

Divides Despite Data

Today – core PCE is the big one and is forecast at +0.3% month-on-month…data is not pointing to a pause but Fed seems divided on what to do, so the data is key here. UoM sentiment and inflation expectations are also due up. Overnight, Tokyo core CPI fell a touch in May to +3.2% from +3.5% in April, but a separate core reading that strips out energy and food rose to 3.9%, its highest since 1982 = when does the BoJ take action? It looks very much like it’s playing the transitory card just as the Fed did and will get well and truly smoked out in the same way.

 

Deb Ceiling Progressing

Debt ceiling talks have made substantial progress it seems, with officials saying that President Biden and Republican congressional leader McCarthy close to striking a two-year deal to raise the debt ceiling. This would cap spending on certain discretionary areas such as education (!), and Reuters says two sides are only $70bn apart...like I said a deal will be done, only a question of when; either before the June X date or it drags out over the summer.

Elsewhere, the lira hit a record low at 20 versus the buck, whilst USD was generally a little softer on the day after a very solid ramp up over the last three weeks. Gold down on rates, oil pulling back after hitting its highest since May 2nd yesterday. It had risen on some huge US stockpile draws and the Saudi warning to short sellers. Debt ceiling breakthrough might help lift sentiment…remember running into a supply crunch later in the year; but this could meet a recession.

 

In the UK and Charts

UK – huge surge in rates this week with the 2yr gilt to 4.5% as inflation remains too hot so solid retail sales today don’t make matters easier. Remember the surge in rates we have seen is the same as after the mini-Budget fiasco; the difference is deleveraging in LDI since has made it easier to handle. Money markets price 5.5% terminal rate for Bank of England, only underlining how the Old Lady has been consistently behind the curve and stubbornly unwilling to do anything to get in front of it. Too high? 5.5% seems a little too ambitious as the lagged effects of hikes take effect – particularly as hundreds of thousands of fixed rate mortgages roll off.

Bank of Japan governor Ueda said an option for tweaking Yield Curve Control could be to target the 5yr rather than the 10yr yield. USDJPY – pulling back a touch after hitting new multi-month highs above 140 yesterday.

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NDX – close to topping out in the rising wedge on the weekly candles on NVDA pop, RSI towards overbought.

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Have a great bank holiday weekend/ half term break – I’ll be back June 5th.

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