NVDA to the Rescue

Europe Down Despite Winners

One or two pockets of strength in European equities (chips post NVDA) but we are generally weaker again today following a bit of a drubbing yesterday as debt ceiling talks in the US got nowhere and UK inflation proved stubbornly high, sending gilt yields skywards. The FTSE 100 closed down 1.75%, whilst the DAX tumbled almost 2% for the session amid a broad selloff of risk assets. The US followed suit, with the DJIA notching its fourth straight decline and the S&P 500 retreating another three-quarters of a percent. 

This morning German data shows the country entered recession in Q1, whilst NVDA’s stunning upgrade is being digested. Shares in London retreated another 0.6% in early trade, taking the FTSE 100 under 7,600. The DAX fell under 15,800, roughly 500pts beneath last week’s record high. US futures are not too shabby this morning but all NVIDIA doing the work for E-minis, Dow futs lower. The 10yr US note yield is at 3.75%, with the dollar making further gains and gold at the bottom of the recent range. Oil holds a bit firmer in the face of the risk-off moves with possible implied OPEC+ action supporting.

Nvidia Smashes It

Not just AI, but a heck of a lot about AI. Shares leapt 25% after-hours following results that were beyond wow – market cap rising $200bn overnight. Management expects sales of $11bn this quarter – way ahead of the $7.2bn that had been forecast. CEO Jensen Huang said the company was seeing “surging demand” for its data centre products. Last week he said this: “We have reinvented computing for the first time since the IBM system 360 60 years ago", pointing out there is a $1tn worth of data centre infrastructure that is based on the old way of doing things.

Last quarter was a beat but still a bit mixed with gaming –38% vs +14% for data centres....but who gives a monkeys about gaming when AI is coming? Question is do you pay 25x sales when MSFT is at 11x? Chips are infrastructure and get commoditized in the end and you kind of wonder if you want to hold them forever. AI bubble stock? I don’t know...short term this stock is taking on a momentum of its own and it’s hard to get in front of that (certainly you’d need balls of steel to short it), but maybe there are other, perhaps, more sustainable ways of playing the AI trade in the long run? The Street has rushed out new price target upgrades, JPM, Barclays, KeyBanc and Evercore go to $500.

Fed meeting minutes

Minutes from the FOMC showed policymakers are divided and questioned the need to lift rates further, citing economic uncertainty. Minutes were all about lagged effects and pauses...they could forego a hike in June by ‘skipping’ it rather than ‘pausing’...all subtle stuff but really we are dancing on the head of a pin now with regards short term interest rates. Markets price in a roughly one-in-three chance of a hike in June.

Debt Ceiling Recap

It’s a charade and a mess, and I think Paul Donovan at UBS may be correct in saying it’s ‘almost never worth commenting on’. But here goes…Janet Yellen said the Treasury could run out of funds by the start of June. Is June 1st really the deadline? Not really – Jun 8th is seen as more realistic but it could go on a lot longer, perhaps as long as October. The government can scrap around to get through the other side of June 8th/9th, then there are tax receipts due Jun 15th and then maybe some new special measures. In all likelihood, absent a deal, we push on through to end of June and there is a bit of reset, which could see end of August as the next X date. The GOP can reason this pretty well and this would tend to mean there is less chance of a deal before June 1st – but that doesn’t mean less chance of a deal at all. It just means everyone thinks June is not really a pressing deadline. Even if August comes around and the debt limit is hit, you don’t just default. The US can delay and prioritise payments- Yellen yesterday said if a deal isn’t done by the X date there will be some payments the government can’t make. Then we have a spending cut – a shutdown perhaps – which could see spend cut by as much as 10% of GDP. This would lead to a considerable economic hit. 

Overriding feeling through all of this will be the assumption that a deal will get done: ‘they won’t just default...it CAN’T happen!’. Well it could and actually has technically a couple of times before. But we are in a whole other world of leverage and complex financial markets that would see some serious shockwaves...but only once a default becomes real – so far markets have been pretty sanguine but we are seeing some more angst this week. So, unless a deal gets done before Jun 1st or Jun 8th, then we could be heading for a protracted debt ceiling standoff that lasts months...good luck with that – as Yellen said yesterday there will likely be substantial financial market distress in the run-up to a possible default….but it’s not so much about a default as the amount of austerity you might see, government shutdown sparking immediate recession etc. Then you have the whole question about issuance and tightening if a deal is done.

Meanwhile, Fitch has placed the US on negative watch due to "increased political partisanship that is hindering reaching a solution to raise or suspend the debt limit despite the fast-approaching x-date". House Speaker McCarthy still says he is optimistic a deal will be done.

Short Selling Ban?

The head of the market integrity team at the US Department of Justice said: "You’ll see some more activity from us involving short sellers sometime in the next few months". So, some kind of action is likely, but what?

Charts – gold possible breach to $1,935/40 region?

GBPUSD – new lows, momentum still with the bears.

Can’t stop the dollar...possible extension to test the key resistance at 105, but RSI looking stretched and buyers may be approaching exhaustion in the near term.