By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Tuesday was another risk-off day for markets with stocks sliding across the board, as sentiment remained under pressure, with focus now turning towards all-important earnings from Nvidia after the close today.
WHERE WE STAND – As ways of trying to shore up sentiment go, breaking the internet such that nobody can check stock prices for a while probably isn’t the worst way to go about it.
I reference, of course, the widespread Cloudflare outage that plunged a whole host of sites into darkness yesterday. I jest, as well, in case that wasn’t obvious, as flicking the ‘off’ switch didn’t really work as intended, with it proving another pretty shaky day in terms of risk appetite.
That was despite us having a textbook ‘turnaround Tuesday’ setup heading into the day, with stocks having sold off on Thursday, Friday, and Monday, which usually (but not always) leads to a bounce on the Tuesday as the bears suffer from exhaustion, and participants realise that the move might just be a bit over-done.
Anyway, that didn’t pan out yesterday, largely because there isn’t a particularly obvious ‘smoking gun’ that we can look to as being the catalyst behind the substantial souring in risk appetite that we’ve seen over the last week or so. When nobody can accurately pinpoint the trigger for the sell-off, it becomes rather difficult to say with certainty when that sell-off is overdone.
One thing that is clear, though, is participants taking an increasingly sceptical view of the whole AI frenzy, and becoming increasingly concerned over how financing in the space is ever-more circular in nature. On that front, yesterday’s news of Nvidia & Microsoft investing $10bln & $5bln respectively into Anthropic, in return for a commitmentto purchase $30bln of Azure capacity, won’t have soothed any nerves whatsoever. In fact, the NQ printing new lows as that headline crossed is a great example of how ‘all capex is good capex’ has now morphed into ‘hang on, how are we getting a return on this capex?’, as participants take a more critical look at the sector.
While the tech space led downside yesterday, it was basically a ‘sea of red’ wherever one looked in the equity complex, especially here in Europe where most bourses shed over 2%, with losses seen on Wall Street too, albeit to a smaller magnitude. Despite that, I remain convinced of the fundamental bull case (resilient economy + strong earnings growth + cooler tone on trade + looser monetary backdrop), and remain a buyer of dips, especially considering that we haven’t really learnt anything new in recent sessions, despite this lurch lower in risk assets.
One small silver lining for the bulls, though, is that the VIX curve is now fairly noticeably backwardated (i.e. front > second future). That sort of inversion is not only unusual, but also tends not to persist for particularly long, being a sign of market stress increasing to a notable degree. As such, this is also a signal that tends to coincide with the equity market at large starting to bottom out. To me, 6,560 remains the key level of support to watch in spoos, being the Sept & Oct lows, as well as where the 100-day moving average currently lurks.
Outside of the equity space, it must be said that calmer conditions prevailed – to be clear, that’s analyst-speak for ‘nothing interesting whatsoever happened’. Both Treasuries and G10 FX remain rather moribund, and my idea from earlier in the week of buying FX vol into year-end hasn’t really worked out at all, despite the risk aversion we’ve seen in the equity space. Still, I’m not throwing the towel in on that one just yet, at least not with NFP looming tomorrow, and with goodness only knows what looming in the UK Budget this time next week.
LOOK AHEAD – All eyes turn to Nvidia today, with the company branded the ‘most important stock in the world’ due to report after the close.
The firm is expected to report quarterly EPS of $1.26, on revenues of $55.2bln, with that latter figure representing growth of about 60% YoY, for a firm that continues to operate with margins well in excess of 70%. Of course, data centre revenue, the linchpin of the AI frenzy, will comprise the bulk of that figure, expected at just shy of $50bln in the quarter.
All that said, the bar is quite obviously a very high one for the firm to meet, not only in terms of the figures themselves, but guidance for the coming quarter as well. Without wishing to dent the hopes of those banking on NVDA’s report to turn sentiment around, the report has proved to often be a ‘buy the rumour, sell the news’ event in recent quarters, with the stock selling-off post earnings on 3 of the last 5 occasions, despite beating consensus EPS expectations for 11 quarters in a row.
Away from that, we get the latest UK inflation figures this morning, which should show headline CPI having slowed to 3.5% YoY last month, confirming that, as the BoE expect, price pressures peaked in September, thus further opening the door to a 25bp cut at the December meeting. We’re also, today, due to receive minutes from the October FOMC meeting, which will again evidence the divided nature of the Committee at present, while the US sells 20-year bonds this evening.