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Hawkish Fed & (but?) Strong Nvidia Report

Updated: Jun 1

BentinPartner Weekly



Global markets were moved by three events last week; the publication of relatively hawkish Fed minutes on Wednesday which took equity markets by surprise, causing a swift equity markets selloff (and also precious metals) on Wednesday, followed by blowout results from Nvidia on Thursday which quickly healed sentiment, especially in the tech space, and finally US economic data which came out mostly stronger than expected.

Hawkish Fed minutes suggested insufficient progress on the inflation front which led some markets pundits to cancel their Fed rate cut expectations for the rest of the year giving a boost to the dollar which was also taken as an excuse for profit taking in precious metals and copper after their very strong gains.

Fed minutes also “raised concerns over valuation” to “elevated” for a range of assets.

 

On the US data front, S&P Manufacturing and Service PMI both rose in May to 50.9 and 54.8 (from 50.0 and 51.3 last month). Durable goods also came stronger than expected on Friday before the long week end.

In contrast, new home sales declined on diminished affordability and more importantly perhaps, news that came from Target and Walmart raised concerns on the ability of US consumers to keep fuelling the expansion.    

The Fed communication contrasted with the ECB which signalled repeatedly through the voices of its President, C. Lagarde, Chief Economist, D. Lane that a June rate cut is baked in. Yesterday, BdF Governor and ECB Governing Council member Francois Villeroy de Galhau pushed back against other monetary officials being uncomfortable with the idea of consecutive cuts, suggesting he favors rate cuts in both June and July. Economic data in Europe were on the stronger side with European PMIs expanding further, allowing European stocks to also post gains.

 

Japanese yields continued their grinding higher (now +50bps on 10-year yield from the beginning of the year) Interestingly, Bloomberg noted that Japanese and Chinese bond yields are now diverging so much in the long end that they might soon cross which so far failed to appreciate JPY which remains handicapped by a large negative interest rate differential with the US.

 

 

Demand for EM local currency bonds remained strong and JPMorgan Asset Management said it was increasing its holdings of Indian local-currency sovereign bonds, viewing them as the best bet among peers in Asia.

Elsewhere in South Africa, yields on local currency government bonds rose ahead of Wednesday’s general election. The vote is shaping up to be the most contested since White-minority rule ended, with polls suggesting the governing African National Congress could lose its outright majority for the first time in 30 years. Still, base case for most investors is that even in that scenario, the ANC will garner enough votes to go into coalition with smaller parties, allowing for policy continuity, Bloomberg reported.

 

Fed minutes concerns quickly vanished after Nvidia produced strong earnings, reviving animal spirits. While the recovery of other equity sectors was uneven, better than expected Nvidia earnings, accompanied by a 10/1 stock split announcement were enough to lick equity markets wounds. How long Nvidia will be able to keep a 75% profit margin remains uncertain but at the moment everybody needs to own that share (or simply owns it via the index) …and the growth of data centers at 400% yoy beat all expectations. The accompanying electricity demand trajectory to serve these call centers also keeps growing faster than expected (not least because a chatgpt search is using 10 times more electricity than a simple google search) and when combined with additional hefty tariff increases targeting Chinese producers of solar panels announced recently, got the whole sector of solar energy (and more broadly of clean energy, nuclear power and electricity producing utilities) in strong break out conditions last week.

 

The concentration of gains remained high last week, especially on Friday and the SP500 widened its relative advance for the year vs. the equally weighed SP500 (which is only +5.7% ytd vs. +12% for the SP500). 

 

 

 

 

Over the past week, the S&P500 was unchanged (11,4% YTD) while the Nasdaq100 gained 1,4% (11,8% YTD). The US small cap index dropped -1,3% (2,4% YTD). AAPL gained 0,1% (-1,3%).

The Equally Weighed SP500 dropped -1,2% (5,2% YTD), underperforming the S&P500 by-1,2%. The median SP500 YTD return closed the week at 4,2%.

Cboe Volatility Index gained 1,7% (-0,7% YTD) to 12,36.

The Eurostoxx50 dropped -0,1% (14,5%), underperforming the S&P500 by-0,1%.

Diversified EM equities (VWO) dropped -1,5% (7,5%), underperforming the S&P500 by -1,5%.

 

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,4% (5,8%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped -0,2% (-0,5%).

 

10Y US Treasuries dropped 5bps (59bps) to 4,47%. 10Y Bunds climbed 2bps (52bps) to 2,55%. 10Y Italian BTPs climbed 2bps (13bps) to 3,83%, matching Bunds.

US High Yield (HY) Average Spread over Treasuries climbed 3bps (-23bps) to 3,00%. US Investment Grade Average OAS climbed 0bps (-10bps) to 0,95%.

In European credit markets, EUR 5Y Senior Financial Spread climbed 1bps (-9bps) to 0,58%.

 

Gold shed -2,9% (14,1%) while Silver dropped -0,1% (33,6%). Major Gold Mines (GDX) sold off by -4,4% (13,7%).

 

Goldman Sachs Commodity Index dropped -0,8% (6,7%). WTI Crude dropped -1,4% (9,8%).

 

 

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