The S&P 500 closed above 7,500 for the first time this week. What is being referred to as a “wall of worry” continues to be climbed by market participants. Despite the obvious macro headwinds, all time highs continue to hit week after week. Having said that, we have now seen what could well be interpreted as signs of exhaustion in the last couple of trading sessions: The components of the rally are increasingly concentrated, options expiries are out of the way, and the “S&P up + VIX up” signal has flashed green. Is the overnight pullback another blip to zoom out and ignore, or the start of a more meaningful correction? Personally I lean more towards the latter heading into today’s US trading session, looking for a sell the news type reaction. Either way though, it’s a good time to be a short-term trader, with price action aplenty across asset classes.
The headlines from the two day summit in China have been overwhelmingly positive. Strengthened communications, consensus reached, stabilised trade relations, interference eliminated. The one apparent moment that leaned towards negativity came from President Xi in touching on the danger inherent in the Taiwan situation and how that could jeopardise the China-US relationship “if handled poorly”. But while we have been able to pore over the luncheon menus from the various events, details of the trade deals reached have been thin in coming and much harder to deduce. As such, traders have thus far interpreted the upshots of the gathering as more status quo than meaningful progress.
No company has ever been worth $6 trillion, but Nvidia is now drawing awfully close. Its stock is up more than 20% in the last seven trading sessions, leading the broader tech and in particular AI-driven rally. CEO Jensen Huang hastily threw a favourite leather jacket or two into his suitcase, after he was called up as a last minute addition to the US dream team on their mission to China. Nvidia’s advanced H200 chips were in focus. Huang has been pushing for the permission required from Washington to export the chips to China, but there are worries that they would provide a concerningly strong boost to Chinese military forces. His inclusion in the cohort, after originally not being included on the guest list, was seen as a strong positive by the market. Its rise on Thursday alone added an incredible $900 billion to Nvidia’s market cap.
Austan Goolsbee, president and CEO of the Federal Reserve Bank of Chicago, summarised the situation without jargon: “we got an inflation problem in this country, and we’ve got to get it back down”. The CPI release this week saw prices rising 3.8% year-on-year, “way, way above” the 2% target inflation rate set by the Fed. Unsurprisingly energy was singled out as the main driver, the NACHO effects mentioned in this column last week now showing up in the hard reverse-looking data. However the impacts of last year’s tariff wars have also persisted for longer than officials hoped and expected. And on top of that, components not directly influenced by either energy or tariffs, eg the service sector, are rising as well. The US dollar index is pushing higher late in the week on the back of a more hawkish repricing of expectations.
The longer the Strait remains closed, blockaded or has traffic limited one way or another, the higher the risk becomes of a serious wave of food inflation, as touched on above. While energy prices have remained elevated, they haven’t risen anywhere near the levels that many feared they would given how long the Iranian conflict has continued, albeit in a ceasefire of sorts for much of it. Why isn’t oil at $200? But costs are undoubtedly high enough for farmers and producers to be feeling the pain. And if that pain persists, naturally more and more of it will be passed on to consumers. Fertilisers are an example of an input significantly affected by the ongoing standoff. If fertiliser prices remain elevated for longer, how long until we see a jump in the price of the associated agricultural commodities as well? Or again, is this still just a blip rather than a trend? Soft commodity markets are to be watched.
From China we get retail sales figures and the PBoC interest rate decision. CPI readings from Japan, Canada and the UK will be telling. The Japanese figure will be particularly closely watched, following a strong upward revision to its forecast at the last BoJ meeting while nonetheless keeping rates on hold. Australian unemployment numbers will be released on Thursday, a measure likewise in focus in relation to potential further tightening by the RBA.
In earnings, Baidu reports pre-market on Monday, Walmart pre-market on Thursday. The big one comes after the main US market session on Wednesday, Nvidia. After the cash session, but not too late for Fintrix clients to trade the related price action in the after-market. Take advantage of our extended hours on US equities.
