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Up Go Stocks, Down Go Bonds

We knew that yesterday was going to be a good day – at least for the stock markets, given that Nvidia defied the expectations that it would – maybe – fail to deliver $20bn sales in the latest quarter. But the company announced $22bn sales. And because a potential misstep from Nvidia was seen as a major risk of a downside correction in stock markets, equity bulls broke their chains free after the blowout earnings. The star of the past two years, the most important stock on planet Earth, or the AI revolution’s mascot Nvidia ended up jumping 16% in a single session and stole the title of the biggest one day jump from Meta – which had just obtained this title after its latest quarterly report a couple of weeks ago. Nvidia added $277 billion to its market cap just yesterday. Morgan Stanley raised its price target from $750 to $795, and Bank of America raised its target from $800 to $925. Allez, let’s round it up to $1000 and see if Nvidia could hit that $1000 mark!

Euphoria and fun aside, the expectation that the narrow stock rally, mainly shouldered by tech, would broaden up has dissipated like dust in the sky in the aftermath of the first earnings season of the year. Tech, and everything related to tech is doing just fine. And the others surf on that optimism. The S&P500 rallied more than 2% and hit a fresh record yesterday and the rally is accelerating above the October 2022 to now ascending range. Nasdaq 100 soared 3% and traded close to an ATH. The Dow Jones industrial, European Stoxx 600 and Japanese Nikkei 225 traded at an ATH as well.

Investors are still wondering whether the US stocks haven’t become too expensive – because the S&P500’s PE ratio is around 23. In this context, Japanese stocks, which also benefit from the AI boom, extra-low Japanese rates, and super cheap Japanese yen trade with a PE ratio of only 16. That makes the Japanese stocks a good alternative for investors who want to increase their AI exposure and diversify geographically. Nikkei’s two heavy weights: Tokyo Electron – that makes semiconductor manufacturing equipment and Adventest – which builds chip-testing machines are both doing great.

And oh, there is also the idea that the Chinese chipmakers would be a cheap option to the US and Japanese counterparts. Yes, the Chinese chipmakers have no option but to fill in the gap from the US export ban. The Chinese companies will be constrained to buy Made-in-China chips, and the Chinese government will put all its weight to make things work – because they can’t afford to fall behind the biggest technology race of the decade. But investing in China implies taking the Chinese government risk. The question is: is growth potential in China big enough to take that risk? At this point, when the world is rushing to AI, I don’t think that the Chinese demand is necessarily needed. (Answer: not necessarily). And speaking of China – real quick – the latest data showed that new home prices dropped the most in 10 months. China’s property crisis gives no signs of improving. On the contrary.

FX and commodities

The cheery mood in the global stock markets was completely decoupled with the gloomy mood in the sovereign space. The US 2 and 10-year yields rose yesterday because some more Federal Reserve (Fed) members warned about cutting the US rates too early and too much. Yesterday’s stronger-than-expected manufacturing and housing data came as further evidence that the US economy doesn’t necessarily need rate cuts in a rush. But the US dollar appetite was nowhere to be found, the dollar index remains offered into the 100-DMA. The 3-month risk reversals of the USD against EM currencies showed that option traders are the least bullish on the US dollar against EM currencies since 2007. That’s interesting, because the US economic data continues to surprise to the upside. The Fed rate cut expectations are being scaled back, yet the dollar doesn’t gain the attraction that it deserves. That’s a good thing, mind you, to prevent the US inflation from spilling to the rest of the world, but it’s not fully rational.

Anyway, in Europe, inflation data came as no surprise while the PMI data showed that activity hit an 8-month high in February. But cracks are widening with German manufacturing falling to the lowest levels since October. Still, the German 10-year bund yield rose to 2.50% and the EURUSD shortly tested its 50-DMA – near 1.0883 – to the upside yesterday and is trying to clear its 200-DMA sustainably. The retreat in dovish European Central Bank (ECB) expectations support the euro’s rebound against the greenback, as the market pricing now suggests less than 100bp cut from the ECB this year.

In energy, US crude advanced to $79 per barrel yesterday after a lower-than-expected jump in US oil inventories last week, while nat gas futures are having a hard time rebounding after a dip to 1.55. The European nat gas futures continue to push lower as traders are selling nat gas for next winter – a sign of confidence that Europe will continue to receive the Russian gas shipments as we near the second anniversary of Russia’s invasion of Ukraine. Europe is not less shocked faced with a war on its continent but is clearly less capable of putting more restrictions on Russian energy – given the cost-of-living crisis and Germany’s descent into hell. Therefore, buying defense stocks is a better way to navigate through war in Europe than buying nat gas futures.

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