Chips on the Shoulder for Wall St as FTSE 100 Index Back up Over 8,000

Ahead of a key week of earnings for the Magnificent Seven — Nvidia, Meta, Amazon, Microsoft, Alphabet, Apple and Tesla — there was a big move out of tech stocks on Friday – the generals are being killed first this time? The question is whether this is more than just healthy rotation...Nvidia 10% in one session does not scream normal.

The FTSE 100 index is back up over 1% this morning to 8,000 though, so this is not just a blanket risk-off. The Dow Jones index also rallied on Friday despite the tech weakness, led by financials.

UK stocks are in the green so far this year, with the FTSE 100 index up close to 7% over the past three months and 3.54% year-to-date (YTD),

Indeed, gold, oil and the US dollar eased back as investors decided there was not enough going on in the Middle East to warrant an extra premium. Oil prices retreated to their lowest since late March, before the strike on the Iranian embassy in Damascus. Gold pulled back to a one-week low, and the dollar has eased off its multi-month highs struck last week.

AI Bubble Straining?

It looked more like a big unwind in the chip stock boom, apparently on Super Micro Computer’s decision not to provide preliminary results. Shares in the company, which builds Nvidia-based servers, dropped –23%. It was less about the macro and rising rates and more about the bubble pricking in tech stocks, which had risen to their most extreme valuations in a long time.

This can be healthy for the market if it leads to a broadening and rotation. The Nasdaq ended the day down 2% and notched its worst week since 2022.

Tech Weakness

Lots of reporting in the Magnificent Seven this week and there has been a bit of payback in recent days – Tesla stock is -40% YTD is very different to Meta’s +35% YTD. We need a new acronym!

Tech weakness has pushed the S&P 500 index back below 5,000 with bears in charge after snapping the 50-day SMA. In retrospect, the RSI divergence that kicked in at the start of the year was always a tell that it would break — the question is really whether you want to wait for the pullback or pick the index funds and forget about it.

Central Banks in Focus

Elsewhere, divergence is seen but the question is now the rate of change in the change in expectations. Banque de France governor François Villeroy de Galhau said the ECB should cut interest rates at its next meeting on June 6.

Christine Lagarde speaks later today – the message is already loud enough and clear enough: June it is. The Fed’s semi-annual Financial Stability Report cited persistent inflation and higher for longer interest rates as key risks, along with geopolitical troubles and the 2024 US presidential election.

Keep eyes on the Bank of Japan this week too with the yen at near 155. Have heard chatter about a ‘shock-and-awe’ hike. The problem I have with that is that a) it would be out of character and b) it would be discounted by the market pretty swiftly – better to keep the powder dry methinks.

Interest Rate Decisions Hanging on Inflation

The 10-year Treasury yield is just a few basis points below the five-month peak of 4.696% hit last week at 4.642%. I guess the question is whether the move to price in “higher-for-longer" is now done for now or there is room for more.

The US core PCE index — the Fed’s preferred measure of inflation — will be key in determining just how persistent of a hurdle inflation is for the Fed as it considers how many rates cuts it will enact in 2024. Last week, Fed Chair Jay Powell said that 12-month core PCE was likely to be little changed at 2.8%. US GDP data is expected to show growth slowing in the first quarter, which could nudge bond yields lower a bit. It’s the blackout period for FOMC policymakers ahead of the meeting on May 2.

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