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European markets sink, while Nvidia gives a lift to US markets

Nvidia

Europe

We’ve seen another day of losses for European markets today as the hangover from yesterday’s sell-off continues to trickle down, as US debt ceiling negotiations move into next week, while a surprise contraction in German Q1 GDP tipped Europe’s biggest economy into recession.

While the losses in the DAX and CAC 40 have been modest, with tech helping to offer some support, the FTSE100 has remained even more unloved, haemorrhaging further losses to fresh 2-month lows.

This came about after comments from Russian Deputy PM Novak pushed back on the idea that OPEC+ would announce a further cut in production when they next meet in June, sending oil prices sharply lower in the afternoon session.

When combined with further declines in natural gas prices in the UK and Europe to their lowest levels since June 2021, this has translated into weakness in BP and Shell which has served to pull the UK index below the 7,600 level for the first time since March 30th.

Utilities are in focus today as Warrington based United Utilities announced its full year numbers for 2023.

With water and sewage leaks very much front of mind in recent weeks, the focus on water companies has never been more intense. United Utilities, the owners of North West Water, which covers the Lake District, announced their latest full year numbers today, with the shares edging higher on the day. Full year revenues declined 2.1% to $1.82bn, while profits before tax fell 41.7% to £256.3m. Last month the company pledged to invest £914m to help reduce storm overflow spills and protecting water quality in the region.

US

Both the S&P500 and Nasdaq 100 opened sharply higher, with the Dow lagging, even as weekly jobless claims came in at 225k, and US Q1 GDP was revised up to 1.3%, while quarterly core PCE rose to 5%, which in turn has seen US 2-year yields rise to their highest levels since March at 4.5%, on an expectation that the Fed will hike again in June.

As far as the debt ceiling negotiations are concerned optimism is rising that a deal may be close after House speaker Kevin McCarthy said not everyone would like the eventual solution, as expectations grows that a deal is getting closer.

Fitch Ratings also weighed in, putting the US on negative watch on their AAA rating, on the back of the recent uncertainty, however since the financial crisis back in 2008 these sorts of warnings haven’t had the impact that they used to.

Nvidia shares provided most of the early lift for US stocks after surging to record highs after the chipmaker surpassed expectations on Q1 revenues, coming in at $7.2bn, and raised its revenue guidance for Q2 to a record breaking $11bn.

This is a huge increase on its Q2 numbers of previous years, or any other quarter, with the improvement being driven by expectations of a big increase in sales of data centre chips, along with investments in Artificial Intelligence. On data centre chips alone during Q1, the company generated $4.28bn alone, followed by gaming which generated $2.24bn. Today’s +20% move in the Nvidia share price has in turn helped drive year to date gains for the chipmaker to over 150%.

Last night’s results and guidance upgrade has served to lift the rest of the chip sector with gains for AMD and TSMC, while Microsoft is also seeing some decent gains.

Best Buy shares are having a positive day after the retailer posted Q1 earnings of $1.15c a share, modestly beating forecasts even as revenues fell slightly short at $9.47bn. Despite the revenue miss the retailer reiterated its Q2 and full year forecast.

Snowflakeshares have dropped sharply after the company downgraded its Q2 and full year estimates on revenues, even as Q1 revenues came in above forecasts at $623.6m, although losses were higher at $0.70c a share. Q2 revenues forecasts came in below estimates of $646.3m at $620m-$625m, while full year estimates were also nudged down to $2.6bn, down from $2.71bn.

FX

It’s been another day of US dollar strength and very briefly fresh two-month highs with further gains against the Japanese yen, before a slight retreat in the afternoon session.

The pound has struggled to make any sort of gains after the weakness of yesterday, slipping back towards its April lows, despite a continued rise in UK 2-year gilt yields, which have pushed back towards the peaks in October.

So far this month 2-year gilt yields have risen by 65bps, as government debt markets price in the prospect of further interest rate rises, and more persistent inflation. This appears to be prompting increased recession or stagflation concerns, putting downward pressure on sterling. The ECB is set to face a similar dilemma as it also looks to tackle persistently high inflation after today’s Q1 Germany GDP data saw a downward revision of -0.3%, meaning that the German economy is in recession having seen a -0.4% decline in Q4 of last year.

The New Zealand dollar has continued to come under pressure, sliding to its lowest levels this year, after this week’s unexpected dovish pivot on the part of the RBNZ, as the central bank indicated that they were done for the time being, when it comes to further hikes.  

We’ve also seen weakness in the commodity space, with a slide in the Australian and Canadian dollar as well as the Norwegian Krone

Commodities

After 3 days of gains crude oil prices have slipped back sharply in the afternoon session after Russian Deputy PM Alexander Novak said that OPEC+ was unlikely to make any new output cuts at its next meeting in early June. A stronger US dollar isn’t helping after the latest US economic data reinforced expectations of another Fed rate hike either in June or July.

The stronger US dollar, as well as higher yields, is also weighing on gold prices pushing the yellow metal to 2-month lows below $1,950, and the prospect of further losses, and a possible move towards $1,900.

Volatility

Pfizer makes it onto the list again, acting as something of a standout in terms of stock specific price action, especially for a company with such a weighty market cap. Some of those drug trial inspired gains from Monday and Tuesday were given back, although shares remain around 5% up on the week. One day vol came in at 62.84% against 36.18% for the month.

CMC’s proprietary basket of luxury goods manufacturers posted another down day on Wednesday as the market continued to absorb those analyst comments from earlier in the week when it came to demand outlooks from the US. The underlying dropped a further 1.5%, returning the basket to two-month lows. One day vol on the basket stood at 24.24% against 18.01% on the month.

Investors took a glass half full approach when it came to the Fed’s mixed opinions on monetary policy tightening last night. Most notably, the tech heavy and rate sensitive Nasdaq was the most active with heavy buying being seen into the close. One day vol stood at 21.58% against 15.48% for the month.

And it was the Kiwi Dollar that proved to be the most active fiat currency by some considerable degree on Wednesday in the wake of the RBNZ rate call and accompanying signal that sufficient has now been done in terms of policy tightening. One day vol against the greenback printed 20.93% against 10.21% for the month.

 


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