Financial Markets – Page 3 – Digital Finance Analytics (DFA) Blog

AI Feeding Frenzy Creates A Headache But The Stock Market Is Not The Economy!

Sparked by Nvidia’s latest blowout earnings report, stock surge and general excitement about a “tipping point” in generative artificial intelligence, Thursday was the best day in more than a year for Wall St’s main stock indexes. And the S&P 500 and Dow Jones Industrial Average eked out another closing record high on Friday, with all three Wall Street benchmarks scoring weekly gains, with the S&P 500 up 1.7%, the Dow up 1.3% and the Nasdaq 1.4% higher, as AI stocks had enough steam to keep the rally chugging along.

Nvidia advanced again on Friday, rising a further 0.4%, and briefly traded above $2 trillion in market valuation for the first time and by the ways Nvidia’s gains on Thursday, the session after its blowout earnings, the chipmaker added $277 billion in stock market value, which is Wall Street’s largest ever daily gain. Despite a smaller advance on the final trading day of the week, its performance still dominated the market’s attention.

Yet the performance of Nvidia and other Big Tech has pushed Fed worries into the background even though investors have been walking back expectations for Federal Reserve interest rate cuts.

Recent Federal Reserve speakers echoed the content of the FOMC minutes since those were published. Communication has been understandably cautious on the inflation outlook considering the recent higher-than-expected CPI, particularly stressing the risks of cutting too early or too fast. The 29 February PCE release may well come in stronger than expected, and push rate cut expectations further away.

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Winners And Losers: AI Versus PMI

It was a confusing day on the markets on Thursday as AI related Stocks drove higher on Nvida results, while weak purchasing managers index (PMI) readings from Australia and Japan, together with FED signals for higher rates for longer saw Asian traders favour the dollar, as business activity in both countries slowed through February.

NVIDIA Corporation rose as much as 10% in U.S. aftermarket trade after clocking stronger-than-expected fourth quarter earnings, while its revenue guidance for the current quarter was also above street estimates.

Gains in tech also saw the Nikkei reach an intraday record high, crossing levels last seen in 1989 before the unwinding of a massive speculative bubble through the 1990’s and 2000’s.

However, elsewhere most Asian currencies retreated on Thursday, while the dollar stemmed recent losses as a slew of signals from the Federal Reserve showed that the central bank was likely to keep interest rates high in the near-term.

The Australian dollar was flat as preliminary PMI data for February showed sustained weakness in business activity. The Judo Bank Flash Australia Composite PMI® Output Index* posted 51.8 in February, up from 49.0 in January. The latest reading signalled that private sector activity returned to growth for the first time in five months and at the fastest rate since April 2023. However, while Australia’s private sector activity improved midway into the first quarter, growth was driven solely by the service sector where service providers reported increased enquires from a widening of customer bases, supporting an expansion in output and employment.

However, in contrast, manufacturing new orders fell again, sending production down at the fastest rate since the worst of the COVID-19 pandemic in 2020. Manufacturers continued to see high interest rates and soft conditions dampening demand.

And combined with recent stronger-than-expected wage price index data, driven by a raft of negotiated settlements across both the private and public sectors, which were released on Wednesday, drove traders to pricing in a greater chance that the Reserve Bank of Australia will keep interest rates higher for longer.

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Another White-Knuckle Ride On The Markets!

This is our weekly market update covering the US, Europe, Asia and Australia plus gold, oil and bitcoin.

This was another volatile week on the markets, as traders played the volatility card and as U.S. stocks fell on Friday with the Nasdaq showing the largest decline after a hotter-than-expected producer prices report eroded hopes for imminent interest rate cuts by the Federal Reserve. Higher for longer.

Earlier this week, a hot consumer prices report sparked a selloff in equity markets as Tuesday’s latest US Consumer Price Index inflation report for January showed both headline and core prices in both monthly and annual terms climbed faster than economists’ forecasts. The former rose 3.1% year-over-year last month, hotter than the +2.9% expected. That makes it harder for the Fed to cut rates. Then later a slump in January retail sales on Thursday stoked hopes of rate cuts.

Fridays producer price index for final demand rose 0.3% last month after declining by a revised 0.1% in December, the Labor Department’s Bureau of Labor Statistics said.

Higher for longer was reinforced by Atlanta Fed President Raphael Bostic who said he needed more evidence inflation pressures are easing, but is open to lowering rates at some point in the next few months and San Francisco Fed President Mary Daly said “there is more work to do” to ensure stable prices, despite remarkable progress.

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Are Stocks At A Precarious Pinnacle?

This is our weekly market update, starting with the US, Europe, Asia and Australia, as well as Oil and Crypto.

The S&P 500 soared to fresh highs on Friday, but fewer stocks have been participating in the rally, stirring worries that recent gains could reverse if the market’s leaders stumble.

We are talking market breadth, or the number of stocks taking part in a broader index’s rise. A high breadth is often viewed as a healthy sign by investors as it shows gains are less dependent on a small cluster of names.

The reverse, a narrowing, on the other hand is a warning. And in fact, the Magnificent Seven have accounted for nearly 60% of the S&P 500’s gain this year, according to Dow Jones Indices.

The problem is the narrow group of stocks powering the market could make it more vulnerable to swift declines if an earnings disappointment or other issue hits its biggest stocks. While most of the megacaps have powered higher this year, shares of Tesla have fallen 22%, the third-worst performer in the S&P 500, demonstrating how quickly the market’s superstars can fall out of favor.

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DFA Live Q&A HD Replay: Investing Now With Damien Klassen

This is an edited version of a live discussion with Damien Klassen, Head of Investments at Walk The World Funds and Nucleus Wealth. Markets are rising, thanks mainly to AI related stocks, while expectations of rate cuts are being pushed out. More broadly, are returns able to justify current valuations, and which sectors are the most interesting ahead.

Original stream with chat here: https://youtube.com/live/lqYE35qTatw

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Markets Play Chicken With All Time Highs, As Risks Rise!

This is my regular weekly market update.

Investors hate surprises and we got many this week – to the point where I begin to wonder whether markets are fundamentally broken as they were driven higher by good results from some of the magnificent seven, despite the shock revelation of mounting losses from commercial property by little-known banks in New York and Tokyo. And then the US jobs number came in so hot, as to lift bond yields while Central Bankers this week played a cautious hand, suggesting that they need to see more evidence before they start cutting rates, against market expectations.

Let’s start with commercial property. The problems particularly the office sector are well known: a combination of remote work and ageing buildings has pushed up vacancy rates and pushed down valuations; office property values in the US fell more than 20 per cent last year.

That’s a problem for landlords that must refinance loans against commercial property; about $US2.2 trillion of loans from the US and European commercial real estate sectors will come due between now and 2025.

US property billionaire Barry Sternlicht told a conference this week the US office property sector was worth $US3 trillion, and now it’s worth $US1.8 trillion. “There’s $1.2 trillion of losses spread somewhere, and nobody knows exactly where it all is.” At least some is in America’s regional banks, where commercial property loans account for about 30 per cent of all loans, compared with 6.5 per cent at large US banks.

Regional US lender New York Community Bancorp and Japan’s Aozora revealed problems with commercial property loans and dropped their share prices significantly underscored a critical question: is this the start of something bigger? Morgan Stanley strategist Mike Wilson says that even if banks holding this debt can cope with the losses, it crimps their ability to lend to other businesses.

But if there’s one broader lesson from the sudden re-emergence of commercial property fears, then it’s this: we still haven’t cleared out the excesses that built up in the era of very low interest rates, and were compounded during the pandemic period of extreme froth.

The world is now so indebted, and so financialised, that these cycles aren’t allowed to occur. With “households and corporates becoming hooked on leverage”, we can’t let bubbles pop because they’re “the essence of our economies”.

This is why investors are cheering the prospect of rate cuts with such gusto. And it’s why the fear of higher-for-longer interest rates – which the Federal Reserve reminded the world of on Thursday by killing off hopes of a March cut – is still real.

“The market has been horribly wrong about the near-term trajectory of Fed policy and this is another instance where that’s the case,” said Kevin Gordon, senior investment strategist at Charles Schwab in New York.

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Record Broken After A 25% Round Trip!

This is our latest weekly market update.

Well, in another volatile week, the S&P 500 posted a record high close on Friday of 4839.81 for the first time in two years erasing the last of a nearly 25 per cent between its record high close of 4,796.56 on Jan. 3, 2022 and its low in October 2022.

The S&P 500 has been in a bull market since it closed at its low on Oct. 12, 2022, fueled by a rally in chipmakers and other heavyweight technology stocks on optimism around artificial intelligence.

The Dow Jones Industrial Average, which also hit a record closing high on Friday, had already confirmed on Dec 13, 2023 that it had been in a bull market since Sept. 30, 2022.

Meanwhile, while the Nasdaq composite recovered 43% in 2023, it would need to rise another 4.8% to return to its record high close of 16,057.4437, reached on Nov. 19, 2021.

On Friday, the S&P 500 jumped 1.23% The Nasdaq jumped 1.70%, while Dow Jones Industrial Average rose 1.05%.

But the questions of Central Bank rate cuts, QT, and whether stocks are still over valued hangs over the market like a bad smell. Volatility will remain the main game for some time to come.

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Operation “Uncertainty Protect” As Bets Rises…

This is our regular weekly market update.

Things got interesting this week on the markets, as U.S. stocks closed barely changed on Friday, after wavering between modest gains and losses driven by mixed bank earnings offset cooler-than-expected inflation news that buoyed hopes for interest-rate cuts from the Federal Reserve.

After briefly topping 4800 points in early trading, the S&P 500 fluctuated, slipping modestly negative in the final hour before edging higher at the close. And note that US markets will be closed on Monday for Martin Luther King Day.

Expectations for a rate cut of at least 25 basis points by the Fed in March moved up to 79.5%, according to CME’s FedWatch Tool, from 73.2% in the prior session. Friday’s data also sent Treasury yields lower, although recent comments by some central bank officials have pushed back on any potential rate cuts.

On Friday, data showed U.S. producer prices unexpectedly fell in December as the cost of goods such as food and diesel fuel declined, while prices for services were unchanged for a third consecutive month, in contrast to Thursday’s hotter-than-expected consumer inflation reading. The headline inflation rose more than expected to 3.4% from 3.1% printed a month earlier.

But all in all, yesterday’s inflation report was less than ideal, and the market reaction was mixed. The US 2-year and 10-year first rose then fell, whereas you would expect a swift shift in dovish Fed expectations following a bigger-than-expected jump in US headline inflation. The 2-year was last at 4.146 and the 10-year 3.944.

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January 2024 Economic Update

This is my edit of our monthly economic update recorded with Nuggets News, which includes some observations about where things may go in 2024.

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