The FTSE 100 has risen nearly 1.5 per cent this morning with positivity spreading across Europe, with the Cac and Dax also posting positive numbers. The Dow also rallied on Friday, led by the banks, but there was some weakness among tech shares.
Ahead of a key week of earnings for the Magnificent 7, 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 dropping 10 per cent in one session does not scream normal. 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 per cent. 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 Friday down 2 per cent and notched its worst week since 2022. Tech weakness has pushed the S&P 500 back below 5,000 with bears in charge.
Alongside this, gold, oil and the US dollar eased back as investors decided there was not enough going on in the Middle East to warrant 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.
Elsewhere, divergence is seen but the question is about the rate of change in expectations. Banque de France governor François Villeroy de Galhau said the Europen Central Bank should cut interest rates at its next meeting on 6 June. Christine Lagarde speaks later today – the message is already loud enough and clear enough: June it is. The Federal Reserve’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.
The 10-year Treasury yield is just a few basis points below its five-month peak of 4.696 per cent. I guess the question is whether the move to price in ‘higher-for-longer' is now done. US core Personal Consumption Expenditure measure of inflation will be key in determining just how persistent of a hurdle inflation is for the Fed as it considers how many rate cuts it will enact in 2024. Last week Fed chair Jerome Powell said that 12-month core PCE was likely to be little changed at 2.8 per cent. 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 2 May.
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The Trader is written by Neil Wilson, chief market analyst at Finalto
