Last week, the Dow swept through the downturn since June, and the stock price fluctuations of artificial intelligence giant Nvidia after topping the market value list not only dragged down the technology sector, but also triggered external evaluations of the industry's prospects and valuation rationality. Some funds also showed a willingness to profit.
In the coming week, with the release of Micron Technology's financial report and personal consumption expenditure (PCE) data, market volatility risk cannot be ignored.
The suspense of interest rate cuts in September still lingers
The major economic data released by the United States last week was mixed. As an important indicator of consumer spending, retail sales in the United States only increased by 0.1% in May, and the April data was revised down to negative, indicating that the American people are feeling the impact of sustained inflation and high interest rates, forcing households to prioritize essential goods and reduce discretionary spending.
As an important forward-looking indicator, the leading economic index of the Chamber of Commerce in May fell to 101.2, marking the third consecutive month of decline, mainly driven by a decrease in new orders, weak consumer expectations for future business conditions, and a decline in building permits. Due to tight supply pushing up housing prices and high mortgage interest rates, the real estate market data has been under continuous pressure since the beginning of this month.
However, a significant rebound in the S&P Global Purchasing Managers Index (PMI) in June may suggest a rebound in business activity at the end of the second quarter. This month, the comprehensive PMI rose to a 26 month high, while companies reported that price pressures have eased, reigniting hopes of achieving a soft landing for the economy.
Bob Schwartz, senior economist at the Oxford Institute of Economics, said in an interview with First Financial reporters that the overall US economy remains resilient, and the direction of retail sales changes is expected to gradually slow down actual consumer spending in the second quarter. In contrast, service industry spending remains in a good growth trend.
The yield of medium - and long-term US Treasury bonds fluctuates narrowly, with 2-year US bonds and benchmark 10-year US bonds closely related to interest rate expectations rising by nearly 5 basis points in the past week. Federal funds rate futures show that the probability of the Federal Reserve cutting interest rates in September is hovering around 60%, and the market is still watching the prospect of two rate cuts within the year. Last week, Imperial Bank of Canada (CIBC) and Capital Economics released reports predicting that the Federal Reserve may begin an easing cycle in September.
Federal Reserve officials also frequently emphasized their policy stance based on data dependence in last week's speech. Federal Reserve Director Kugler stated that the Federal Open Market Committee (FOMC) may cut interest rates later in 2024, but further evidence is needed to prove that the improvement in inflation is still ongoing. Richmond Fed Chairman Barkin stated that he is open to policy decisions based on new data.
Schwartz told First Financial that the anti inflation trend seems to have returned to track, and the upcoming May PCE data will be crucial. He believes that if the indicators continue the previous performance of the Consumer Price Index (CPI), coupled with the support of several price reports before the September meeting, the rate cut will be a highly probable event. However, Schwartz emphasized that the direction of the labor market will become a key influencing factor.
Funds leaving the market to focus on volatility risk
Last week, the style of the US stock market changed, with the Dow Jones Industrial Average, represented by cyclical sectors, achieving its largest weekly increase in nearly two months, while technology stocks behind the artificial intelligence boom showed a trend of rising and falling.
Since May, the new round of market trends has been mainly driven by Nvidia and related technology heavyweights. The latest fund manager survey by Bank of America shows that trading long on technology stocks has remained the most crowded for the 15th consecutive month.
However, after Nvidia topped the global market capitalization list, the company's stock price evaporated by over 200 billion US dollars in two days. The stock price volatility was exacerbated by factors such as Nvidia CEO Huang Renxun and other executives reducing their holdings, external doubts about the reasonableness of valuation, and option expiration and delivery, which led to selling pressure on related sectors.
John Hancock Investment Management Co Chief Investment Strategist Emily Roland said, "Technology stocks continue to be the focus. I don't remember any stock that has such influence in the market, and this (NVIDIA) is really the key driving force that determines the direction of the market." He believes that although it is still unclear whether the rebound driven by artificial intelligence has reached its limit. Even NVIDIA, which is large enough to influence the market, there are signs that its upward momentum may be slowing down.
The flow of funds indicates that the uncertainty of the Federal Reserve's policies has led investors to choose safe haven. According to data provided by the London Stock Exchange (LSEG) to First Financial reporters, after selling $21.54 billion the previous week, US stock funds experienced a reduction of $8.37 billion last week, with a net outflow of $4.88 billion from large cap funds. At the same time, the net sales of money market funds reached $21 billion, indicating a cooling of risk appetite.
Jiaxin Wealth Management wrote in its market outlook that the deterioration of technical indicators in technology stocks suggests that the recent gains need some consolidation. Behind Nvidia's adjustment, the relative strength indicator RSI reached a severely overbought range, followed by a huge 7% intraday shock in the stock price. Of course, it is still too early to determine whether the technological uptrend has ended, but some factors may become catalysts, such as investor confidence wavering and funds seeking to buy higher choosing to stop losses.
Jiaxin Wealth Management believes that the focus of the next week will be whether the adjustment of technology stocks is over, and if it continues to weaken, whether there will be a rotation of funds towards other underperforming sectors in the market. There are recent signals of capital intervention in the energy and financial sectors. The report states that the performance of Micron Technology is expected to determine whether the artificial intelligence boom can return, and the performance of the inflation indicator PCE will also affect market risk appetite, with volatility remaining a potential source of pressure.