Buy the rumour, sell the fact as US shutdown nears its end

The main news that bis dominating financial markets on Tuesday is that the US shutdown could come to an end as soon as tomorrow, when the Senate funding bill reaches the House of Representatives. However, after Monday’s euphoric reaction to news that the US Senate had passed a bill that would provide a stop gap funding measure for some agencies through to January 30^th and others to Septemner next year, the rally has faded on Tuesday.  

European equities are still in the green, but they have given back some of their earlier gains, likewise, US equity market futures are mostly flat to lower.

Lack of momentum halts long term trends

There has been a lack of momentum in stock markets in the past week, and momentum stocks, mostly big tech stocks, have acted as a drag on the main US indices, even if they did pop higher on Monday. Without momentum helping US indices move higher, volatility could take hold, so we are not expecting stocks to move in a straight line for now, and the market correction may not be over.

After the shutdown, what’s next?   

The US government funding bill will now be passed to the House of Representatives, who will review it and vote on it on Wednesday. If this passes, then President Trump needs to sign the bill to get it into law. Thus, if all goes smoothly, the shutdown could be over by the end of the week.

Once the shutdown is over, the focus could shift to the torrent of economic data that is set to be released. Hopes are high that the delayed labour market and CPI data will support further Fed rate cuts, but even this may not be enough to sustain the market rally. For example, stocks remain directionless even though the ADP private sector weekly payrolls report, showed that 11,250 jobs were lost each week in the private sector for the 4-weeks ending 25/10. This suggests that the private sector struggled to create jobs in the second half of last month. This has caused a sell off in the dollar, and an increase in Fed rate cut expectations for next month to 67% from 62% on Monday.   

AI trade falters once again

The AI trade is once again causing jitters in financial markets, after another big investor raised concerns about an AI bubble. Last week it was Scion Capital’s Michael Burry, who said that he was selling key AI names including Nvidia. On Tuesday, Softbank announced that it was selling its entire Nvidia stake for a decent $5.83bn. Softbank did not elaborate on the sale of the stake, however, the CFO said that he could not tell if AI was in a bubble or not, when your stake is worth more than $5bn, its probably better not to take too many risks. For the wider investment community, when big investors cash out of their AI positions, they will take notice, and this is why the stock is declining today.

Nvidia earnings could revitalize AI trade

Nvidia will report earnings next week, and analysts are expecting another monster report. The company is expected to report revenues of $54.8bn, with net income expected at $30.68bn. Although Nvidia does not typically provide long term forward guidance, the AI hyperscalers have pledged another $400bn of capex for next year to fund their AI buildout, which is 20% higher than 2025. Thus, we can assume that a large chunk of this money will flow to Nvidia.

When will the AI trade unravel?

The problem for Nvidia and the wider AI trade is not what happens today, or even next year, the trade won’t start to unravel until 1, the hyperscalers scale back their capex spending on AI, or 2, if AI uptake does not happen at a fast enough pace, which threatens corporate profits for big tech. For now, we may not be at the peak of the AI trade, but in the coming months, any signs that capex spending could slow down,  would be a serious blow to Nvidia’s share price.

UK rate cut bets continue to ramp up

Elsewhere, UK bond yields continue to decline sharply on Tuesday, after weak labour market data. The rise in the unemployment rate to 5% has sent bond yields tumbling. The 10-year yield is extending declines and is lower by nearly 8 bps, the 2-year yield is also lower by 8 bps. This comes as the Bank of England is set to cut interest rates next month. The interest rate futures market has priced in an 86% chance of a cut from the BOE next month. This could be a much-needed antidote to the Budget, which is set to include hefty income tax increases when it is announced in 2 weeks.

The decline in yields and rise in rate cut expectations has weighed on the pound, which remains the second weakest currency in the G10 FX space, even though it has clawed back some earlier losses as the dollar comes under pressure after the weak ADP jobs data.