Market goes back to tech trade as volatility declines

When the market lacks conviction about certain events: outcomes of political elections and the future direction of monetary policy, it tends to go back to the ‘comfort blanket’ trade. For markets in 2024, that is semiconductors and the big tech trade. Nvidia was higher by more than 4% on Monday, Tesla was higher by more than 5% before it releases earnings this evening. The semiconductor equipment sector on the S&P 500 was the best performing at the start of the week, rising more than 6%.

European stocks had a mixed open on Tuesday. The FTSE 100 is lower, largely because of its lack of tech, which is the star sector so far this week.  Interestingly, while there were some notable US value companies who underperformed on Monday, including airlines and oil and gas companies, the Russell 2000, the US mid-cap index rallied alongside the US blue chip indices. Unsurprisingly, this index was also led by small cap tech stocks, the tech sector on the Russell 2000 rallied by more than 2% on Monday.

Politics put to bed for now

The political race has become much closer due to the resignation of Joe Biden. However, both candidates are known quantities, so whoever wins the race for the White House, the market, in some ways, knows what to expect. For example, Kamala Harris may continue the policies of Joe Biden, and everyone expects President Trump to cut taxes and to implement trade barriers. This could be beneficial if it means more semiconductors are made on American shores, but it could be negative if it stops other goods being sold abroad. Thus, politics could be less of a driver for markets for the rest of the summer now that the Democrats are back in the race.

AI’s crucial test: Google earnings preview

The main concern is AI. Will this earnings season show that AI is generating profits and boosting corporate bottom lines, instead of being a constant drag on investment spend? Alphabet’s results later tonight are worth watching closely. The company is expected to report EPS of $1.90, which is a 32% gain on a year ago. Revenues are expected to be $74.77bn for the quarter, and operating profit is expected to come in at $26.37bn. The market is expecting strong YoY growth for Alphabet’s latest earnings report, however the focus for investors will be on whether AI is paying off for the search giant. There are three things to watch for in Google’s earnings report: 1, Advertising sales, they could grow by 11% YoY, higher than forecast, due to increased time spent on the site amid new AI features. 2, How is Vertex AI offering helping its cloud business? And 3, subscription growth for its Gemini AI tool. Its forecast for the future is also worth watching. Alphabet is the first of the Magnificent 7 AI investors to report earnings, so they are a bellwether.

The big summer sell off in commodity prices

Alphabet’s share price rallied ahead of its earnings report and was up more than 2% at the start of this week. Elsewhere, ahead of US inflation data later this week, the focus could be on the commodity price sell off this month. Since the start of July, Brent crude is lower by 4%, Nat gas is down by more than 13%, copper is lower by 4% and iron ore is down more than 6%. The drop in the oil price is worth watching. Brent crude is now back to the level it was before the last Opec + meeting. Could Opec be forced to enact more production cuts and reverse some production normalization to boost the price of oil in the second half of this year? It is worth watching closely. Or is this a fundamental reminder that the global economy is slowing down?

There have been fewer declines in the agricultural sector, however, the sharp declines in commodity prices at the start of Q3 could add to pressure on central bankers to cut interest rates. While the market expects a rate cut from the Federal Reserve in September, the market is pricing out the prospect of a rate cut in the UK, there is now only a 40% chance of a rate cut from the BOE next week.

FX view

The yield differential has been a key support for the pound this year and it remains the best performing currency in the G10 FX space so far in 2024. However, July has also seen a massive unwinding of the carry trade, in particular USD/JPY, which has declined 2.8% so far this month. This is a theme that may get a further boost this week, especially if US inflation for June comes in on the softer side and weighs on the greenback.