Stocks brush off Nvidia, as French yields remain stable and USD weakens

The S&P 500 made a fresh record high on Wednesday, but the rally is likely to be on pause later today. US futures point to a tepid open later today, and the FTSE 100 has opened up marginally higher. Global stocks have had a strong August so far, led by US indices, and markets are a sea of green so far this month, however that rally looks like it will take a temporary pause, as the market digests disappointing Nvidia results, which caused the stock price to slip nearly 3% in post market trading.

China woes to weigh on US tech sector

Although Nvidia released another monster earnings report, including a 50% + increase in its revenues YoY, and CEO Jensen Huang said that appetite for AI remains insatiable, analysts’ focus was on China. This is where the company could not deliver since it did  not  include a forecast for China sales of the H20 chip. China is a big opportunity for Nvidia, but it is also a source of uncertainty, due to political interference on both sides. Although the Nvidia CEO said that revenues from China could top $50bn in the next year, if there is a delay with selling chips into China, it gives China time to develop their own domestic chips, which is an ever-present existential threat to the Nvidia’s tech dominance.

Asia vs. US tech

Thus, we could see US chip stocks lag vs. Asian chip stocks on Thursday. A slowdown in Nvidia sales growth is an opportunity for Asian stocks, especially for domestic semiconductors in China. Asia is a major source of AI growth, and if Nvidia is hindered by its political battles, then it gives some breathing space for Asian tech giants.

China semiconductor stocks surge

China’s Cambricon, one of the largest listed AI chip designers in Asia, saw its stock price surge 7% on Thursday, as it capitalized on Nvidia’s China issues. It is the best performing stock on the CSI 300 index in the past month, higher by 117%, and it is a top 10 performer in the Chinese stock market so far this year.  Ironically, as China chip stocks surge at the top of the main stock index, Nvidia is not even a top performer so far this year. In the past month, health care, homebuilders and agricultural products are the best performing sectors on the index.

Thus, if Nvidia’s stock price takes a pause, it could give other sectors of the US index time to play catch up. However, tech remains an important part of the US stock market ecosystem, and a 3% drop for Nvidia is small considering the amount of money Nvidia’s top customers are planning to spend on AI this year.

It is worth noting that S&P 500 and the Russel 2000 have both outperformed Nvidia in the past month. The equal weighted S&P 500, which strips out the effect of the big tech companies, has also outperformed Nvidia in recent days and this may continue. For now, we look for the continued outperformance of Asian tech vs. US tech and for non-tech related stocks to outperform in the US. This is also good news for indices like the FTSE 100, which do not have much tech exposure.

Chart 1: Nvidia, the Russell 2000, the S&P 500 and the equal-weighted S&P 500

Source: Bloomberg

French bond yields not flashing red yet even with budget woes

Ahead today, the focus will also be on the bond market. Yields are broadly lower on Thursday, however, the spread between the French and German 10-year bond yield widened to 80bps on Wednesday, its widest level since January, and this widening spread will be a key feature as we lead up to the September 8^th confidence vote in Francois Bayrou’s government. The inability for Bayrou to push through necessary budget cuts is worrying the market and threatens another political crisis in France. When French ministers throw around comments like the country may need an IMF bailout, the bond market usually takes notice. For now, French bond yields are not in dangerous territory, for example, the 30-year yield is trading at 4.4%, nearly 1.2% lower than the UK 30-year yield. Perhaps the bond market thinks IMF involvement in French fiscal matters would be no bad thing, perhaps they would think that about the UK too? Either way, it is a reminder that Rachel Reeves needs to be careful when it comes to the UK Budget later this year.

USD weakens as we lead up to key US data

The US dollar is broadly weaker on Thursday and is the weakest performer in the G10 FX space, as we wait for US GDP and Friday’s core PCE data. The Core PCE data is likely to be the main event as an upside surprise could shift interest rate expectations and impact financial markets. The Fed Fund Futures market is pricing in two rate cuts for this year, and the White House’s interference with the Fed’s board, including the threat of firing Lisa Cook for mortgage fraud, suggests that the bias is to the downside for US interest rates for the foreseeable. This is why we think that any uptick in the dollar could be temporary.