Stocks slip and Gold rises, as nerves set in for investors

Markets are jittery as we lead up to some key event risk in the coming days, including a raft of tech earnings data, the August 1^st deadline when higher tariffs will kick in for the EU, Canada and Mexico, an NFP labour market report and a Federal Reserve meeting.

Tech drags down US index

US stocks opened lower on Tuesday, and the S&P 500 is trading with a defensive flavour. For example, the healthcare and materials sectors are rising, while the biggest drag on the index is tech. Semiconductors are the weakest sub sector today, and Nvidia is lower by more than 2% so far. Nvidia and Meta are the weakest performers in the Magnificent 7 on Tuesday, as investors wait for Alphabet and Tesla earnings. Alphabet earnings will be a key litmus test for the monetization of AI investments. Although Google is expected to report strong earnings driven by its AI technology, nerves are setting in as we lead up to their results on Wednesday.   

The market is priced for strong tech earnings, for example, Nvidia and Meta have both seen their share prices rise by 20% YTD. This is also a reflection of high expectations that the AI theme will continue to run. Hence, the proof will be in the pudding for AI during this earnings season. Thus, it is to be expected that stocks may wobble as we lead up to key earnings releases.

Are investors too complacent?

There is also some concern around the low level of the Vix, even with plentiful event risk on the horizon. The Vix is now well below the average level of the last 12 months and is currently trading around 16.8. This is one of the lowest levels since February, which preceded the selloff in US stocks. When volatility drops to low levels, the market tends to get nervous, as the Vix doesn’t usually stay at very depressed levels for long.

Bond market benefits as stocks sell off

The suppressed level of volatility is also evident in the bond market. Global bond yields are falling, which is a sign of risk aversion. Bond yields are lower for a second day, and even UK yields are falling at a faster pace than the rest of Europe, defying fears about rising public sector borrowing. 10-year Treasury yields have fallen by nearly 15bps in the past week, UK 10-year yields are down by 5bps, and yields are lower by 14bps in France.

Gold may test record high

The gold price is also rising and is higher by nearly $30 per ounce on Tuesday. In the past 5 days, the gold price is higher by 3%, outpacing gains in stocks and oil. The yellow metal is trading back towards the top of its recent range and is only $75 way from the record high of $3,500 reached on 22^nd April.

Tariff risks mount

The low level of the Vix does not chime well with falling bond yields and a rising gold price. The biggest risk for investors is the August 1^st tariff deadline. For now, stock investors seem to be underpricing this risk, as higher tariff rates and retaliatory levies from the US’s trading partners, could be a major shock for the US private sector. If this leads to a sharp contraction in the US private sector, then US stocks could sell off, and there could be rotation to other regions.

While we might not see the spike in volatility that we saw in April, it could be a slow burn lower for US stocks until the outlook for tariffs is clearer.