Will the Fed save the day?

Nvidia yesterday revealed new products at the company’s annual GPI Technology Conference at San Jose. The CEO Jensen Huang showed off its new AI system Vera Rubin, called after nothing less than the astronomer who discovered the evidence of dark matter, and announced new partnerships with GM and Taco Bell. The new Vera Rubin, the next, next generation chip, is more than twice as fast as its predecessor Blackwell. GM will integrate Nvidia’s technology into its self-driving cars and will also benefit from their systems for improving the performance of its factories and robots, while Yum Brands is looking to boost its AI-powered drive-thru ordering. A year ago, investors would be popping champagnes on the news, but this time around, they just weren’t impressed. The stock price fell 3.43% yesterday.

Of course, it was not about Nvidia or the AI conviction, it was about the overall market mood that’s been souring due to a number of reasons including the tariff war, the high tech valuations, the rotation trade, the uncertain Federal Reserve (Fed) outlook and the ugly geopolitics. As such, the S&P500 reversed two-session gains and fell 1%, Nasdaq 100 lost 1.66% and the Dow Jones eased 0.62%. Facebook became the last of the Magnificent 7 stocks to give back all of its ytd gains. If Nvidia’s AI news couldn’t wet investors’ appetite, it means that the correction is poised to extend deeper. The S&P500 could shed additional 5-10% from the actual levels. For the short-term investors, there could be a tactical opportunity in the selloff, for the long-term investors, the periods of correction are not particularly enjoyable, but there has always been light at the end of the tunnel.

Jawohl!

Across the Atlantic Ocean, the spring winds are gently blowing across the markets. The Germans agreed to pass a bill that will allow the government to increase its spending without being laid back by the strict borrowing rules. Germany could borrow up to EUR 500bn in the context of a special, off-budget fund to finance infrastructure and defence needs. The other European nations will feel free do the same, of course. Rheinmetall jumped more than 5.5%, the BAE systems added more than 1%, The Select Stoxx 600 Europe Aerospace & Defence ETF – that includes these names among other defence names - gained another 1.46% and the Stoxx 600 was up by 0.61% in a continued contrast with the American peers’ morose performances. Cherry on top, the German 10-year yield eased as the government’s intention to boost spending was fully priced in, and the EURUSD traded above 1.0950. The traders are now shifting their focus to today’s Fed meeting to find out whether the Fed could, and will do something to reverse the negativeness among the US market investors.

What does the Fed think about it?

The Fed is expected to maintain its rates unchanged today. But the committee will update its dot plot, growth and inflation projections and will provide a hint regarding where the policymakers are planning to put pressure in the changing economic landscape. Is the Fed worried about a renewed uptick in inflation due to the government’s hectic tariff policies? Is it more worried about the negative impact of the wide-ranging White House policies on employment and growth? Is it worried about the stock market selloff?

What investors are explicitly wishing is to hear that Powell and the Fed are ready to step in in case the market selloff gets worse to ensure a minimum financial stability – a thing that it’s beautifully done in the past by lowering rates and buying bonds. Economists expect the Fed to cut the rates two times this year as a response to economic slowdown with limited progress toward the 2% inflation goal. Traders see three cuts as a response to a potentially ugly selloff in equity markets. Either way, activity on Fed funds futures hints to around 65% chance for the next rate cut to arrive in June. The dot plot will tell who is closer to the Fed’s mind and when we could expect a rate cut. A dovish stance could help slow the equity selloff and give a minor rebound to equities and the US dollar, while a cautious stance could sent the S&P500 back into the correction territory – meaning 10% or more lower than its February peak – and extend the scope for deeper losses for both US equities and the US dollar.

The US 2-year yield is hovering around the 4% mark this morning, the 10-year yield sits near the 4.30%. The US dollar index remains under the pressure of the waning growth prospects, the EURUSD bulls are waiting in ambush to push the pair above the 1.10 psychological mark.

Note that yesterday’s conversation between Trump and Putin didn’t hint at a sustainable peace anytime soon, but the Russians agreed to not bomb the Ukrainian energy infrastructure for a month. Crude is extending losses this morning below the $67pb level. The candlesticks of the past days have long upper wicks hinting at a lack of conviction from the price rebounds that suggest that the bearish trend remains strong in the short run and we could see further losses toward the $65pb mark.