Home

Monday Market Minutes: Cutting it Fine

PUBLISHED

2023-05-28

Content

Will Australian investors charge into the market this morning after news from the White House that it has struck a debt ceiling deal with the Republican Party in the US House of Representatives?

The news came yesterday, Sydney time, but any surge based on this story could be aborted before it starts because the agreement will have to be voted on by those Republicans and there is a rump of hardline conservative supporters of Donald Trump who will oppose the deal.

This reluctance to accept the deal will mean that the impasse will continue for a few more days and add more pressure to markets.

The bipartisan deal announced on Sunday would raise the debt limit for two years while cutting and capping some government spending.

But Congressional passage before the June 5 deadline for the US Treasury to run out of money is not assured, as those right-wing Republicans are all but certain to revolt.

The question now is whether Wall Street will now focus on the debt ceiling story after being diverted Thursday and Friday by the AI (artificial intelligence) boom after being results from leading chipmakers, Nvidia (Thursday) and Marvel (on Friday).

Still Australian investors will have the comfort of the 70-point gain for the ASX 200 share price futures index (SPI) on Friday night (Sydney time) to work with today while they assess the next move in the debt ceiling impasse.

The SPI surge was very different to the modest 0.23% rise on Friday in what was indifferent local trading.

Partly reflecting the mixed global lead and falling metal prices (iron ore and copper fell) the Australian share market dropped 1.7% last week led down by falls in materials, retail, property and financial shares.

Local investors are bidding up the prices of some local techs such as Wisetech Global (which uses AI and seen as a big beneficiary). Its shares added 4.55% last week and have gained more than 52% year to date.

Wall Street’s strength though is undermined by the fact that it is based on fewer companies.

For most of this year it’s been the likes of Apple, Alphabet, Microsoft, Meta and Netflix that have been carrying the market - especially the Nasdaq.

Last week it was the turn of Nvidia, the chipmaker (which makes chips used in the booming generative AI product sector), to carry the market higher with a near 26% surge, including a 25% gain on Thursday.

Bank of America calls them The Magnificent Seven, a nod to the 1960 classic western starring Yul Brynner, Steve McQueen and Charles Bronson.

These are Apple, Microsoft, Google, Amazon, Nvidia, Meta and Tesla, which have price-earnings ratios of 30 times or more (Nvidia has a P/E of 202) as opposed to 22 for the rest of the US market.

But it’s not just these US giants - Bank of America also mention their European peers, but in the luxury sector, with LVMH, L'Oréal, Hermès, Christian Dior, Compagnie Financière Richemont, Kering and Ferrari, whose average P/E is 36 times, compared with 12 times for the STOXX Europe 600.

That saw Deutsche Bank (DB) analysts on Friday point out that the S&P 500′s outperformance over its equal-weighted counterpart is the largest since 1999.

DB analysts said that means only a few stocks have been driving the S&P 500′s gains recently.

“There’s no doubt it was a good week to do the series as the investment world has gone AI crazy in the last 36 hours after Nvidia’s stunning results,” Deutsche’s Jim Reid wrote. “Interestingly, this continued tech frenzy has caused the narrowest rally of the century.”

Another chipmaker emerged to the forefront on Friday - Marvell Technology surged a record-setting 32.4% after the chipmaker said it expects AI revenue in fiscal 2024 to at least double from the prior year. Marvell shares ended up 45% over last week.

Citi analysts upgraded their view of the markets “With a recession not imminent yet, and the Fed in the very last innings of its hiking cycle, we think that U.S. equities may well do better once the Fed actually does go on hold — in line with the pattern of the last 30+ years,” strategists led by Dirk Willer wrote on Friday.

Ford shares rose more than 7% on news of the charger deal with Tesla whose shares were up 4.7% as investors started to understand the importance of that deal.

The S&P 500 rose, 54.17 points, or 1.3% to close at 4,205.45. The Dow rose 328.69 points, or 1%, to 33,093.34.

The tech-heavy Nasdaq notched the biggest gains, rising 277.59 points, or 2.2%, to 12,975.69.

That saw the Nasdaq notch its fifth straight weekly gain, rising 2.5%. The S&P 500 managed a small 0.3% rise but the Dow was the laggard this week, losing 1%.

Year-to-date performance of the major Wall Street indexes tell the story and support the DB and Bank of America ideas - The S&P 500 is up 365.95 points, or 9.5%, the Nasdaq is up 2,509.21 points, or 24% but the Dow is down 53.91 points, or 0.2%.

The Japanese share market continued its resurgence rising another 0.4%. However, for the week Eurozone shares fell 1.5% and Chinese shares fell 2.4%.

…………

The old headline ‘rate rise looms’ is starting to return to US investor thinking, although there’s not much real interest while the AI boom continues.

That said, data on reported consumer spending was stronger than expected last month, rising 0.5% after being unchanged in March. As well, the personal consumption expenditures index, the Federal Reserve's preferred inflation measure, also rose, climbing 4.4% on an annualised basis above the 4.2% rise reported for March.

Another report estimated the US economy grew at a 1.3% annual pace in the first three months of the year, stronger than the 1.1% in the first GDP estimate in April.

That report also suggested inflation was a touch stronger in the first quarter.

The stronger-than-expected data helped dampen investors’ fears about a looming recession but it could also see the Federal Reserve raise interest rates again next month (on June 12 and 13).

Author