Are we in an AI bubble?

Corporate Earnings News
Global market indices
Currencies
Cryptocurrencies
Fixed Income
Commodity sector news
Key data to move markets this week
Global macro updates

Corporate Earnings News

Corporate earning calendar 22 February - 29 February 2024

Thursday: Fiverr International, Keurig Dr Pepper, Moderna, Newmont, Intuit, Block, Dominion Energy, Edison International, Iron Mountain, Pool Corp.
Monday: Unity Software, Zoom Video Communications, Domino's PIzza 
Tuesday: Lemonade, Virgin Galactic, Ebay, Lowe's Companies, American Tower Corp., Autozone, Ross Stores, Sempra Energy, American Electric Power Co., Extra Space Storage, Devon Energy, Splunk, Universal Health Services, The JM Smucker Co.
Wednesday: Baidu, Viatris, AMC Entertainment, HP, Salesforce, Snowflake, Monster Beverage, Dollar Tree
Thursday: Hewlett Packard Enterprise, Zscaler

According to FactSet data, the S&P 500 is reporting year-over year revenue growth for the 13th straight quarter. 

US Stock Indices Price Performance

Nasdaq 100 +1.98% MTD +3.87% YTD
Dow Jones Industrial Average +1.08% MTD +2.32% YTD
NYSE +2.79% MTD +3.14% YTD
S&P 500 +2.68% MTD +4.31% YTD

Nvidia soared around 13% in late trading on Wednesday after it released its Q4 corporate earnings with Chief Executive Officer Jensen Huang saying “accelerated computing and generative AI have hit the tipping point.” The surge does seem to confirm the market’s narrative that AI and associated tech stocks will be strong for the foreseeable future. The company reported a 265% increase in quarterly revenues and projected revenue for the current quarter to reach $24 bn thanks to a global spending frenzy on artificial intelligence.

US stocks

Mega caps: A tough week for the “magnificent seven” as expectations for rate cuts were pushed out further. Apple, Microsoft, Alphabet, Meta Platforms, and Tesla are all down this week. Amazon is also down this week despite joining the Dow Jones Industrial Average (DJIA) this week, replacing Walgreens Boots Alliance.

Nvidia posted $22.1 bn in revenue in fourth quarter earnings, a 265% rise from the same period last year and above analysts’ expectations and its own guidance. Nvidia also beat profit forecasts, reaching $4.93 in diluted earnings per share, beating analysts’ expectations of $4.59, according to LSEG estimates. Net income rose 770% to $12.3 bn compared with the same period in the previous year of $10.4 bn. In the fiscal fourth quarter, the chipmaker reported a whopping 486% year-over-year growth in earnings per share excluding certain items. The company admitted that “sales to China declined significantly in the fourth quarter due to US government licensing requirements.” However, there is some concern around an AI bubble developing. According to Bloomberg news, Nvidia is still less expensive than peers. The stock traded at about 30 times forward earnings as of Wednesday’s close, compared with Advanced Micro Devices at 43 times. The shares are also cheaper than Amazon and Microsoft, while the Nasdaq 100 Index trades at a 25 times multiple.

Energy stocks had a mixed week this week although the energy sector itself was generally up. Occidental Petroleum and Apa Corp (US) are relatively flat, while Shell, ConocoPhillips, Chevron, Baker Hughes, and ExxonMobil are all up this week. Phillips 66, Halliburton, and Marathon Petroleum are all down over this past week.

Surprisingly Energy Fuels is down this week. This is despite news that investment banks Goldman Sachs and Macquarie are positioning themselves to benefit from surging uranium prices, which has reached 16 year highs, doubling over the past year to about $102 a pound. Reuters reported earlier this week that the banks are boosting trading in physical uranium, with Goldman also increasing options trading.

Materials and Mining stocks also had a mixed week. Aluminium prices rose to a three-week high on Wednesday as traders anticipated further Russian sanctions could lead to a supply disruption. Sibanye Stillwater, Nucor, and Yara International are all down this week. Freeport-McMoRan, Newmont Mining, Mosaic, CF Industries, and Albemarle are all up this week.

Sibanye Stillwater fell 4% on Wednesday after it warned its annual profit plunged by as much as 91% in 2023, mainly due to a sharp decline in platinum group metal (PGM) prices, particularly the decline in the prices of palladium and rhodium.

On Wednesday Nucor said its board had approved $860 million in funding for the construction of a rebar micro mill in the Pacific Northwest with the exact location yet to be decided. 

European Stock Indices Price Performance

Stoxx 600 +1.11% MTD +2.52% YTD
DAX +1.27% MTD +2.19% YTD
CAC 40 +2.03% MTD +3.56% YTD
IBEX 35 +0.29% MTD +0.05% YTD
FTSE MIB +4.15% MTD +5.50% YTD
FTSE 100 +0.42% MTD -0.91% YTD

Nvidia’s overwhelmingly positive performance is also having an impact on European markets with Europe's STOXX 600 index, boosted by technology stocks, advancing earlier today to reach an all-time high.

According to LSEG I/B/E/S data, as of 20 February 2024, fourth quarter earnings were expected to decrease 5.3% from Q4 2022. Excluding the Energy sector, earnings were expected to increase 0.6%. Fourth quarter revenue was expected to decrease 0.9% from Q4 2022. Excluding the Energy sector, revenues were expected to increase 3.2%. Of the 172 companies in the STOXX 600 that had reported earnings by 20 February 2024 for Q4 2023, 54.1% reported results exceeding analyst estimates. In a typical quarter 54% beat analyst EPS estimates.

Other Global Stock Indices Price Performance

MSCI World Index +2.38% MTD +2.92% YTD
Hang Seng +6.57% MTD -3.19% YTD

Japan's Nikkei share average surged past the 1989 bubble-era record high, as chip-related stocks led across-the-board gains after Nvidia's outlook beat market expectations. The index is up almost 17% this year after surging 28% in 2023. The Nikkei's rally has defied a recession in Japan.

Currencies

The US dollar weakened this week but remains largely supported as traders pared back bets on the number and timing of rate cuts this year. The GBP is +0.01% MTD against the USD and -1.98% YTD. Following BoE Governor Andrew Bailey’s testimony to the Treasury Select Committee at the House of Commons earlier this week where he suggested that the BoE was comfortable with market expectations of rate cuts and that “We don’t need inflation to come back to target before we cut interest rates. Traders are pricing in the first rate cut in August. The EUR is -0.39% MTD against the USD and -0.73% YTD. The ECB has pushed back on rate cuts with ECB President Lagarde stating that she doesn’t want the ECB to make a hasty decision and see inflation rise again and have to take more measures.

Cryptocurrencies

Bitcoin +21.00% MTD +22.56% YTD
Ethereum +25.45% MTD +28.06% YTD

Bitcoin was supported by record inflows into Bitcoin ETFs last week. According to Coindesk.com, a record $2.5 billion flowed into crypto exchange-traded products last week, with Bitcoin funds responsible for 99% of all the inflows. Ethereum continues to be supported by rising expectations that an Ethereum ETF will gain US regulatory approval.

Fixed Income

US 10-year yield to 4.32%
German 10-year yield to 2.45%.
UK 10-year yield to 4.10%.

Yields rose this week as markets worried about last week’s higher than expected inflation data. Yields also rose after a weaker than expected $16 billion sale of 20-year bonds on Wednesday and minutes of the last Federal Reserve meeting that expressed concern about cutting interest rates too quickly. Investors showed limited appetite for the Treasury's 20-year bond auction, with the bid-to-cover ratio, at 2.39, down from last month's 2.53 and the 2.62 average. This was the lowest since August 2022. This has raised concerns about demand for government debt issuance. According to the Congressional Budget Office (CBO), the US government is expected to run huge deficits over the next decade of around 5%–7% of gross domestic product (GDP) annually. 

The UK government has decided to open up access for retail investors to buy newly issued gilts. According to the Financial Times, providing retail access to gilt sales comes as the UK faces daunting borrowing needs, with the government’s gross financing requirement estimated at about £277 bn for the 2024-25, 16 per cent higher than the current year.

Commodities

Gold futures to $2,035.80 per ounce.
Silver futures to $23.16 per ounce.
West Texas Intermediate crude to $78.04 a barrel.
Brent crude to $83.03 a barrel.

Gold prices were up this week driven by a weakening dollar and safe haven demand as the Middle East conflict continues. 

Oil prices rose this week on increased US supply, a lack of a ceasefire agreement between Hamas and Israel, and continuing Houthi attacks on commercial vessels in the Red Sea and the Bab al-Mandab strait. However, prices have been range-bound due to concerns that Fed rate cuts could be pushed back even further as Fed minutes indicated that FOMC members were.

Note: As of 4 pm EST 21 February 2024

Key data to move markets this week

EUROPE

Thursday: Eurozone Ecofin Meeting, German HCOB Composite, Manufacturing and Services PMIs, Italian CPI, Eurozone HCOB Composite, Manufacturing and Services PMIs, Eurozone Harmonised Index of Consumer Prices, and ECB Monetary Policy Meeting Accounts.
Friday: Eurozone Ecofin meeting, German GDP, German Ifo Business Climate, Current Assessment and Expectations surveys, and speeches by ECB Executive Board member Isabel Schnabel and German Bundesbank President Joachim Nagel.
Saturday: Eurozone Ecofin meeting.
Tuesday: German Gfk Consumer Confidence.
Wednesday: Eurozone Economic Sentiment, Consumer Confidence and Business Climate surveys.
Thursday: German Retail Sales, Unemployment, CPI and Harmonised Index of Consumer Prices.

UK

Thursday: S&P Global/CIPS Composite, Manufacturing and Services PMIs.
Friday: Gfk Consumer Confidence.

US

Thursday: Initial Jobless Claims, S&P Global Composite, Manufacturing and Services PMIs, Existing Home Sales Change, and speeches by Fed Board of Governors members Philip Jefferson and Lisa Cook, Philadelphia Fed President Patrick Harker, and Minneapolis Fed President Neel Kashkari.
Friday: A speech by Fed Board of Governors member Christopher Waller and Fed Monetary Policy Report. 
Monday: US New Homes Sales Change.
Tuesday: Durable Goods Orders, Nondefense Capital Goods Orders, Housing Price Index, and Consumer Confidence.
Wednesday: GDP, Personal Income, Personal Spending, Personal Income Consumption Expenditures Prices, and Core Personal Consumption Expenditures.
Thursday: Initial Jobless Claims, Personal Consumption Expenditures - Price Index, Chicago Purchasing Managers Index, and Pending Home Sales.

Global Macro Updates

Fed wary of cutting rates too quickly. FOMC minutes released on Wednesday showed “most participants noted the risks of moving too quickly to ease the stance of policy and emphasised the importance of carefully assessing incoming data in judging whether inflation is moving down sustainably to 2%.” It appears that the Fed is quite reluctant to start easing if it means it might have to backtrack by slowing down cuts or hiking again if inflationary pressures rise. In short, the Fed is wary of losing market confidence in its ability to control inflation. On Wednesday Fed Governor Michelle Bowman said the time to cut interest rates was “certainly not now.” At a separate event Richmond Fed President Thomas Barkin said recent economic data highlighted price pressures for service industries and housing, and said data released since the Fed’s last meeting, showing strong job growth and stronger inflation than anticipated, made any rate-cut call "harder."

The minutes also showed that Fed officials agreed borrowing costs were likely at their peak, with the minutes indicating growing support for slowing the pace at which the Fed shrinks its asset portfolio. The Fed has been allowing as much as $60 bn worth of Treasuries and $35 bn of mortgage-backed securities to roll off its balance sheet under its so-called quantitative tightening programme.

Eurozone sees relief, but Germany remains in the doldrums. Euro-area private-sector activity hit an eight-month high in February. The HCOB flash composite purchasing managers’ index increased to 48.9 in February, the closest to the 50 level that marks expansion since June. That’s all down to services, which reached 50.0, up from January’s 48.4 and a 7-month high.

Meanwhile, manufacturing saw a deepening of the slowdown, with the HCOB Flash Eurozone Manufacturing PMI at 46.1, down from January’s 46.6 and a 2-month low. The slowdown was largely attributed to the continuing weakness in Germany. The German government expects the economy to grow 0.2% this year, far less than a previously forecast 1.3%, due to weak global demand, geopolitical uncertainty and persistently high inflation. The HCOB German Flash Composite PMI fell to 46.1 in February from January’s 47.0. February was the eighth month in a row with a reading below the 50 mark, which points to a contraction in business activity, and marked the fastest rate of decline since last October. Germany, Europe’s largest economy, shrank by 0.3% in 2023 and it is expected to enter another technical recession in the first quarter of this year.

How much more evidence does the BoE need? Bank of England MPC member Megan Greene said earlier today at an event in Johannesburg, South Africa that she wanted more evidence that inflation pressures were easing before voting to cut rates. "Markets are pressuring every central bank to cut rates. I would need to wait to see more evidence that inflation wasn't as entrenched as we may fear before I would be willing to vote (for a cut)," she said. Her comments were in contrast to those of fellow BoE MPC member Swati Dhingra, who on Wednesday warned holding rates at current levels could lead to a ‘hard landing’, potentially permanently ‘scarring’ the economy. She argued that weak producer price data offered a better guide to future inflation than services prices or wages. However, BoE Governor Andrew Bailey said earlier this week to the Treasury Select Committee at the House of Commons that although the UK was in a technical recession it would be short lived. He said that the BoE was most focused on services price growth, wages and labour market tightness and that he was comfortable with a market profile that has cuts in it, but that is not to say when or how much. "We do not endorse the market curve. We are not making a prediction of when or by how much (we will cut rates). But... it's not unreasonable for the market to think that," he said. February’s flash Composite PMI is at 53.3, up from January’s 52.9 and a 9-month high. The flash services PMI remains unchanged at 54.3, while the flash Manufacturing PMI edging upwards to 47.1 from January’s 47.0, reaching a 3-month high. Chris Williamson, S&P Global Market Intelligence's Chief Business Economist, said the survey pointed to the economy growing by 0.2% or 0.3% in the first three months of 2024 and that "With growth accelerating and prices on the rise again, February's data mean policymakers are increasingly likely to err on the side of caution when considering the appropriateness of cutting interest rates.”

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