Nvidia shares surged to a record high of $1,037.99/share after the company beat earnings and revenue estimates for the first quarter and analysts felt more bullish following the results.
- Nvidia earnings boost Artificial Intelligence (AI) and semi-conductor stocks
- United States (US) stock markets retreat over likely higher-for-longer interest rates
- Johannesburg Stock Exchange (JSE) dragged down by resources
- Dollar gains on strong economic data while the rand retreats after a strong month
NVIDIA EARNINGS HELP PULL UP THE NASDAQ AND OTHERS IN AI ECOSYSTEM
It is now widely accepted that Nvidia’s quarterly earnings report is the ultimate validation for the broad investor bullishness around the current technology cycle. The chip maker reported its earnings on Wednesday, announcing record quarterly revenues driven by its ‘Compute’ and ‘Networking’ products, which grew five and three times, respectively. With this credible performance from Nvidia, the market will likely breathe a sigh of relief until the next earnings season.
Nvidia’s combination of state-of-the-art hardware with proprietary software supports a captured audience of large cloud and internet companies looking to develop increasingly advanced use cases for AI. Meta, for example, uses Nvidia’s chips to train better algorithms to drive engagement, which ultimately supports advertising revenues, while Tesla trains and enhances its already successful autonomous driving systems for its electric vehicle range. Each industry, be it banking or mining, has a particular use case where large productivity gains can justify the high price for high-performance compute, a term which describes concepts and objects related to software computation.
As an upstream player, Nvidia informs the market about conditions further down the information technology (IT) supply chains, where services meet enterprises and consumers alike. Strong demand for Nvidia chips informs demand for services such as cloud services, cloud infrastructure, cybersecurity, and networking, many of which are supplied by S&P 500 companies. The manufacture of Nvidia chips also supports semiconductor manufacturers and memory companies.
US inflation sticky
In the slower lane, the latest United States (US) Federal Open Market Committee (FOMC) minutes provide a glimpse into considerations around monetary policy. The minutes released on Wednesday revealed the committee’s concerns that the disinflationary path in the US has slowed, which is to say that prices are not cooling as quickly as expected to reach the committee’s 2% target. This is particularly the case for property rentals, which are slowing less than expected. The view is that persistent inflation establishes a bias towards falling economic activity as households respond to increasing costs.
Within the committee, there was some disagreement around the large seasonal effects driving the relatively higher first-quarter inflation, whereas other committee members consider inflation to be broad-based. According to the FOMC minutes, the committee members remain convinced that inflation will ease back to 2% over the medium term; however, the path to get there will likely take longer.
DATA IN A NUTSHELL
The number of Americans filing new unemployment claims decreased last week, indicating strong underlying conditions in the labour market that are expected to continue to support the economy. The US Labor Department’s report on Thursday marked the second consecutive weekly decline in claims, reversing most of the increases observed at the beginning of the month, which had pushed applications to levels not seen since last August. Although job growth is slowing due to significant US Federal Reserve (Fed) interest rate hikes in 2022 and 2023, layoffs remain minimal.
The S&P Global US Composite Purchasing Managers Index (PMI) for May surprised to the upside as it improved to 54.4 from 51.3, indicating that business activity in the US private sector grew at a faster pace than in April. The S&P Global US Manufacturing PMI for May was reported at 50.9, a slight increase from 50.0 in the previous month, signalling an expansion in the manufacturing sector. Additionally, the S&P Global Services PMI also increased from 51.3 to 54.8 in May. US new home sales in June were 679,000, a decrease from 693,000 in the previous month, reflecting a slowdown in the housing market.
In the United Kingdom (UK), Consumer Price Index (CPI) inflation year-on-year for April was 2.3%, up from 2.1% in the previous month but significantly lower than the previous year’s 3.2%. Prime Minister, Rishi Sunak, celebrated the normalisation of inflation as “[marking] a major moment for the economy”. UK public sector net debt reached 97.9% of GDP, its highest level since the early 1960s as public sector net borrowing for May rose above expectations to reach £19.59 billion.
South Africa’s CPI inflation year-on-year for April was 5.2%, marking the second month of a slowing of inflation, following the 5.3% rate recorded in March. The core CPI inflation, excluding volatile items, was 4.6% in April, down from 4.7% in the previous month and 4.9% in the previous year.
Equities
On Thursday, US equity markets turned negative as initial excitement over Nvidia’s quarterly results waned and strong economic data raised questions around higher-for-longer interest rates. US Treasury yields increased following the data releases. All three major US stock indices lost ground in the afternoon, and at the sector level, technology stocks were the only gainers.
Locally, the JSE Top40 Index retreated 1.57% for the week. All three of the bourse’s major indices were in the red, with resources losing the most, at 4%, financials giving back 0.7% and the industrial complex down 0.68%. At a stock level, we saw the Platinum Group Metals (PGM) miners having a tough week, with Sibanye Stillwater the biggest loser of the week, shedding 10% of its value. Amplats lost 7.1%, and Implats was down 6.5%. We also saw Anglo American rejecting a third bid from BHP this week at about £29.34 per Anglo American share. The bid also once again included demands for Anglo to unbundle its platinum and iron ore assets in South Africa, a process Anglo has previously deemed too risky and complex. On a positive note, however, the companies agreed to extend the talk deadline by one week, to 29 May.
Commodities
Copper futures pared back gains this week to close around $4.83/pound following a strong run last week to an all-time high of $5.12/pound. A notable recent macro development affecting base metals was China’s government decision to support the country’s beleaguered real estate sector by proposing that local governments buy millions of unsold homes to create affordable housing.
Brent crude oil prices fell 2.5% over the week to $82.60/barrel adding to a general downward trend in oil prices over recent weeks. Against this backdrop, Swiss investment banker, UBS, recently forecast Brent crude prices to rise to $91/barrel in the coming months due to an undersupplied market and expectations that the extended Organization of the Petroleum Exporting Countries (OPEC+) will extend production cuts. Healthy demand and OPEC+ efforts to balance the market support a positive outlook, with estimated demand growth of 1.5 million barrels per day for 2024 compared to the long-term average of 1.2 million.
Currencies
On Thursday, the dollar strengthened against the euro following data showing that US business activity reached its highest level in over two years in May, which suggests that economic growth picked up halfway through the second quarter. The currency action showed that the market still responds to strong US economic data in the expected way.
The euro fell by 0.2% to $1.080525/€ after reaching $1.0861/€ earlier in the session. The eurozone’s preliminary composite PMI remained above the growth threshold for the third consecutive month, with improvements in the struggling manufacturing sector. Despite recent economic data supporting the euro’s rally in April and early May, Thursday’s figures brought the currency closer to mid-May’s two-month high of $1.0895/€.
The rand finally experienced some profit-taking after a stellar month. On Thursday, it weakened against the dollar following the release of the FOMC minutes, which hinted that interest rates will remain higher for longer. At closing, the rand traded at R18.45/$, 0.85% weaker than its previous close.
Key Indicators:
USD/ZAR: 18.48
EUR/ZAR: 20.00
GBP/ZAR: 23.48
GOLD: $2,338
BRENT CRUDE: $81.27
Sources: Bloomberg, Reuters, Trading Economics, Seeking Alpha.
Written by: Citadel Equity Analyst, Thambo Mthwalo and Citadel Portfolio Manager, Zain Ghoor.