Head of FX Strategy
Summary: The market is clearly betting on a significant shift in outlook from the Fed. Elsewhere today, Brexit dynamics to accelerate on hyperactive parliamentary schedule.
The Nvidia sales warning and Caterpillar profit miss yesterday spooked markets anew on China’s growth trajectory, and despite a cratering business confidence survey out of Australia, AUDUSD is essentially unchanged.
Risk sentiment took a fresh hit yesterday on ugly news from Nvidia, a company associated with consumer tech and cloud computing data center tech and from Caterpillar. For perspective, Caterpillar’s profit miss was its worst in a decade and if Nvidia’s new sales outlook for Q4 is correct, it will be the worst slowdown in the company’s topline growth since 2010. The blame in both companies was squarely on developments in China.
Piling on to this story overnight, the latest Australia NAB business confidence survey showed the worst month-on-month drop in the Business Conditions portion of that survey since the teeth of the global financial crisis. The Aussie hardly reacted to this ugly development, as the market. On that front, note that while top Chinese negotiation Liu He is scheduled to visit Washington tomorrow and Thursday, the US has just charged Huawei on a number of accounts, not only on Iranian trade sanctions, but also on industrial espionage. The timing can’t be a coincidence and the situation is a pressure cooker that may not result in the deal everyone is hoping for. The end of this week could be downright explosive on all fronts if developments take a wrong turn on US-China negotiations, the Federal Open Market Committee meeting or Brexit.
On the Brexit front, today marks the beginning of the endgame into the March 29 Article 50 deadline, a process that will either take us closer to a new version of May’s original deal that can find its way through parliament or to a delay of the Article 50 deadline to give more breathing room for where the process leads next. The process is becoming so Byzantine that it has become increasingly tough to understand what is going on, but a Reuters article today gives a solid overview of today’s calendar. Basically, the House speaker John Bercow will announce at 13:00 GMT the amendments that will be voted on later in the day, and those amendments will be voted on at 19:00 GMT in serial fashion. The two most pivotal issues at stake are first, whether parliament will take control from the government on avoiding a No Deal risk as the March 29 deadline approaches and second, whether May can impress the EU with a vote sufficiently in favour of her strategy to revisit the Irish backstop portion of the existing deal that was so profoundly rejected.
Chart: AUDUSD
AUDUSD rallied sharply on Friday on the hopes that the Fed is set to signal a reassessment of its commitment to QT at tomorrow’s FOMC meeting. The AUD has also been held aloft despite various desperately bad corporate announcements clearly pointing to weakness in demand in China because offsetting that news we have the FOMC hopes and China continuing to boost its currency.
Another test for the Aussie dead ahead over tonight’s Q4 CPI release. We’re negative on the currency, but the immediate path is very unclear and the “right” outcome of US-China talks and the FOMC could engineer a further squeeze before fresh headwinds arrive to drive the Aussie back lower.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
