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London Quick Take - 10 June - US CPI the big test as tech hits the skids again and volatility returns, while US and Iran exchange strikes
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
“Central bankers around the world…seem more comfortable with inflation closer to 3% than I wish were the case. That’s very dangerous stuff. We can have an economic boom in that scenario, but there’ll be a high price to pay.” - Kevin Warsh, 2024.
The inflation data for May will dictate market expectations for next week’s Fed meeting, or rather, for what it does after next week since everyone now expects the FOMC to hold at the June meeting. The April print rose to +0.6% for the month, pushing annual CPI inflation to +3.8%. Core CPI rose 0.4% for the month and +2.8% year-on-year. For May, the headline rate could rise +0.3% on the month for a +4.2% annual rate, which would be the highest since April 2023, while core is seen at +0.5% for the month and +2.9% annually. The Cleveland Fed CPI nowcast is at +4.18% in May and core at 2.82%. Just how long can Kevin Warsh look through inflation being above target>
Tl/dr: AI endgame? Iran no endgame? It was a tough session on Wall St but bulls circled the wagons and the S&P 500 finished down just -0.26%, a full 150pts off the lows, on the day but there is a huge amount of churn under the bonnet and NDX has a horrible chart setup. Brent crude briefly touched its lowest since 17 April before turning a wee bit higher (but not much) after the US and Iran exchanged fire after the downing of a US helicopter, the biggest conflagration since the start of the two-month ceasefire. Concern is that oil futures are trading inventories not flows, but there are signs things may be opening up a bit.
Vix +23, SPX and NDX touched 5-week lows before the dip was bought but without a huge amount of conviction...some of the calls on the Street are starting to turn more bearish at least for the near term...something of a deleveraging unwind going on in some corners - AI hardware and hyperscalers, plus quantum stocks took a hit as high beta plays as the market reassesses a couple of things – assumptions about AI returns on investment, the durability of the AI capex story which has underpinned the bull market, the IPO wall to scale, and where the Fed is going with rates. Sticking to my June pullback thesis - there is likely further to go before this settles down.
Tech is in the crossfires again as the Nasdaq led the broader market lower on Wall Street, sliding 1%, but finishing well off the session lows. SPX declined 0.26% and the Dow rallied a touch as investors rotated out of tech into, well just about everything else - consumer staples, materials, healthcare, industrials, real estate, financials and utilities...semis were down almost -9% at one point before the wagons were circled to leave the Philly Semiconductor index down almost –2% at the close. Jensen Huang backed Qualcomm shares but it didn’t do much good....shares finished down around 6%. Oracle reports today for the latest view on AI spend etc. It's important to recognise that this is not a broad selloff - selling is concentrated in the highest-flying AI-related names that have a stonking year so far and are most exposed to profit-taking and cash-raising for redeployment in other (and new) shares.
Apple has had a couple of horrible sessions, down more than 3% yesterday as its AI progress underwhelmed, while Microsoft –2% and Tesla –3% continued to bleed below their 200-day moving averages. The fraying in tech and broader AI worries that seem to be seeping into the sentiment narrative hit the Kospi in Korea again with the index down more than 4% as heavyweights Samsung and SKY Hynix tumbled 6-7%, while Softbank fell -10% to weigh on the Nikkei as the AI trade was reined in. European stocks are enjoying a little bounce this morning having taken part in the steep decline in the first half of yesterday’s US session but nothing of the rally, so it looks like a bit of a catchup to par.
Yesterday, of note, selling took place against lower Treasury yields and oil prices backing off to two-month low. Signs of progress on US-Iran talks may have been less impactful than signs of ships navigating the Strait of Hormuz, with US energy secretary Wright saying ship tariff through the passage was increasing “very meaningfully”. But then we’ve had a downed US helicopter and ‘defensive’ retaliation and it suddenly doesn't look so great a picture – yet oil prices have barely moved higher. Gold meanwhile continues to break down on technical selling following the downside breach of the 200-day SMA with $4,200 the next level taken out as long positions are liquidated.
So where next for stocks? Buffett indicator at extreme 238%, BofA warns of too many red flags and Moody’s says US teetering on brink of recession just as we see volatility catalysts from a deluge of equity issuance and a Fed tightening surprise...outlook risky and dangerous for equities. Citi sees aggressive short building in Nasdaq stocks alongside extended bullish positioning that leaves the market vulnerable to downside risks. Market desks are generally warning of sharper equity unwinds following Friday’s selloff...Goldman Sachs and Barclays both suggest it could signal deeper fragility, not a one-off move, citing crowded momentum positioning, weak market breadth, and risks for rates staying higher for longer ...in short AI, rates and inflation create added volatility risks...as I was talking about last week with a confluence of risk factors likely triggering a higher volatility regime.
Takeaway: Volatility is back - downside moves are going to become more aggressive, forcing equity markets lower but buy-the-dip will continue to exert a powerful check on the downside moves.
So, today’s CPI is going to be hugely important for risk sentiment into the back end of the week with markets still wary following Friday’s selloff in the chips and AI space and with markets taking another leg lower on Tuesday.
It comes after the hot NFP print and may see markets up bets the Fed will hike. Borrowing from BofA as why not and because this seems very pertinent right now with inflation on deck in today’s session:
Vix +23, SPX and NDX touched 5-week lows before the dip was bought but without a huge amount of conviction...some of the calls on the Street are starting to turn more bearish at least for the near term...something of a deleveraging unwind going on in some corners - AI hardware and hyperscalers, plus quantum stocks took a hit as high beta plays as the market reassesses a couple of things – assumptions about AI returns on investment, the durability of the AI capex story which has underpinned the bull market, the IPO wall to scale, and where the Fed is going with rates. Sticking to my June pullback thesis - there is likely further to go before this settles down.
Tech is in the crossfires again as the Nasdaq led the broader market lower on Wall Street, sliding 1%, but finishing well off the session lows. SPX declined 0.26% and the Dow rallied a touch as investors rotated out of tech into, well just about everything else - consumer staples, materials, healthcare, industrials, real estate, financials and utilities...semis were down almost -9% at one point before the wagons were circled to leave the Philly Semiconductor index down almost –2% at the close. Jensen Huang backed Qualcomm shares but it didn’t do much good....shares finished down around 6%. Oracle reports today for the latest view on AI spend etc. It's important to recognise that this is not a broad selloff - selling is concentrated in the highest-flying AI-related names that have a stonking year so far and are most exposed to profit-taking and cash-raising for redeployment in other (and new) shares.
Apple has had a couple of horrible sessions, down more than 3% yesterday as its AI progress underwhelmed, while Microsoft –2% and Tesla –3% continued to bleed below their 200-day moving averages. The fraying in tech and broader AI worries that seem to be seeping into the sentiment narrative hit the Kospi in Korea again with the index down more than 4% as heavyweights Samsung and SKY Hynix tumbled 6-7%, while Softbank fell -10% to weigh on the Nikkei as the AI trade was reined in. European stocks are enjoying a little bounce this morning having taken part in the steep decline in the first half of yesterday’s US session but nothing of the rally, so it looks like a bit of a catchup to par.
Yesterday, of note, selling took place against lower Treasury yields and oil prices backing off to two-month low. Signs of progress on US-Iran talks may have been less impactful than signs of ships navigating the Strait of Hormuz, with US energy secretary Wright saying ship tariff through the passage was increasing “very meaningfully”. But then we’ve had a downed US helicopter and ‘defensive’ retaliation and it suddenly doesn't look so great a picture – yet oil prices have barely moved higher. Gold meanwhile continues to break down on technical selling following the downside breach of the 200-day SMA with $4,200 the next level taken out as long positions are liquidated.
So where next for stocks? Buffett indicator at extreme 238%, BofA warns of too many red flags and Moody’s says US teetering on brink of recession just as we see volatility catalysts from a deluge of equity issuance and a Fed tightening surprise...outlook risky and dangerous for equities. Citi sees aggressive short building in Nasdaq stocks alongside extended bullish positioning that leaves the market vulnerable to downside risks. Market desks are generally warning of sharper equity unwinds following Friday’s selloff...Goldman Sachs and Barclays both suggest it could signal deeper fragility, not a one-off move, citing crowded momentum positioning, weak market breadth, and risks for rates staying higher for longer ...in short AI, rates and inflation create added volatility risks...as I was talking about last week with a confluence of risk factors likely triggering a higher volatility regime.
Takeaway: Volatility is back - downside moves are going to become more aggressive, forcing equity markets lower but buy-the-dip will continue to exert a powerful check on the downside moves.
So, today’s CPI is going to be hugely important for risk sentiment into the back end of the week with markets still wary following Friday’s selloff in the chips and AI space and with markets taking another leg lower on Tuesday.
It comes after the hot NFP print and may see markets up bets the Fed will hike. Borrowing from BofA as why not and because this seems very pertinent right now with inflation on deck in today’s session:
“Central bankers around the world…seem more comfortable with inflation closer to 3% than I wish were the case. That’s very dangerous stuff. We can have an economic boom in that scenario, but there’ll be a high price to pay.” - Kevin Warsh, 2024.
The inflation data for May will dictate market expectations for next week’s Fed meeting, or rather, for what it does after next week since everyone now expects the FOMC to hold at the June meeting. The April print rose to +0.6% for the month, pushing annual CPI inflation to +3.8%. Core CPI rose 0.4% for the month and +2.8% year-on-year. For May, the headline rate could rise +0.3% on the month for a +4.2% annual rate, which would be the highest since April 2023, while core is seen at +0.5% for the month and +2.9% annually. The Cleveland Fed CPI nowcast is at +4.18% in May and core at 2.82%. Just how long can Kevin Warsh look through inflation being above target>
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