London Quick Take - 27 Aug - FTSE tech stocks gain as Nvidia, Salesforce, Crowdstrike post strong earnings while dollar hits 1-week high after sticky US inflation

Gains today largely confined to tech. A mixed start in Europe with London and Paris trading lower while Frankfurt was a little firmer. Across the Stoxx 600 only tech was up early this morning despite progress in the Middle East that is pushing crude futures back to yesterday's two-week low. Tech funds led the FTSE 100 on Thursday after Nvidia smashed expectations; Scottish Mortgage and Polar Capital among the top risers along with tech names Sage and Computacenter. But the blue chips traded down -0.5% as oil majors and some of the other larger weightings in the index slipped. The DAX outperformed as it has more tech - the FTSE 100 has very little so it's struggling. The early mixed picture turned decisively more bearish as the morning wore on with the FTSE 100 extending losses to trade -0.9% and the DAX turned negative by around 10am UK time as oil prices turned +1% higher off their lows at 7am. Stock futures in the US were firmer early Thursday as Nvidia’s results lifted sentiment across the tech and AI sectors, after all of the DJIA, S&P 500, Nasdaq and Russell 2k fell marginally on Wednesday. Overnight this tech boost fed into a +1.5% gain for the Kospi in Korea.

 

Nvidia delivered on pretty much all fronts and signalled AI demand is even stronger and last longer than thought. Shares rose +8% higher in pre-market trade after management guided 70% growth in fiscal 2028 vs. current expectations of 45%. Customer forecasts point to growth doubling next year but supply constraints are dragging.  A couple of potential headwinds were flagged - memory costs are set to pull gross margin from 75% towards 71–72%, bottoming out in the fourth quarter, while free cash flow fell 56% quarter-on-quarter. And Nvidia is far from immune to higher bond yields – for the first time the company broke out indebtedness as a risk factor. But lots of questions were answered both in the results and on the earnings call that will keep investors happy. Charu has more on Nvidia's earnings here.

 

A big overhang for Meta stock was removed after the Facebook and Instagram owner agreed a settlement to resolve claims brought by California and other states over allegations the sites harm young users and that it misled consumers and improperly collected children’s personal data. Meta agreed to pay up to $16.68bn as part of the settlement. Whilst not an insignificant amount shares rose on the news as it could have got a lot messier and costlier. Meta said before the trial that California, Colorado, Kentucky and New Jersey were seeking up to $1.4tn, though the states said the figure was likely closer to $200bn. But, of course, we should note that Meta and other social media stocks still face a deluge of lawsuits in the US. Shares traded up +4% in pre-market but were down early before finishing up a modest +1% on the news. And there were other good news stories from the tech space with Salesforce rallying +13% as revenues beat forecasts, Crowdstrike +10% as it beat and raised its outlook, and Okta +20% on booming demand for its agentic AI. 

 

Crude prices tracked lower after Iran and Oman said they’d agreed terms on managing traffic and revenues from the Strait of Hormuz, a critical step towards it reopening properly. Although Tehran said reopening the waterway requires more than this deal, it’s clearly progress. President Trump said 10 million barrels moved through the strait on Tuesday, which be an overestimate but also reveals that a lot of oil is leaking out. Brent trades with an $86 handle early Thursday with resistance at the 20-day SMA at $87.70 holding the topside, with yesterday’s lows at $85.40 the big downside test for bears. There had been a big rebound on Wednesday with prices jumping to almost $90 on reports Russia was threatening to escalate the war in Ukraine. More on oil from Ole here.

 

Inflation is hotter and stickier than a stalled Jubilee Line during a London summer. PCE inflation rose 0.2% for the month and +3.7% for the year, ahead of expectations. Core PCE posted +0.2% MoM and +3.3% YoY, in line with forecasts. Core PCE was 3.0% using a three-month annualised rate and 3.5% six-month annualised. So-called ‘supercore’ services was unchanged, at 3.8% YoY, which points to persistently sticky service-sector inflation. All told it means inflation has been above the Fed’s target for well over 5 years and ought to strengthen the case for a rate hike next month.

 

Market-based expectations for the Federal Reserve to hike rates next month ticked down a shade however, with bond yields holding steady; the 10yr at 4.65% from a high last week at 4.75%, while the 2yr note is a little above 4.2%. The problem is the market doesn’t understand yet the reaction function of the Fed under its new chair. All eyes are on Kevin Warsh’s speech at Jackson Hole tomorrow, which may or may not provide some framing for the current picture. Boston Fed President Susan Collins said the June and July inflation reports were "mildly encouraging" but “it will be appropriate to tighten policy soon" if the decline in inflation doesn’t happen.

 

In addition to the PCE inflation report for July we had the second reading for Q2 GDP and prices. GDP slowed in Q2 to +1.5%, which reflected lower government spending, slower investment and export growth, and an increase in imports. Stronger consumer spending was notable as a partial offset with real final sales to consumers rising +4.2%, revised up from +3.9%. Inflation was revised higher with the gross domestic purchases price index +5.8%, while headline PCE rose 5.3% and core PCE increased 3.6%.

Still talking about Bessent’s buybacks and subsequent remarks...so much has been written about it, (and not all of it by AI!). But the key is that Treasury has signalled it won’t tolerate higher yields and the market will test its resolve. Stan Druckenmiller is correct in pointing out that once the market believes Treasury is defending a particular price, any increase in yields is test of policymakers. What Bessent has committed to is small potatoes and has not had much impact on yields – which seem to have declined chiefly on oil prices falling. The intervention is small and he is effectively inviting the market to find out where the real threshold for pain and a response lies. The reaction function seems clear enough but it’s not being tested. Therefore, at some point the market will move in a way that would force Treasury to walk the talk – ie commit capital. I wouldn’t be surprised if this means we see a much bigger intervention than talked about so far. If the bond market is not allowed to express price discovery fully then the dollar becomes the release valve. The key is whether the 10yr Treasury breaks the 5.25% resistance, the high points from the 2006/07 era – currently it sits around 4.70% but if we’ve learnt anything from the last week it’s that both Wall Street and Washington are concerned about rising deficits. Debasement trades have faded a touch with gold now finding near-term resistance at $4,600 having failed to make good on the drive to $4,700. Yesterday's low at $4,582 may provide some support as price action consolidates around the $4,600 area following the momentum breakout. Meanwhile, the dollar index has risen to a one-week high and Bitcoin is holding below $79k. This is probably a bit of a pause rather than a top for the debasement trade but one to watch with the Warsh speech likely to spark moves in these trades.