Nvidia nears record high

Nvidia nears record high, as UK rate cut hopes dashed

There are a few themes that are driving markets right now. US stocks and their relentless quest for fresh record highs is lifting European stocks. The S&P 500 is having its longest winning streak since November; however, the gains are highly concentrated. The S&P 500 is outperforming the equal weighted S&P 500 by 10%, which is the widest margin since the 1990s. Added to this, the Dow Jones is also under performing the S&P 500, and the divergence between the two indices has widened significantly since June.

Nvidia does heavy lifting for US stocks

The sectors powering the S&P 500 to fresh record highs are semiconductors and semiconductor parts, which are massively outperforming other sectors in the S&P 500. The semiconductor index is higher by 87% YTD, compared with a 30% gain for the broadline retail index, which includes Amazon. Nvidia is also massively outperforming the other Magnificent 7 tech stocks, this isn’t a tech rally, this is an Nvidia rally.

Nvidia’s stock price is higher again on Wednesday and is up more than 1.7%, and it is approaching the record high from 18^th June. Nvidia has risen nearly 10% this week, even though it hasn’t announced earnings or any new products. Some argue that the surge in Nvidia’s share price is part of the FOMO trend, the fear of missing out. The rise of ETF investing could also be fueling the AI boom, as passive investing favours large and liquid growth stocks, rather than value investing, which is leading to a positive price shock for the biggest growth companies like Nvidia.

Are big tech shares bullet proof?

The sharp rise in Nvidia’s share price this week suggests that the biggest tech stocks are immune to political instability in the US and around the world. The fact that a benign economic backdrop: a slowing but positive growth outlook for the US economy, the prospect of rate cuts in September and falling inflation, is not boosting the broader market, suggests that the tech giants are a bigger driving force for financial markets right now, even more so than the Fed.

The key drivers of the S&P 500 are earnings revisions and momentum. Nvidia has seen earnings upgrades in the past month, and has a history of beating earnings forecasts, thus as we embark on the start of earnings season, Nvidia is in focus.

BOE economist dashes hopes for summer rate cut

Elsewhere, the market has scaled back expectations for a rate cut from the BOE next month. The market is currently pricing in a 55% chance of a cut, down from a 65% chance earlier this week. Interest rate cut expectations were revised lower after the BOE’s chief economist warned about the persistence of inflation in the UK. He is the second BOE member to caution against cutting rates this week, thus a rate cut next month is not a done deal. This has put upward pressure on the pound. GBP is the top performer in the G10 FX space in the last 24 hours, and GBP/USD is back above $1.2830. The case in favour of a stronger pound continues to build. It now includes: 1, hawkish BOE members who may not vote for a rate cut next month. 2, A higher real interest rate in the UK vs. Europe and the US. The UK’s real interest rate is currently 3.25%, compared to 2.7% in the US and 1.25% in the Eurozone. Thus, the pound may continue to benefit from yield support, and this may lead to further GBP gains in the short to medium term. 3, Labour government policies around the living wage.

Labour plans for living wage could weigh on BOE rate cut hopes

The last point is worth focusing on. The Tory government raised the living wage by nearly 10% in April, which was the largest increase since the Blair era. Labour have said that they could increase it even more. Back in June, the BOE cautioned that the increase in the living wage could feed through to wage growth more broadly and lead to upward pressure on price growth, particularly core prices. Thus, now that Labour have won the election and have said that they will focus on workers’ rights, the BOE may be more reluctant to cut rates until they know exactly how much upward pressure on wages could be coming down the pipeline. We may not know the government’s plans for raising the living wage until we get the budget in the Autumn, thus a rate cut could be pushed further out to the latter part of H2, especially if the new government’s policies lead to the BOE and the OBR raising their UK growth forecasts. The change in the political landscape in the UK means that the August 1^st BOE meeting will be a close-run event, and one that will be crucial to the direction of sterling.