The Week Ahead

• Nvidia sinks as Huang faces investigation over affair 
• Nvidia’s loss is AMD’s gain 
• The risk of the key man, and why Nvidia’s business may need to change 
•  CoreWeave gets hit as its saviour Huang comes under scrutiny 
• Why CEO indiscretion matters for the AI trade 
• US inflation, could it surprise on the downside? 
• UK GDP: AI set to drive GDP

The market calm continues as we start a new week. The Vix index, Wall Street’s fear gauge, has fallen back from last week’s peak, although it is still elevated by historical standards. US stock futures are pointing to a higher open, however, there is still a preference for European stocks over US ones, and the oil price is also continuing to fall on Monday and holding much of the decline from last week.  

Nvidia’s crisis 

The main story today is Nvidia, and its shares are down more than 5% in pre market trading, bucking the overall improvement in risk sentiment at the start of this week. Nvidia shares are burdened by news that CEO Jensen Huang, the founder/ CEO of Nvidia, had an affair with a women who is accused of being a Chinese spy. This has plunged Nvidia into a deep crisis and the company’s board has launched an investigation using outside counsel. 

The investigation will focus on whether Huang has been a target of a honeytrap, whereby a foreign operative tried to gather sensitive information from him. There is no reason to think, at this stage, that either national security or Nvidia secrets were compromised by this relationship, however, it still comes at a sensitive time for the AI industry. 

Why Democrats may get the upper hand from Huang’s indiscretion 

AI stocks plunged last week because of fears that a Democratic Congress will scrutinise AI firms and slow down the pace of development. Nvidia has been lobbying the White House to make AI regulation less onerous, however, Huang’s affair and the potential threat to national security will strengthen the Democrats’ hands when they take control of Congress in January. 

Ultimately, this news changes nothing for Nvidia’s upcoming  earnings call. Sales of chips to China are small, they can sell their basic chips after President Trump reversed previous bans. However, they cannot sell their advanced chips like their Blackwell GPUs. Revenue from China makes up less than 1% of total sales, and the company does not include China sales in its forecast for future revenue. Many analysts expect Nvidia to reach the $1 trillion mark for annual sales in 2028, and we do not think that the news threatens this target.

Key man risks for investors 

However, this story highlights a big risk for Nvidia. Huang is only human and humans make mistakes, which he has apologized for. However, this is more than just a family issue for Huang, especially if the investigation uncovers any irregularities with his relationship. 

There are no public succession plans for Huang’s replacement, and so the market does not know who could lead the company, and what their strategy will be if Huang does have to step down because of this. Hunag is one of the only founder/ CEOs left in Silicon Valley, he is Nvidia. 

When one person is seen as being irreplaceable, this can signal governance problems or weaknesses, which are likely to be picked up in this investigation. Ultimately, the outcome of the investigation could change the way that Nvidia does business, it could weaken Huang’s control of the business and it could weigh on the share price for the long term. 

How this could impact Nvidia’s China ambitions 

Nvidia and other chip companies have stated their desire to sell their chips and GPUs into China. This makes commercial sense, since China is the world’s second largest economy. The question is, has this episode jeopardized those potential sales, and can Nvidia continue to see rapid revenue growth without China? Last quarter sales growth was 106% YoY.  

Investors have poured money into Nvidia’s stock on the back of hopes that the company will continue to see mega sales of its chips as the world continues to boost its AI exposure. If Nvidia is now seen as compromised when it comes to national security, investors may look elsewhere.

AMD gains from Huang’s demise  

For now, AMD, Nvidia’s biggest rival in the chip and compute sector, is benefitting from Nvidia’s demise, and its stock price is higher by nearly 4% in pre market trading on Monday. Complicating the situation is Nvidia’s next earnings call on November 17th. That is a must-listen event for traders of Nvidia stock. Typically Huang delivers the earnings call and updates investors and analysts on sales and the future direction of the company. If he takes the call then he is likely to be asked plenty of questions about the investigation and the potential fallout for future sales, which could weigh on the share price. However, if he chooses to skip the call, this could arouse investor suspicion and the stock price may fall further anyway. For now, while Huang is at the helm of Nvidia, the company’s stock price has limited room to recover, in our view, which is good news for AMD.

Chart 1: Nvidia 

Source: XTB 

This episode in Nvidia’s history reminds us that individual corporate risk matters for share prices, and that  universal themes such as political change in Washington, or fears about the AI buildout are not the only drivers of stock prices. 

Nvidia drags CoreWeave down 

Interestingly, CoreWeave’s stock price is also declining sharply in the pre-market today and buckling the overall direction in US futures markets. Nvidia has a close and multilayered relationship with CoreWeave. It is one of Nvidia’s largest neocloud customers and the two companies have a massive contractual agreement with Nvidai agreeing to purchase unsold capacity at CoreWeave data centres, while CoreWeave buys Nvidia GPUs. 

The neocloud sector has been under intense pressure in recent months as analysts worry about unused capacity and the lifecycle of their data centres. It was Jensen Huang who came out and supported CoreWeave just 3 weeks ago and said it was stabilizing and the company did not need a backstop. 

If CoreWaeve’s financial position worsens in future, the view was that Nvidia would always step in and stabilize the company. However, there is now a risk that if Huang has less influence at Nvidia, or if other executives question the reverse capacity agreements with the likes of CoreWeave, then a potential backstop may not be forthcoming. This means that investors are likely to cool on CoreWeave further, and this stock is one to watch. 

So far, Nvidia’s decline is not having an impact on the index level in the US,  as investors brush off this corporate news and instead focus on falling oil prices and the upcoming week ahead. There is plenty of economic data to keep investors busy after a volatile few weeks for markets. 

1, US CPI 

US inflation will dominate sentiment on Tuesday. The market is expecting the annual rate of headline price growth to rise to 3.9% in October, up from 3.7% in September. The annualised core reading of CPI is also expected to rise to 2.8% from 2.6%. However, investors may instead focus on the monthly readings. The monthly rate of headline inflation is expected to drop to 0.3% from 0.6% in September, while the core rate is expected to rise by only 0.2%. This could ease fears that price pressures are building in the pipeline, and could be an antidote to the strong NFP reading on Friday. 

A moderate reading for CPI last month could see a pullback in expectations for a Fed rate hike next month. CME’s Fedwatch tool is pricing in an 80% chance of a hike next month. It could also weigh on the dollar, which is weakening again on Monday. The dollar index is back below 102.00, however, it remains close to its highest level in 18 months, so there is room for plenty of downside if we see a weaker than expected reading for inflation this week. 

2, UK GDP 

Q3 GDP will be released on Thursday, and investors are expecting a robust reading for the quarter. Growth is expected to expand by 0.7%, which is the fastest quarterly pace of growth since the start of 2024. 

The UK economy has been surprising on the upside in recent months. This has been driven by AI spending and investment, which the BOE estimated has contributed nearly a fifth to UK growth this year. 

The AI theme is now penetrating into the real economy, just as cracks are starting to appear in the AI trade. However, UK GDP data could ultimately help investors to regain confidence in the AI trade in the long term. AI is a transformative technology and the UK is expected to have one of the quickest uptakes of AI due to our strength in the tech sector. If the UK economy is growing due to rapid AI expansion, then this is also proof that demand for AI infrastructure and products continues to build. 

Monthly GDP data for September is expected to slip and -0.1% is expected. However, analysts and economists have routinely under-estimated UK GDP in recent months, so take these expectations with a pinch of salt. Business AI investment does not turn on and off like a tap, also, the UK consumer has been resilient in the face of higher energy prices, so we would not be surprised if the September data is also stronger than expected when it is reported later this week. 

The pound will be in focus during the GDP data. A weaker than expected reading could weigh on Gilts and the pound. GBP/USD is higher by 1.5% in the past month, and the pair is back above $1.34. However, weaker GDP data could halt cable’s march back towards $1.35. 

In contrast, a strong reading could see this pair bounce above $1.35, for the first time since early September. 

Chart 2: GBP/USD, daily chart 

Source: XTB