The Overnight Report: AI Explosion

By Greg Peel

Breakdown

The ASX200 crashed through support at 7200 yesterday, due to no result on the US debt ceiling, sparking a significant technical sell-off, no more evident than in the banks (-1.9%) – the worst sector performer.

We can only assume that when a deal is reached, we’ll go flying back up again, but the other issue is that of commodity prices, and that’s more to do with China, other than for gold.

Materials was the second worst performer yesterday (-1.8%). Energy managed to fall only -0.6% due to higher oil prices but the oils rolled over last night.

US bond yields are now running up hard and dragging Aussie bonds with them. Yesterday the tens rose 4 points and the twos rose 7.

Consumer discretionary fell another -1.1%. Staples, which should be a place to hide, fell -0.5% on a balance of Costa Group Holdings Ltd (ASX:CGC) 6.7% gain on its AGM and Treasury Wine Estates Ltd (ASX:TWE) -7.8% fall on a guidance downgrade.

Healthcare did offer some safety (+0.3%), as did utilities (-0.1%) ahead of massive power price rises, but the star of the day was technology (+2.4%), boosted by Nvidia’s (NASDAQ:NVDA) result overnight.

The connection is indeed spurious, except perhaps for Nextdc Ltd (ASX:NXT), which rose 4.3% as Nvidia supplies data centres. AI company Appen Ltd (ASX:APX) rose 8.5% but is no longer in the index. Brainchip Holdings Ltd (ASX:BRN) is in the index, but is currently in a trading halt.

The good news is our futures are only down -6 points this morning, although the S&P500 is up 0.9% overnight. We’re not joining in today because it was all about Nvidia and we did that yesterday.

More critical will be the debt ceiling negotiations, which have gone nowhere so far. With only seven days to go to the supposed D-Day, there is some hope there could be a breakthrough over this Memorial Day long weekend.

The Real Deal

Given Nvidia had already rallied 100% year to date on AI hype, it was clear the company would have to post a damned impressive earnings result in order to avoid a wave of profit-taking. Suffice to say it did, but it was next quarter revenue guidance that really had Wall Street agog.

Nvidia thus rallied 25% last night – or actually step-jumped 25%, as it had already rallied by that much in Wednesday night’s aftermarket. The stock is now up 160% year to date to a PE multiple of 175x.

Investors are betting that E (earnings) will only grow exponentially from here. While there will at some stage no doubt be some blow-off, commentators agree AI is no passing fad. While many a company is still busy migrating their systems on to the cloud, there will need to be a manifest uptick in IT investment over the next several years to generative AI capabilities, and while Nvidia is not alone in providing the goods, it is top of the pops at present.

All chipmakers and other related tech stocks rallied last night, to send the Nasdaq up 1.7% and the S&P500 subsequently up 0.9%.

Snoring away in a rocking chair in the corner was the Dow Jones Industrial Average.

Here’s a fun fact: During the first 100 trading days of the year, the Nasdaq has now outperformed the blue-chip Dow by more than 22% — the widest margin since the Nasdaq’s launch in 1971.

The problem for the anachronistic Dow is that it only includes two Mega Techs – Microsoft Corporation (NASDAQ:MSFT) and Apple Inc (NASDAQ:AAPL) – and because it is share price-weighted these two stocks have a lesser impact than for the market cap-weighted S&P500, or Nasdaq. Other Mega Techs, such as Amazon.com Inc (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL), trade on share prices that are too high to be included without completely distorting the Dow index.

As tech takes over the world, even more than it already has, the Dow’s relevance diminishes. Not that today’s traders really pay much attention to it anyway – the S&P500 is the US index.

At least we can say that the Dow was down around -200 points last night before closing down only -35.

Meanwhile, while Nvidia was sucking all the oxygen out of the room last night, top House Republicans and the White House sounded upbeat last night on the debt ceiling talks, with Biden saying negotiations were “making progress”.

Wall Street will only believe it when it sees it. Selling in US bonds accelerated further last night, as D-Day approaches, but yields were pared back on the above “progress” comment. Ratings agency Fitch has nevertheless put the US on “negative watch” ahead of a potential downgrade.

Commodities

Oil prices had been climbing for the past few sessions on speculation OPEC-Plus was set to further cut production quotas, but last night the Russian Deputy Prime Minister played down the prospect, sending prices tumbling again.

You can always trust those Russians.

Gold continues its pullback as US bond yields continue to rise, which are also pushing up the US dollar, adding to weakness for the Aussie, which is down another -0.6% at US$0.6510.

Today

The SPI Overnight closed down -6 points.

Australia will see April retail sales data today, which will be closely watched by the RBA.

The US will see durable goods orders and consumer sentiment but, more importantly, April PCE inflation.

Fisher & Paykel Healthcare Ltd (ASX:FPH) reports earnings today.

Appen Ltd (ASX:APX) hosts an investor day and Invocare Ltd (ASX:IVC), under renewed takeover, holds its AGM.

CSR Ltd (ASX:CSR) goes ex.

"The Overnight Report: AI Explosion" was originally published on FNArena.com and was republished with permission.