Risk-On Sentiment Dominates: US Tech Rallies, Nvidia Soars, and Carry Trades Regain Popularity

While the move in US/DM equity has been in play for some 26 days, and the momentum was already clearly skewed for higher levels in risk, what we’re seeing today can be partly explained by the benign US CPI print, which has reinforced the quasi-goldilocks environment for risk appreciation. However, this move is really about the passive/options dealer hedging/systematic flows that have resulted in a momentum chase, which can be best seen and portrayed in the price action, which just further solidifies my view that in this market, the only fundamental input you need is the price – it is only the opinion that I care about.

We can view the intraday tape of the NAS100 and see futures flatlining through Asia and EU trade but came alive as soon as the US cash equity market opened. The volumes in SPX and NAS100 futures predictably spiking when US cash equity trade got underway, and from that point the rally was on, resulting in an out and out low-to-high trend day. The move in the SPX and NAS100 cash and futures played out on volumes a touch below the 30-day average, and some will point to poor breadth and participation (49% of S&P500 companies closed higher on the day) - but when Nvidia and Tesla run hard, and backed by a 1-2% gain in Apple, Amazon, Meta, and Google, the result is typically a positive one for the index.

Nvidia is where we need to be looking, though, with the market happy to build on recent longs – the impressive +5.6% close higher coming in response to confirmation that the US Commerce Department have pulled the Biden-era AI export rules and will replace them with new, potentially less onerous rules, in the future. News that Nvidia will be selling 18,000 of its marquee chips to the Saudis is also fuelling the buying interest. However, it’s the flows that count, and, on the day, we can see nearly 2 million ODTE (zero days to expiry) call options (lots) traded. A large amount of the total call buying centred on the $125, $127 and $130 strikes, and as NVDA’s underlying share price moved higher, options dealers (who sold the calls to the street) would have managed their exposures by buying Nvidia shares to bring their delta back to zero.

Various US bank flow desks also report that CTAs (systematic momentum/trend accounts) have been buying S&P500 futures, with price pushed above the trigger points, while these same players have reached a “max long” exposure in NAS100 futures. Leveraged ETFs are also a factor, with strong moves in a leveraged US tech/semi’s ETF/ETP space seeing the typical high buying volume at the close, with APs rebalancing and bringing the NAV inline.

This is hot market – and perhaps starting to become a little too hot - but as long as the various indices remain above their short-term moving averages (which are rising sharply), and Nvidia continues to show leadership into earnings (on the 28 May) and the rest of the tech space (plus Amazon, Google and Meta) can hold up and support, then – at least for now - I remain on the long side of risk.

Asia will take the lead from Wall Street and run with it, with the HK50 cash set to outperform the other equity bourses in Asia. Tencent report earnings in the session ahead, and while options pricing implies a subdued -/+2.5% move in response to the upcoming numbers, Tencent's earnings are still a risk for those trading the stock and the HK50 index. Our opening calls suggest a flat open for the ASX200, which won’t surprise given the low weighting that ASX tech holds on the index, with US materials and financial stocks failing to fire up and participate in the rally. Locally, Westpac consumer confidence, NAB business confidence and Q1 wages are due out today but shouldn’t move equity or the AUD too intently.

Good luck to all.