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Trader Thoughts – You can’t keep AI names down for long

Chris Weston
Head of Research
Mar 12, 2024
The market had rightly put significant emphasis on the US CPI print, but while we saw US core CPI coming in hot at +0.36% m/m, this was not enough to shock a market that had largely priced this outcome.

We now look ahead at US PPI inflation tomorrow (23:30 AEDT), and economists will take out the components from the PPI basket and feed them into their models for core PCE inflation, alongside contributions from today’s CPI basket to get a better steer on core PCE inflation expectations (due 29 March) – where current estimates for the February print are running around 0.3% m/m (from 0.42% in Jan).

As is typically the way, we see a reaction in markets and try to justify that move with sound fundamental reasoning – it's why pure price action and TA traders often lead a less troubled existence. The surprising reaction has been in US equity which has found good buying support after an initial pullback, with AI names providing tailwinds for the NAS100, which has led the charge higher (the cash index closed +1.5%). In the art of justifying this move perhaps these cynical equity heads had gone in looking for a core CPI print above 0.4% - relief being the order of the day.

Rates reaction - US swaps pricing massages a 25bp cut in the June FOMC meeting lower into a 79% probability and price out 6bp of expected cuts by December, which in part leads the US 2yr Treasury +5bp at 4.58%. I question if the average market participant had known the US CPI print in advance and even known the reaction in rates/Treasuries, then I’m sure many would have said equity should be 0.5% to 1% lower and not breaking to new highs!

It cements the notion that the market will do what it wants to do, and we, as traders, react as unemotionally as possible to the flows.

You can’t keep AI/tech down for long – Oracle (+11.7%) leads the way after solid earnings and has some gap to fill at stage down the track, while Super Micro and Nvidia kick hard once again – Nvidia investors eye next week’s GTC conference with keen interest and CEO Jensen Huang’s presentation (18 March) will a must watch for tech/AI investors. Tactically, the risk of a strong run into Nvidia’s GTC conference seems real, although this sets the stock up for a sell-the-fact type event.

Looking at NVDA 1-month (25 delta) call implied volatility we see it trades at a 9 vol premium to puts – this is rare and essentially shows that options traders feel if there is to be a move then it will be far more pronounced to the upside than downside – truly bullish expectations.

Poor breadth, whatever…

The US500 cash closed 1.1% and resulted in the 17th closing ATH of 2024, in what has been a solid low to high intraday tape – 57% of stocks closed higher, so participation could be better in a 1%+ move, but for equity index traders poor market breadth has failed to give any reliable signal for some time. Tech leads, with comm services, and discretionary working well, while utilities and REITS lag.

EU equity can’t be left out either, as the respective cash markets had a chance to price the US CPI print and we see green on screen across the various bourses, with new ATHs in the EUSTX50, FRA40 and GER40. Happy to be biased long FRA40 and GER40 – onwards and upwards for now.

Our opening calls for Asia look mixed at this stage, with the JPN225 likely seeing the outperformance, and we see the HK50 opening 0.5% lower. The ASX200 eyes an open 0.2% higher – flick to the 1-hr timeframe and longs will want to see a move through 7733/36 (the 38.2 fibo of the recent pullback and 12 March intraday high), where a break will open a move towards 7780.

The DXY is largely unchanged on the day although looking across the various currencies we see heightened activity, and the USD has moved modestly higher on a broad basis, with the NOK, JPY and NZD holding the bigger percentage changes. Again, no real significant range expansion in this space, and looking at the various daily charts we see indecision in the price action.

USDJPY remains front and centre with ever more speculation around next week’s BoJ meeting – it seems a 10bp hike and a move away from negative rates (NIPR) seems a real proposition, although most are questioning if really matters if the hike is in March or April and we also need to consider other factors including its plans for bond purchases.

One could also argue that while we could get some short-term vol in the JPY and JPN225, what really matters is pricing and expectation for further policy moves further out of Japan’s rates curve and a belief they could go again later this year – there is a big difference between a token move away from NIRP and unconventional policy, and that of a hiking cycle, which we’ve all felt ex-Japan.

What to do with USDJPY? For now, the pair eyes US PPI and US retail sales tomorrow and USDJPY will likely be a slave to moves in US 2yr Treasury yields – we also get the outcome of Japan's large company wage negotiations on Friday and that could be a big influence on expectations on next week’s BoJ meeting – my preference is to sell strength into 148.20.

Gold has been well traded once again from clients and many have been on the right side of the move into $2150. While we’ve seen some pockets of USD strength, US real rates have risen 3 to 4bp higher, and the slight repricing of US rate expectations has married with a gold price that has had quite the run. No market ever goes up forever, and gold is no different. Price holds above the 5-day EMA for now, and so all is not lost for XAUUSD longs – it will need to kick though, and perhaps this flush out is just what new money wanted to see.

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