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Breakfast Bites - Breaking records!

Nvidia smashes earnings; Japan hits all-time high!; Fed minutes signal caution; S. Korea holds rates

Author

Ayesha Tariq
February 22, 2024

Rise and shine everyone.

The big news we’ve all been waiting for… Nvidia did not disappoint! The data center market continues to remain strong and chip demand is increasing to fulfill the needs of AI computing power. Revenues rose 265.3% year/year to $22.1 bln vs the $20.4 bln est. and EPS came in at $5.16 vs. $4.59 est. They issued upside guidance for Q1 (Apr), sees Q1 revs of $24.0 bln +/- 2%. The stock is up over 14% in pre-market trading. ⚡️

But Mr. Huang is not the only one breaking records. Here’s something I never thought I’d see in my lifetime. ⤵️

That’s right… Japan’s Nikkei 225 surpassed all-time closing high in intraday trading… the last time we saw that was 38,915 on Dec 29th, 1989, about 34 years ago! 🤩

It seems like the whole world was waiting for Nvidia to smash earnings. Asian markets traded higher across the board, as did Europe. The Eurostoxx 600 also hit an all-time high!

US Equity Futures are significantly higher with the Nasdaq 100 Futures up over 2% in pre-market trading. The US Dollar and Yields are moving lower, alongside Oil and Bitcoin. Gold is higher.

Big Stories

The Fed will be cautious

  • US FOMC Minutes reinforced the view that many members are unclear about when the rate cuts that the market has already priced in may begin to occur. They acknowledged that rates had peaked but, will not lower interest rates until they're sure inflation is steadily dropping toward their 2% goal.

  • Short-term funding markets were described as stable, with typical year-end dynamics. The decline in the ON RRP was not cause for concern and reflected shifts by money market funds towards Treasury bills and private-market repurchase agreements, which offered slightly more attractive rates compared to the ON RRP rate.

  • While financial stability risks in the banking system had declined notably and liquidity remains ample, they did highlight certain vulnerabilities that required monitoring including uninsured deposits, unrealized losses on assets from rising longer-term interest rates, and high exposures to commercial real estate.

  • In-depth balance sheet discussions will likely during the March meeting to decide on slowing the pace of run-off. This consideration was linked to uncertainties surrounding the ample level of reserves and the aim to smooth the transition to that level or to allow for a longer duration of balance sheet runoff.

PMIs Contract

While Japan’s equity market moves higher, PMIs move lower in stark contrast. After the recession reading, this will be yet another concern for the BoJ when it comes to making a decision about rates. This was the lowest PMI out of Japan since the pandemic in 2020.

Australia slipped into a contraction as well on the manufacturing side, and Germany came in notably weaker. We were looking for these numbers to bottom, and start to turn up from here. But, it would seem that there’s still some ways to go and global growth continues to slow.

It’s interesting to note, however, that services PMIs are picking up. This is yet another point of concern - can this lead to services re-accelerating, or remaining sticky at least?

Quote of the Day

“The time for lower rates is certainly not now.” Fed’s Bowman

Chart of the Day

Presented without comments!

  • The Bank of Korea held rates at 3.5%, and Gov Rhee said it was unlikely to cut during H1. While the market is higher today on tech results, this could result in a pullback in the next couple of days.

  • India Regulator Finds $241 Million Accounting Issue at Zee. This came after news that the possible alliance with Sony would be revived.

  • Fitch affirms Hong Kong at AA-; Outlook stable

  • China said to boost AI development by state-owned companies.

  • China reportedly implements a ban on net sales at the opening and closing of each market session.

  • Indonesia's Central Bank (BI) keeps the BI rate steady at 6.00%, as anticipated. Governor Warjiyo mentions in a pre-rate decision press briefing that rising geopolitical tensions could disrupt supply chains, potentially slowing the reduction of inflation.

And in other news, I was on Bloomberg this morning discussing markets. Here’s a snapshot of the discussion:

BLOOMBERG DISCUSSION

We continue to see financial conditions ease and strong growth and the scenario is playing out in line with our outlook - a re-acceleration of inflation and animal spirits taking over the markets.

Inflation - Now, the scary part about inflation here is that the inflation re-acceleration that we're seeing is internal versus external. So we're seeing services inflation go up, and shelter inflation accelerate again. So this is a little worrying.

Fed Rate Cuts - The Fed has a path here. And the path is that they will start cutting rates, but not too soon, which is the right view because the last thing they want is to make a mistake here. The risk of cutting too soon would be that inflation starts to become entrenched then the Fed will possibly have to hike further than where we are right now.

Portfolio and Earnings - In terms of a portfolio, what I would look at here is more the growth story in earnings. Earnings right now are improving, but most of it is still driven by the Mega Cap tech. Right? We want this handoff to happen. We want to see the Mega Cap Tech to normalize and the rest of the market to pick up and the market to broaden out. So that's still undervalued to a certain extent. And so we think there's good opportunity in, say, industrials, healthcare and even energy for that matter, ahead of the Fed cuts.

Japan, hit an all-time high today. But I'd be cautious about Japan though, because we are going to see a change in policy there. So perhaps in March, I would start to sort of take some profits.

Emerging markets - I think the opportunity is huge because the path for rate cuts in the emerging markets seems to be a little bit clearer. They've been hiking for a while, they've held rates high for a while, and it's time for them to ease. It seems like they have their act together a lot more. We're seeing earnings as well revised upwards. So all things considered, I think emerging markets are a great space to be in 

Long Energy - Many of these energy companies have had huge cash flows since 2022. They are increasing their return to shareholders, but they are still undervalued. So there's a lot of room for them to run over there. Chevron, for example, is a really good pick. They're broadening their portfolio with all the cash that they got into. So I think everything considered, the energy companies, if you select them well, they have upside growth for a while.

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)

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