Nvidia once again impressed the world with its quarterly earnings results last Wednesday. It was arguably one of the most anticipated earnings reports in recent years, giving investors a much needed insight into the current state and future outlook of AI demand.
Before the release, options markets were pricing in an average of a 6.4% share price move in either direction; for the world’s largest company this is equivalent to a gain or loss of a staggering $280bn. This demonstrates how much uncertainty is currently priced into companies with revenues that are heavily tied to AI. To put this into perspective, AstraZeneca – the largest company in the UK – has a market cap of just $275bn.
Markets initially responded very positively to the figures, which comfortably beat expectations on all key profitability metrics. Nvidia’s shares rose over 5% in after-hours trading and sent equity markets in Asia rallying when they opened on Thursday morning – Japan’s Nikkei 225 and South Korea’s KOSPI were up 2.7% and 2% respectively.
US Equity Market:
The broad market sell-off continued at the beginning of last week; the S&P 500 was down around 1.4% by close last Wednesday. Nivida’s results, combined with some positively received labour figures temporarily restored some confidence, bringing the index back into positive territory last Thursday morning. This was short lived as the S&P 500 fell over 3.3% from its intraday high later in the afternoon. This marks the largest daily swing since the tariff announcement back in Aprils.
At close on Friday the S&P 500 and the tech-heavy NASDAQ Composite were down 1.9% and 3.04% respectively for the week.
UK Equity Market:
The UK equity market has performed extremely well this year, with the FTSE 100 outperforming both the S&P 500 and the STOXX Europe 600 in local currency terms. This stellar performance has, in part, been driven by global investors trying to diversify their exposure away from the US market, which has become more and more concentrated.
Data released from Emerging Portfolio Fund Research (EPFR) last week showed that domestic investors have actually pulled money out of the UK equity market at a record rate this year, missing out on these gains. Some of these outflows have been attributed to uncertainty around the Budget this week. With the government looking to raise around £20bn, tax rises are certainly a possibility, and some investors have opted for crystalising capital gains and boosting cash reserves to exclude themselves from potential market volatility.
At close on Friday the FTSE 100 was down 1.58%, broadly in line with the sell-off seen in most major equity markets in the past week.
Inflation, Interest Rates and Bond Markets:
The US Bureau of Labor Statistics have announced that, as a result of the government shutdown, October’s jobs data figures will not be published in time for the next Federal Reserve meeting on the 10th December. These will instead appear on the 16th December alongside the November figures. Before the release of the September labour figures last Thursday, markets were pricing in just a 30% chance of a cut at the next meeting, down from 95% three weeks prior. In September the US economy added 119,000 jobs, far surpassing the 50,000 expected. The unemployment figure, on the other hand, came in higher than expected at 4.4%, complicating the decision for the Fed next month.
In the UK, inflation fell to 3.6% for October, increasing the likelihood of an interest rate cut from the Bank of England at the next Monetary Policy Committee meeting. After a tight 5-to-4 vote in favour of holding rates at 4% on the 6th November, the Bank of England is expected to cut the base interest rate to 3.75% on the 18th December.
The Japanese Yen has fallen to a 10-month low against the dollar, as the country now faces its highest borrowing costs since the global financial crisis in 2008. Yields on the benchmark 10-year government bond rose up to 1.84% last Thursday on the expectation that the new prime minister, Sanae Takaichi, will announce a plan for larger-than-expected government spending. The 30-year government bond yields rose to an all-time high of 3.40% last Thursday, highlighting investor concerns over debt sustainability in a country with a debt-to-GDP ratio exceeding 250%.
What’s on the horizon
For UK investors, attention is going to be heavily on the Budget on Wednesday. Rachel Reeves is expected to announce plans to plug a fiscal gap that is estimated to be in the region of £20bn. With reports emerging recently that Labour are likely to keep their manifesto promise to not raise income tax, VAT or National Insurance, investors are wondering where this money is going to come from. Bond markets didn’t react to the news well, sending the 10-year gilt rate up as much as 0.13% before recovering some of the losses.
Germany will release third-quarter GDP figures on Tuesday, giving investors an insight into the financial health of Europe’s largest economy. On the other side of the world, Australia and Japan are due to release new inflation figures on Thursday and Friday respectively.