Market Review 2nd September 2024

Everything you need to know, Simplified!

Markets last week

Summary

• Markets were stable, with equities rising slightly and bond yields ending moderately higher

• NVIDIA’s second-quarter earnings results were closely watched, highlighting its significant impact on broader market sentiment. Despite a 7.7% drop in NVIDIA share price, broader market sentiment remained positive, with eight out of eleven sectors finishing in positive territory

• Bond markets gave back some ground but have made significant gains in recent months, particularly in the US Treasury market, as the case for Federal Reserve (Fed) loosening has strengthened

• The Fed’s favoured inflation gauge, core Personal Consumption Expenditures (PCE), remained steady in August, aligning with the Fed’s 2% target

• Eurozone inflation slowed from 2.6% in July to 2.2% in August, supporting the case for further European Central Bank (ECB) easing

• Services inflation rose, largely due to hospitality price increases in France during the Olympics

• This week, US labour market data is greatly anticipated, with expectations of a slight improvement in the unemployment rate from 4.3% to 4.2%.

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Markets last week

Market environment

On rare occasions, a singular company rises above its peers, shifting from a mere market participant to a pivotal force influencing broader economic trends. NVIDIA, the US chip manufacturer at the forefront of the Artificial Intelligence (AI) boom has become such a force, transcending the micro into the macro realm. Last week NVIDIA reported its second quarter earnings and even the most macro-minded investors were paying close attention.

Altogether it was a quiet week where equity markets drifted higher, the US market rose 0.2% while the UK rose 0.4%. Bond yields coasted sideways rising on Friday to end moderately higher. The US 10-year Treasury yield closed at 3.90% and the UK 10-year gilt yield at 4.02%.

NVIDIA and equities

Before the launch of OpenAI’s ChatGPT, NVIDIA had a market capitalisation of $290bn, today it is $3trn making it the third largest company in the world. Its growth has seen it become a key driver of equity markets and sentiment. NVIDIA’s superior chips are required to operate AI models and since the launch of ChatGPT in November 2022, demand for NVIDIA’s chips has exploded, leading to a period of supernormal sales.

NVIDIA’s second-quarter results were remarkable, beating earnings estimates. However, the results did not fully meet the market’s high expectations. NVIDIA’s profit margin remained above 50%, five times the average for the US market (according to Bloomberg) but fell marginally for the first time since the launch of ChatGPT. Additionally, analysts were hoping for more clarity on the rollout of their next-generation Blackwell chip.

NVIDIA shares fell 7.7% last week, evidencing the extent to which the company had been priced to perfection. The good news is that although the market reaction was negative, it wasn’t enough to diminish broader positive sentiment with eight out of eleven sectors finishing in positive territory. Technology was the worst performing sector and growth underperformed value with financials, industrials and materials performing best.

Inflation and bonds

Bond markets gave back some territory but have made significant gains in recent months, particularly the US Treasury market has performed well as the case for Fed loosening has strengthened. The Fed’s favoured inflation gauge, core PCE, remained steady in August and is consistent with the Fed’s 2% target.

Fresh insights into Eurozone inflation provided a positive backdrop as headline inflation slowed from 2.6% in July to 2.2% in August. Energy base effects were largely responsible for the fall. Services inflation jumped to 4.2% - much of this can be attributed to hospitality price rises in France during the Olympics. Policymakers remain cautious given sticky services inflation and a gradual easing cycle remains the base case. Nonetheless falling inflation supports the case for further easing from the ECB. European sovereign yields rose slightly over the week with the 10-year German bund yield closing at 2.30%.

The rise in yields in the US and Europe was largely in anticipation of fresh supply in September.

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The week ahead

Friday: US labour market data

Our thoughts: The US labour market has ‘unmistakably’ cooled in recent months and in doing so unsettled equity markets. August’s report is therefore greatly anticipated. The data is expected to show some marginal improvement with the unemployment rate projected to fall to 4.2% from 4.3% in July. Nonetheless the softening of the labour market supports the case for interest rate cuts and will be instrumental in determining the scale and pace of the easing cycle.

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