The Overnight Report: AI Explosion

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World Overnight
SPI Overnight	7150.00	– 6.00	– 0.08%
S&P ASX 200	7138.20	– 75.60	– 1.05%
S&P500	4151.28	+ 36.04	0.88%
Nasdaq Comp	12698.09	+ 213.93	1.71%
DJIA	32764.65	– 35.27	– 0.11%
S&P500 VIX	19.14	– 0.89	– 4.44%
US 10-year yield	3.81	+ 0.10	2.55%
USD Index	104.22	+ 0.34	0.33%
FTSE100	7570.87	– 56.23	– 0.74%
DAX30	15793.80	– 48.33	– 0.31%

By Greg Peel

Breakdown

The ASX200 crashed through support at 7200 yesterday, due to no result on the US debt ceiling, sparking a significant technical sell-off, no more evident than in the banks (-1.9%) – the worst sector performer.

We can only assume that when a deal is reached, we’ll go flying back up again, but the other issue is that of commodity prices, and that’s more to do with China, other than for gold.

Materials was the second worst performer yesterday (-1.8%). Energy managed to fall only -0.6% due to higher oil prices but the oils rolled over last night.

US bond yields are now running up hard and dragging Aussie bonds with them. Yesterday the tens rose 4 points and the twos rose 7.

Consumer discretionary fell another -1.1%. Staples, which should be a place to hide, fell -0.5% on a balance of Costa Group’s ((CGC)) 6.7% gain on its AGM and Treasury Wine Estates’ ((TWE)) -7.8% fall on a guidance downgrade.

Healthcare did offer some safety (+0.3%), as did utilities (-0.1%) ahead of massive power price rises, but the star of the day was technology (+2.4%), boosted by Nvidia’s result overnight.

The connection is indeed spurious, except perhaps for NextDC ((NXT)), which rose 4.3% as Nvidia supplies data centres. AI company Appen ((APX)) rose 8.5% but is no longer in the index. BrainChip Holdings ((BRN)) is in the index, but is currently in a trading halt.

The good news is our futures are only down -6 points this morning, although the S&P500 is up 0.9% overnight. We’re not joining in today because it was all about Nvidia and we did that yesterday.

More critical will be the debt ceiling negotiations, which have gone nowhere so far. With only seven days to go to the supposed D-Day, there is some hope there could be a breakthrough over this Memorial Day long weekend.

The Real Deal

Given Nvidia had already rallied 100% year to date on AI hype, it was clear the company would have to post a damned impressive earnings result in order to avoid a wave of profit-taking. Suffice to say it did, but it was next quarter revenue guidance that really had Wall Street agog.

Nvidia thus rallied 25% last night – or actually step-jumped 25%, as it had already rallied by that much in Wednesday night’s aftermarket. The stock is now up 160% year to date to a PE multiple of 175x.

Investors are betting that E (earnings) will only grow exponentially from here. While there will at some stage no doubt be some blow-off, commentators agree AI is no passing fad. While many a company is still busy migrating their systems on to the cloud, there will need to be a manifest uptick in IT investment over the next several years to generative AI capabilities, and while Nvidia is not alone in providing the goods, it is top of the pops at present.

All chipmakers and other related tech stocks rallied last night, to send the Nasdaq up 1.7% and the S&P500 subsequently up 0.9%.

Snoring away in a rocking chair in the corner was the Dow Jones Industrial Average.

Here’s a fun fact: During the first 100 trading days of the year, the Nasdaq has now outperformed the blue-chip Dow by more than 22% — the widest margin since the Nasdaq’s launch in 1971.

The problem for the anachronistic Dow is that it only includes two Mega Techs – Microsoft and Apple – and because it is share price-weighted these two stocks have a lesser impact than for the market cap-weighted S&P500, or Nasdaq. Other Mega Techs, such as Amazon and Google, trade on share prices that are too high to be included without completely distorting the Dow index.

As tech takes over the world, even more than it already has, the Dow’s relevance diminishes. Not that today’s traders really pay much attention to it anyway – the S&P500 is the US index.

At least we can say that the Dow was down around -200 points last night before closing down only -35.

Meanwhile, while Nvidia was sucking all the oxygen out of the room last night, top House Republicans and the White House sounded upbeat last night on the debt ceiling talks, with Biden saying negotiations were “making progress”.

Wall Street will only believe it when it sees it. Selling in US bonds accelerated further last night, as D-Day approaches, but yields were pared back on the above “progress” comment. Ratings agency Fitch has nevertheless put the US on “negative watch” ahead of a potential downgrade.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1941.20	– 16.30	– 0.83%
Silver (oz)	22.73	– 0.30	– 1.30%
Copper (lb)	3.56	– 0.01	– 0.15%
Aluminium (lb)	1.01	+ 0.01	0.94%
Nickel (lb)	9.61	+ 0.19	1.99%
Zinc (lb)	1.01	– 0.03	– 3.07%
West Texas Crude	71.85	– 2.49	– 3.35%
Brent Crude	76.10	– 2.25	– 2.87%
Iron Ore (t)	105.60	+ 0.04	0.04%

Oil prices had been climbing for the past few sessions on speculation OPEC-Plus was set to further cut production quotas, but last night the Russian Deputy Prime Minister played down the prospect, sending prices tumbling again.

You can always trust those Russians.

Gold continues its pullback as US bond yields continue to rise, which are also pushing up the US dollar, adding to weakness for the Aussie, which is down another -0.6% at US$0.6510.

Today

The SPI Overnight closed down -6 points.

Australia will see April retail sales data today, which will be closely watched by the RBA.

The US will see durable goods orders and consumer sentiment but, more importantly, April PCE inflation.

Fisher & Paykel Healthcare ((FPH)) reports earnings today.

Appen hosts an investor day and InvoCare ((IVC)), under renewed takeover, holds its AGM.

CSR ((CSR)) goes ex.

The Australian share market over the past thirty days…

Index	25 May 2023	Week To Date	Month To Date (May)	Quarter To Date (Apr-Jun)	Year To Date (2023)
S&P ASX 200 (ex-div)	7138.20	-1.94%	-2.34%	-0.55%	1.41%

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AFP	AFT Pharmaceuticals	Upgrade to Buy from Hold	Bell Potter
AX1	Accent Group	Downgrade to Neutral from Buy	Citi
CAT	Catapult International	Upgrade to Buy from Hold	Bell Potter
CMM	Capricorn Metals	Upgrade to Buy from Hold	Bell Potter
DBI	Dalrymple Bay Infrastructure	Upgrade to Add from Hold	Morgans
EBR	EBR Systems	Upgrade to Speculative Buy	Bell Potter
NAB	National Australia Bank	Downgrade to Underweight from Equal-weight	Morgan Stanley
NAM	Namoi Cotton	Downgrade to Hold from Add	Morgans
QAN	Qantas Airways	Upgrade to Buy from Neutral	UBS
TAH	Tabcorp Holdings	Upgrade to Overweight from Equal-weight	Morgan Stanley
TNE	TechnologyOne	Downgrade to Hold from Buy	Bell Potter
		Downgrade to Hold from Buy	Shaw and Partners
WBC	Westpac	Downgrade to Equal-weight from Overweight	Morgan Stanley

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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