The Overnight Report: All-In On Ai & Tech

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World Overnight
SPI Overnight	7752.00	– 21.00	– 0.27%
S&P ASX 200	7769.70	– 8.40	– 0.11%
S&P500	5487.03	+ 13.80	0.25%
Nasdaq Comp	17862.23	+ 5.21	0.03%
DJIA	38834.86	+ 56.76	0.15%
S&P500 VIX	12.48	– 0.27	– 2.12%
US 10-year yield	4.22	0.00	0.00%
USD Index	105.25	– 0.02	– 0.02%
FTSE100	8205.11	+ 13.82	0.17%
DAX30	18067.91	– 64.06	– 0.35%

It looks like the local market is yet again positioned for a rather lacklustre session.

By Chris Weston, Head of Research, Pepperstone

Good morning,

With US markets closed for the Juneteenth holiday, and as we look ahead to a massive US quarterly options expiration on Friday, which could have big implications for equity markets and volatility next week, we look at the current trend in US large-cap indices and what could spur a lasting reversal of fortunes.    

-S&P500 YTD gains coming predominantly from six stocks
– When could we see Nvidia reverse its bull trend?
-The big risk to markets
-Why market positioning is a factor to consider

With the NAS100 eyeing 20k and the S&P500 pushing 5500, and with the knowledge that July is typically a solid month for returns in the NAS100 (the NAS100 has closed higher in July in all 15 of the last 15 years), the question of what derails this momentum move is one we hear ever more frequently from clients.

Granted, all is not so rosy under the hood, where index market breadth has been poor, with participation underwhelming, suggesting the rally has been built on a shaky foundation.

As many who have tried to short these indices at least outside of a scalp or a day trade will attest to, bearish directional trades have been tough, as we rarely get follow-through after a 1-day down move.

Naturally, the question comes down to what rocks Nvidia, Apple, Microsoft, Meta, Alphabet and Amazon, given these six names alone have accounted for 60% of the S&P500’s 15% YTD gains. Conversely, only 30% of S&P500 constituents are outperforming the S&P500 YTD the lowest read in two years.

It has simply been a tough trade to bet against AI in its various guises – so until we lose these behemoths then pullbacks at an index level will likely be shallow and well-supported.

Nvidia remains the most important stock in the world, having now eclipsed Microsoft as having the largest market capitalisation globally.

There has been some focus that corporate insiders (within Nvidia’s upper ranks) have recently been selling down holdings, but judging by the price action, few in the investment or trading world have seen this as a signal to reduce exposures in fact, given the daily massive level of short-dated call (option) buying relative to puts, most market players continue to chase the intraday rallies.

Maybe this dynamic changes as we head into US Q2 earnings, where Nvidia reports on 23 August. Perhaps should Nvidia trade on a 55x-60x forward PE multiple (currently 50x) and where this quarterly earnings report should see a decline in gross margins into 75%, then perhaps this could be the time to rotate into other areas of the market.

The big overriding concerns that could impact

The scenario which would cause a lasting reversal in risk would be a trend towards deteriorating economic data flow, with labour markets cooling far quicker than many expect, consumption metrics pulling back rapidly and business and consumer confidence falling hard. If this was to occur, especially if inflation remains at current levels, or even rises, then all bets are off and we think about the Fed having to ease rates to stimulate the economy.     

However, if the US economic data flow is really going to deteriorate increasing the prospect of a recession, which would impact corporate earnings, then it isn’t going to happen overnight and could take months to fully evolve.

We also know there is Fed insurance that supports risk sentiment, with the central bank ready to ease rates to a more neutral setting (considered to be 3.5% on the fed funds rate), should conditions warrant such action. We also know the Fed can very effectively utilise its balance sheet should it need to. Why sell equity exposure when the Fed has your back?

The French election risk rolls on and there could be further volatility going into the second-round vote on 7 July, but it is not going to spur a correction in these big US tech names. Quite the opposite in fact, where capital will likely come out of EU assets and head to the US tech plays should we see increasing concerns. The threat of France leaving the EMU is also very low, even if the right-wing RN party get a working majority.

The US Presidential election is not until 5 November, and it’s still too early to be expressing a view at this point. Again, it is early days, but the probability markets (and recent polls) currently suggest that Trump will likely be re-elected as President, with the Democrats flipping the House and the GOP getting the Senate.

Granted, Trump will go hard on tariffs, but he’ll be just as hard on deregulating industries and that could bedare I say it. the trumping factor that sees US equity outperform.

We can go on looking at the risk factors that could spur a lasting trend reversal, but one aspect that makes me nervous is equity and volatility positioning. Now positioning alone won’t be the cause of a more prolonged drawdown in the US500, US30, US2000 or even NAS100, but it would exacerbate the pace at which any sell-off happens.

Positioning is the clear consideration

The recent Bank of America Fund Manager survey, which canvasses some 238 money managers and accounts for assets under management of US$721bn, highlighted that fund managers’ cash levels are now at 4% – the lowest since 2021, arguing against the notion of cash on the sidelines’ still ready to come into the market.

Systematic trend-following funds (known as CTA’s or Commodity Trading Advisors) are positioned max long of equity futures. While risk parity’ funds i.e. pension & insurance funds whose exposure to the equity market is calibrated to the level of realised volatility in the S&P500 are also fully invested.

We see the weekly CFTC report showing net positioning in VIX futures sits at -37k contracts the biggest net short position ever. When in doubt sell equity volatility (vol), but as vol stays low, it just incentivises active money managers into the equity names that are working well and when you’re an active manager you simply must beat benchmark returns, or you don’t get paid. If it’s going up, you chase.

Traders have removed portfolio hedges, as hedges cost money and lower absolute returns when the equity index is trending strongly higher. Complacent markets perhaps, but given we’ve seen an incredible 31 new all-times highs in the S&P500 in 2024 alone, with only one day in 2024 seeing a -2%-plus daily decline in the NAS100, it’s not hard to see why they are.  

The fact remains the market is now all in on the rally in AI-related names and big tech and given the lack of clear immediate risk the path of least resistance is for higher equity index levels. However, with positioning incredibly crowded in AI names, cash levels depleted, hedges minimal, and traders short-vol in spades, the skew in risk in markets is evolving.

We can make a list of factors that could cause a sustained sell-off, but what’s equally important is how the market is positioned as this could lead to the rats jumping ship all at once.

To a trader positioning helps us understand our risk-to-reward trade-off, but also how our trading environment could change when indeed tech days come to an end.

Buckle up, because when it comes, it could get a little crazy out there in these markets.

Corporate news in Australia:

-Guzman y Gomez ((GYG)) lists today
-REA Group ((REA)) acquires the 63% in Realtair it doesn’t yet own
-Mineral Resources ((MIN)) will shut iron ore mines and look for jobs for about 1000 displaced workers in other parts of the company
-Yesterday, shares in Helia (HLI)) tanked -20% as CommBank ((CBA)) opened up its servicing to a public tender

Also:

-VanEck Bitcoin ETF lists on the ASX ((VBTC)). Competitors Monochrome and Global X already have bitcoin ETFs available to trade on the alternative Cboe exchange

Over in Europe:

-The Bank of England is widely expected to keep its policy rate unchanged today.

ANZ Bank economists report markets have pared back expectations of rate cuts, pricing around an 80% probability of a September rate cut, versus around 85% yesterday

-Minutes from the Bank of Canada’s June meeting confirmed that officials discussed whether to wait until July (when additional CPI data would be in hand) before cutting.

The BoC did cut, citing four consecutive months of falling core inflation as “sufficient progress to warrant a first cut in the policy rate”.

The official line is now the central bank is data-dependent and “take future monetary policy decisions one meeting at a time”.

On the calendar today:

-New Zealand Q1 GDP
-UK BoE policy meeting
-US jobless claims
-US May housing starts

Spot Metals,Minerals & Energy Futures
Gold (oz)	2342.70	– 1.50	– 0.06%
Silver (oz)	29.83	+ 0.22	0.74%
Copper (lb)	4.51	+ 0.02	0.35%
Aluminium (lb)	1.12	– 0.00	– 0.16%
Nickel (lb)	7.81	+ 0.00	0.05%
Zinc (lb)	1.29	+ 0.01	0.39%
West Texas Crude	80.64	0.00	0.00%
Brent Crude	85.27	0.00	0.00%
Iron Ore (t)	107.11	+ 0.06	0.06%

The Australian share market over the past thirty days

Index	19 Jun 2024	Week To Date	Month To Date (Jun)	Quarter To Date (Apr-Jun)	Year To Date (2024)
S&P ASX 200 (ex-div)	7769.70	0.59%	0.88%	-1.61%	2.36%

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ASX	ASX	Upgrade to Equal-weight from Underweight	Morgan Stanley
BPT	Beach Energy	Downgrade to Sell from Neutral	Citi
		Downgrade to Neutral from Outperform	Macquarie
BTH	Bigtincan Holdings	Downgrade to Equal-weight from Overweight	Morgan Stanley
CHN	Chalice Mining	Downgrade to Neutral from Buy	UBS
CUV	Clinuvel Pharmaceuticals	Accumulate	Ord Minnett
ILU	Iluka Resources	Upgrade to Buy from Neutral	Citi
NEM	Newmont Corp	Upgrade to Buy from Neutral	UBS

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

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

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