UK banks pop higher, as a split emerges in the Magnificent 7

After popping higher at the start of the week, risky assets are having a muted start today. European stocks are mixed, while US futures are muted. The Nasdaq had a stunning rally on Monday, as tech stocks led the charge higher.

The FTSE 100 has also turned lower as we move through the morning, however, there are some big winners in the UK index as we lead up to the Budget. News that banks will not face a windfall profit tax in tomorrow’s budget has boosted banks’ share prices. NatWest, Barclays and Lloyds are all posting gains of more than 2% today, as they avoid Rachel Reeves’ tax grab.

FX market is nervy ahead of UK Budget

However, with taxes and spending on benefits and welfare payments expected to rise, the pound could come under pressure as the FX market questions whether this government can deliver growth. More FX traders are buying downside protection for the pound in the run up to this budget, and the 1-month GBP/USD risk reversal is trending lower. Thus, it could be a bumpy ride for the pound in the coming weeks.

The pound is one of the weakest currencies in the G10 FX space since the start of Q4, and is lower by 2.8% vs. the USD and by nearly 1% vs. the EUR. These losses have slowed since the start of this month; however, this is not a sign that the market has warmed to sterling. Instead, the market could be waiting for another driver to send the pound lower, and an unconvincing budget both regarding growth and long-term fiscal consolidation, could tip GBP over the edge, sending it below $1.30 vs the USD.

UK bond yields in Rachel Reeves’ cross hairs

UK bond yields will also be watched closely on Wednesday. So far, they have been stable today. UK yields have trended lower in the past 3 months, but that downward trend has stopped, especially further out the curve. The 10-year yield has risen by 13bps in the past month, as concerns about the UK’s fiscal outlook have grown. Thus, if the budget is not well received by markets tomorrow, we could see a continuation of the weakness in bond prices/ increase in yields, and this could add to downward pressure on sterling.

Retail sales to determine where stocks go next

The US stock market recovery has paused as we wait for key US retail data that is due later this afternoon. Retail sales for September are expected to rise by 0.4% for headline sales, and 0.3% for core sales. This is a touch lower than the August reading but it would still suggest that the US consumer maintained upside momentum as we ended Q3. Although this data is old at this stage, it could still rock markets today as the delayed impact from the government shutdown catches up with markets. Due to this, if retail sales are stronger than expected, this could weigh on stocks and risky assets as it may reduce expectations for a Fed rate cut next month.

Tech stocks lead US market rally

The Nasdaq rose by  2.6% on Monday, and was led higher by Broadcom, which surged by 11%, Robinhood, which rose more than 7%, and Tesla and Alphabet were both higher by more than 6%. Nvidia was a laggard, as its stunning earnings report last week has failed to excite investors. In the longer term, there could be more weakness to come for Nvidia.

The stock fell in post-market trading last night after Meta announced that it would buy chips from Alphabet, as Google becomes a challenger to Nvidia. If Nvidia’s market share is genuinely threatened by other chip makers, then it may struggle to return to the top of the Magnificent 7.

Divergence in the Magnificent 7

As you can see below, there is a clear divergence within the Magnificent 7 that has widened so far this month and Google breaking away from the pack. Its share price has risen by more than 22% in the past month, after a confluence of positive factors boosted its attractiveness. Firstly, Warren Buffet announced a stake, secondly it had record breaking results for Q3 that generated more than $102bn in revenue. Also, it is becoming the ultimate AI hybrid: it is both a hyperscaler, creating AI software and products for its customers, and it is now a chip producer for the hyperscalers, who are spending hundreds of billions on their AI infrastructure build outs. Meta is taking a punt on Google’s chips and announced that it would be spending billions of dollars on them. This dual model could supercharge Google’s future revenue potential, which has driven the share price higher by more than a fifth.

A new entrant to the chip market is not actually a bad thing. As one chip maker sees its share price struggle, another will fill that void. Thus, although Nvidia makes up 7% of the S&P 500, if the stock struggles into the end of the year, then it may not lead to a broader demise on the index.

Chart 1: Magnificent 7, Google is the clear winner, as Nvidia struggles to keep up

Source: XTB and Bloomberg