Volatility wakes up: what next for Nvidia?

Volatility wakes up: what next for Nvidia?

The sustainability of the rally in stock markets is facing a tough test this week. Volatility rose on Friday and stock market darling Nvidia dropped by more than 5%. Added to this, US CPI and retail sales data will be released this week, and they could show a slow retreat for prices and a strong consumer, a mix that is likely to keep the Federal Reserve cautious about the timing of rate cuts.

The S&P 500 was lower by -0.26% and the Nasdaq was lower by 1.17% last week, after markets erased gains made during Fed Chair Powell’s speeches at Congress, which set the tone for the Fed to start cutting interest rates later this year. The pullback in risk sentiment has impacted the Asian session at the start of this week, and the Nikkei fell more than 2% on Monday. Fears about the Bank of Japan raising interest rates next week have stopped the Nikkei in its tracks, after a strong run so far this year. The Nikkei is higher by 11.3% on a currency adjusted basis. Looking ahead at this week, we think that event risk could stymie any attempt for stocks to recover. The S&P 500 emini future is volatile this morning and is indicating a slightly lower open for US stocks later today. Likewise, futures for the Eurostoxx 50 and the FTSE 100 also point to a lower open for Europe at the start of this week.

Nvidia: why did it sell off and where could it go next?

The biggest shock of last week was the sharp selloff of Nvidia shares on Friday. The stock slumped by 5.5%, but it is still higher by more than 70% YTD. Ahead of the sell-off, there was talks about Nvidia’s stock price reaching $1000 dollars, after it broke another record high earlier during the Friday session. Later in the day, the stock initially sold off 11%, but then managed to claw back gains and close down 5.5%. While there are good reasons to think that Nvidia’s earnings will continue to deliver this year, as it increases its customer base, and remains the world’s chief producer of GPU’s for data centres, Friday’s sell of is a reminder that the market for AI stocks is frothy, after a staggeringly good run over the last 15 months.

Even if Nvidia has good fundamentals, the market’s desire to get exposure to the AI theme has reached a level of feverishness that a pullback was likely. There was no single trigger for the sell off, some blamed news that top Nvidia executives were selling large amounts of stock, which can make the market nervous, others thought that fate was the driver, as the highs in stocks was close to the 24^th anniversary of when the Nasdaq hit its peak back in March 2000.

A broader sell off for Tech

The sell off in Nvidia weighed on the rest of the Magnificent 7, which sold off more than 3% on Friday. This could make a recovery rally on Monday harder to achieve. However, there is some good news for the stock market bulls. The equal-weighted S&P 500 index also reached a record high on Friday, which is a sign that the rally in stocks was broadening out beyond tech. The equal-weighted S&P 500 also fell at the end of Friday’s session, however, not by as much as the tech titans, the equal weighted S&P 500 fell by 0.72%.

Why Nvidia is not down and out

In the longer term, there was no fundamental driver for the sell-off: Nvidia’s business is still incredibly profitable, the US economy is showing signs of strength and US inflation is expected to moderate in February. However, the increase in Nvidia’s stock price and market cap had got to ‘meme stock’ levels, and a pullback was to be expected. We continue to think that any decline will be used as a buying opportunity and we think that the selloff in Nvidia will be temporary, as AI continues to go from strength to strength. However, it is a reminder that even the biggest tech titans remain vulnerable to a pullback when the market gets frothy, and the path to $1000 for Nvidia will not be without its potholes.

We expect markets to remain fairly quiet at the start of this week while we wait for key economic data to be released. US CPI, US retail sales, UK labour market data, UK GDP for January and a China interest rate decision are all scheduled for release this week. The US CPI report is probably the most market-moving event of the week due to the intense focus on when interest rates will be cut.

US CPI: a threat to the market rally

US CPI is expected to rise by 0.4% on the month, with the core rate rising by 0.3%. The annual rates are expected to remain at 3.1% for the headline rate, while the core rate is expected to moderate to 3.7% from 3.9%. This may ease fears that inflation is on the rise again, after January’s inflation shock. However, it is worth remembering that stock markets sold off in February after the January inflation data, so if the CPI surprises to the upside, then we could see another repeat of Friday’s price action. US retail sales are also released this week, and they are expected to show a recovery for February, after a sharp decline in sales for January.

Watch Treasury yields and USD/JPY ahead of US economic data

Treasury yields fell last week, and this weighed on the dollar, which was the weakest currency in the G10 FX space last week. A stronger CPI could weigh on bonds and put upward pressure on yields later this week, it could also help the dollar to make a recovery. US yields are mostly stable at the start of the week, and USD/JPY, which has sold off sharply in March, is mostly stable after the Japanese stock market sell off on Monday.

UK asset prices will also be in focus this week, as we wait for wage data and labour market data, which could impact the timing of rate cuts from the BOE.