Weekly wrap: Stocks on pause ahead of Fed

Weekly Wrap

The markets have been volatile this week. US stocks reached record highs before pulling back, as the market remains directionless ahead of next week’s Federal Reserve meeting. Higher than expected inflation readings for the US this week have knocked markets off course, as investors re-consider whether the Fed will signal three interest rate cuts for this year.

Nvidia drags US markets lower, but B100 chip reveal could trigger a recovery

Earlier this week we mentioned that Nvidia was now more volatile than Bitcoin, and this volatility has weighed on Nvidia’s strong run so far in 2023. Its share price was lower by more than 1% at the start of trading on Friday, and it is lower by more than 7% so far this week.

However, watch out for Monday’s Nvidia AI conference for developers, which lasts from 18-21^st March. The company is expected to launch a new chip, the B100, and analysts are getting excited about it. This chip could herald advances in Nvidia’s GPU and AI capabilities, which could lead to another leg higher in the stock market rally. Some analysts are calling for this stock to reach $1000, it is currently trading around $870. But, as we have seen, Nvidia can have large price swings in both directions, so this is a stock to trade with caution.

The S&P 500 has had a changing of the guard this week. Oracle and Google are some of the best performing stocks, and they are up 9.5% and 6.7%, respectively. Pharma companies are also in the top 10 best performers so far in the US this week, along with PayPal and Valero Energy. This is a turnaround, as Oracle and Google have lagged Nvidia’s performance so far this year. While Nvidia is higher by 70%, Oracle has risen by 20% and Alphabet (Google) is up by just over 3% YTD.

Chart 1:

Source: XTB and Bloomberg

The weekly performance of the S&P 500 also suggests that the rally in the US stock market is broadening out. Earlier this week, the equal weighted S&P 500 rose to a record alongside the market-cap weighted S&P 500, which was a sign that sectors other than tech are also moving higher.

Chart 2: S&P 500 and S&P 500 Equal Weighted index

Source: XTB and Bloomberg

Elsewhere, European indices are on track to outperform their US counterparts for a second week. The FTSE 100 also made a 2024 high. The Granolas, Europe’s version of the Magnificent 7, which includes a mixture of pharma companies, software, luxury and food producers, are underperforming the Magnificent 7 on a normalized basis, however, the performance difference is narrowing, as you can see below. The largest European stocks are playing catch up with mega tech. If we see a prolonged sell-off in Nvidia and other tech giants, then we could see Europe’s Granolas take the mantle from the Magnificent 7 as we move into Q2.  AI has driven the Magnificent 7 rally this year, yet we still don’t know how AI will work in the real world and whether it will have major benefits beyond tech stocks. In contrast, Europe’s pharma sector in particular, has more tangible routes to long term profit growth than AI, in our view. Weight loss drugs and immunotherapy drugs used in oncology are particularly interesting, and they may start to challenge AI for airtime as we move through 2024.

Chart 3:

Source: XTB and Bloomberg

Elsewhere, commodities have also been in focus this week. After reaching a record high, gold has fallen, and is down by 0.8%. This is in contrast to silver, which has rallied strongly and is up by nearly 4% in the last 5 days.

In contrast to the global stock markets, which have been mostly directionless, commodities have been on the move this week. WTI and Brent crude have rallied strongly and are both up by 3.38% and 3.37% so far this week. WTI oil has broken above $80 per barrel, while Brent crude is currently above $84 per barrel. In the agriculture space, corn, sugar and soybeans have also rallied strongly. The parallel rise in the oil price and the price of some key agricultural commodities may keep upward pressure on inflation, which has been rising so far this year. This week’s commodity market performance suggests that upward pressure could remain as we move through March.