Investment Insights

Global Stocks Snap 3-Week Losing Run

  • Aug 30, 2023
  • Andrew Gillham

Optimism that central banks will soon stop hiking interest rates and blowout earnings from the semiconductor giant Nvidia helped stocks to end their worst run since last September. The blue-chip S&P 500 and technology focused Nasdaq indices gained 0.8% and 1.5% respectively.

Markets have spent much of August on the back foot as a raft of stronger than expected economic data reports suggested central banks will need to raise interest rates further. However, business surveys released sequentially on Wednesday indicated that economic activity is already creaking under the strain of previous interest rate hikes.

The Purchasing Managers’ Index (PMI) surveys, which measure trends in the manufacturing and services sectors, in the Eurozone, UK and US all pointed to weaker business activity from previous months.

A reading below 50 points to contraction and the composite PMI index in the Eurozone fell to a 33-month low of 47.0, with manufacturers particularly hit hard by new orders falling and backlogs easing. The composite PMI levels in the UK (47.9) and US (50.4) were not much better.

The reports led to immediate repricing of interest rate expectations and both bonds and stocks rallied strongly throughout the day on Wednesday. Money market futures are now pricing in the Bank of England’s benchmark interest rate to peak at 5.75%, rather than 6%, later this year.

Shares in Nvidia, the semiconductor manufacturer at the forefront of the artificial intelligence (AI) computing boom, climbed to a new record after it reported that its second quarter earnings managed to beat some very lofty forecasts.

Nvidia revealed its revenue doubled to a record $13.5 billion, versus analysts’ forecasts of $11.5 billion, during the quarter from a year earlier on the back of surging demand for its graphic processing units (GPUs) used for AI computing. It also upgraded its revenue guidance for the third quarter to $16 billion.

The company was established in 1993 to produce graphics chips for video games but revenue from gaming ($2.5 billion) now represents a much smaller share of its total than it earns from data centre unit ($10.3 billion). The gap is set to grow wider with chief executive Jensen Huang asserting that a new era has begun and companies around the world are seeking more powerful computing that can handle Chat-GPT style generative AI. He added that some of the biggest cloud computing companies are building “massive infrastructures”.

Throughout the week, investors waited eagerly for Federal Reserve Chair Jerome Powell’s speech at the annual Jackson Hole symposium on Friday afternoon UK time. Last year’s speech triggered a broad sell-off across markets after he warned more interest rate hikes were needed to bring down inflation but the reaction this time around was more kind.

While Powell reiterated that inflation “remains too high”, and higher interest rates may still be needed to bring inflation back down to the Fed’s 2% target rate, he softened the warning with a commitment to proceed carefully. He acknowledged that there is a risk that raising interest rates too high “could also do unnecessary harm to the economy” and that the full effects of previous rate hikes had not yet worked their way through the financial system.

Brent crude held steady at $84 a barrel as concerns of weaker demand from China were offset by tighter supply with Saudi Arabia expected to extend its voluntary output cut of 1 million barrels a day into October.

European natural gas prices remained volatile and fell sharply last week after the prospect of a strike at Woodside Energy’s North West Shelf facilities receded. The Offshore Alliance union representing workers at the LNG facilities, which account for around 4% of global LNG supplies, revealed that it had reached an agreement in principle on a number of issues, including pay and job security.

However, prices spiked higher on Monday when the union announced workers will take industrial action at LNG facilities operated by Chevron in Western Australia.

(Cover Image Source: Sean Oulashin)

TEAM Asset Management is a trading name of Theta Enhanced Asset Management Limited which is regulated by the Jersey Financial Services Commission.