Optimism over AI initially outweighed doubts over whether the Fed will cut rates in December.
NVDA delivered initially sending NASDAQ about 2% higher. Perhaps the appropriate question is whether the pending orders received by NVDA will materialize. Consensus is split as to whether the four largest technology companies can or have the ability to actually make the purchases they have indicated.
Bloomberg states that the companies all have a capitalization of over $1 trillion and have recently increased planned capital expenditures to 25% to 50% of revenues up from 10% to 20% of revenues several months prior.
Some are asking the question as to what ROI these capital expenditures will generate. Others are asking what the depreciation schedule of such spending will be. Will the companies purchasing the products have a longer deprecation schedule than the seller of the product, a pivotal question regarding asset values and earnings.
Only history can answer the above questions and the answers are pivotal to determining as to whether or not there is a bubble and if this bubble bursts, many will then decry that it was so obvious.
Conversely if AI spending materializes at the pace currently anticipated and generates an acceptable ROI, economic growth and productivity could surge, perhaps radically changing the macroeconomic and monetary landscape.
Speaking of monetary policy, September’s employment data was released. Most view it as “stale,” offering little insight given as the statistics are over 60 days old and does not capture the impact of the longest government shutdown in history.
Fed Fuds futures will little moved by the statistics, suggesting about a 35% chance of a December rate reduction. The odds of such policy rose insignificantly from the prerelease levels. Short-dated Treasuries, however, rallied causing the curve to further steepen.
Commenting further about yesterday’s equity markets, NVDA initially rallied about 5% on the earnings only to end lower by 3.15%, causing all indices to retrace moderate gains on AI valuations fears and concerns whether or not the long-term projected spending will materialize.
As a result, the NASDAQ and Dow closed down 2.15% and 0.85%, respectively. Bloomberg wrote the obvious…”as NVDA so does the indices,” further commenting about the extreme narrowness of the markets.
Bloomberg writes “[yesterday was] the widest intraday range for the S & P 500 since early 2021, excluding the sharp swings during Liberation Day week, underscoring just how strong the unwound has become.” The unwinding occurred in a “handful of names, the same handful that propelled the markets higher.”
And then there is Bitcoin. Bitcoin’s 4% drop led all other cybercurrencies lower. Bitcoin has declined about 32% in several weeks with many asking what happened to all the perceived liquidity in this market?
What will happen today?
Last night the foreign markets were down. London was down 0.17%, Paris down 0.02% and Frankfurt down 0.48%. China was Japan down 2.40% and Hang Seng down 2.38%.
Dow and NASDAQ futures are up 050% and 0.25%, respectively on renewed dovish monetary policy expectations. Bitcoin extended its decline and is now down over 33% from last month’s apex with many asking why the violent rout. The 10-year is up 3/32to yield 4.08%.
