Written by Risk appetite returns, with the help of AI
Equities are rebounding on Thursday, lifted in part by the ongoing slide in oil prices, but crucially, concerns about AI valuations were allayed, at least for now, by stellar earnings from rising AI star, Micron Technology.
Having already skyrocketed by 700% over the past year, Micron’s stock surged by more than 15% in after-hours trading yesterday after the chipmaker reported much better-than-expected quarterly results. Micron beat both its revenue and earnings per share estimates, but investors were mostly impressed by its forecasts for the current quarter, when it expects revenue to hit $50 billion versus estimates of $43.6 billion.
The boom in AI has fuelled demand for memory chips, leading to shortages that may last well into next year, pointing to more gains for chipmakers.
Nasdaq futures are up 2%, recovering about half of the past three days’ losses, while Japan’s Nikkei and South Korea’s KOSPI, where chip stocks have single-handedly been driving the indices to record territory, finished today’s session up 4.6% and 6.2% respectively.
Oil plummets amid growing Mideast optimism
Signs that US and Iranian officials are gradually working through their differences, with some progress seen even on the thorny nuclear issue, is also aiding the recovery in risk sentiment. A new round of technical level talks is due to take place in Switzerland next week according to Pakistani mediators.
More importantly, oil flows through the Strait of Hormuz are finally being restored to near pre-war levels. US Energy Secretary Chris Wright told Reuters on Wednesday that 20 million barrels of oil exited the strait in the last 24 hours.
There’s also growing indications of oversupply in the physical oil market, as even before the latest ceasefire agreement between the US and Iran, Middle East producers were finding other ways to export oil, either via alternative routes or by ‘dark transits’ whereby ships turn off their GPS signals to avoid detection as they travel through the Hormuz Strait.
There’s still a risk of a re-escalation of the conflict or countries deciding to refill their massively drawn-down strategic reserves, but as things stand, the oil market is being inundated with supply, pushing prices sharply lower.
Brent crude is currently testing the $73 a barrel level, while WTI oil has slipped below $70 for the first time since the start of the war.
Dollar pauses advance ahead of PCE data
Interestingly, the more than 30% slump in oil prices in May and June hasn’t dramatically altered rate hike expectations for the Fed and other major central banks. And even though government bond yields have pulled back from their post-war peak in May, the consensus view is that some tightening in monetary policy will be needed to prevent second-round effects from the energy price shock.
However, it’s only for the Fed that investors have had to re-evaluate their rate hike expectations due to the policy uncertainty that preceded Kevin Warsh’s appointment. Hence, the Fed’s hawkish shift, which came about despite falling oil prices, wrong-footed many investors, leading to renewed bullish bets for the US dollar.
The greenback has rallied by over 2% against a basket of currencies since last Wednesday’s FOMC decision, but the six straight days of gains look set to be snapped today, with the dollar easing slightly on some caution ahead of key inflation data coming up later in the day.
The PCE inflation readings will be watched closely along with personal consumption data. The core PCE price index for May will be particularly important, as any upside surprises could boost expectations of a Fed rate increase as early as next month.
Speculation of a surprise July hike is high after Treasury Secretary Scott Bessent earlier this week appeared to endorse such a move by referencing former Chair Alan Greenspan’s "one tap-on-the-brakes rate hike" quote from 1997 when the Fed delivered a single rate rise.
Gold and yen struggle, pound perks up
The fear of potentially being caught off guard again by Kevin Warsh, who has refused to provide any forward guidance, is one explanation why gold continues to underperform.
The precious metal is trading marginally lower today, at around $3,990/oz, extending its losses after yesterday’s break below the psychologically important $4,000 mark. Although there seems to be some support around $3,960, the near-term risks to gold remain skewed to the downside.
In FX markets, the pound is the biggest gainer against the dollar, erasing some of its weekly losses after being boosted on reports that the next likely UK prime minister, Andy Burnham, is no longer keen on appointing left-wing Ed Miliband as his chancellor.
The yen on the other hand continues to bleed, as the dollar creeps up towards the 162-yen level, with no signs of intervention yet by Japanese authorities.
By XM.com
