Nvidia surges and leads tech rally as ECB set to cut rates

Market volatility surged on Wednesday as investors decided whether a reduction in rate cut expectations for the Federal Reserve was bullish or bearish for financial markets. However, after an initial big decline in US stocks, markets rallied, as a slightly stronger CPI print was considered a sign that the Federal Reserve was not behind the curve when it comes to cutting rates. Tech led the rally, the Nasdaq closed up more than 2% and Nvidia rallied by more than 8%, after Jensen Huang, the founder and CEO of Nvidia, made a bullish speech about the benefits of GPUs and AI. He said that cloud providers make $5 for every $1 they spend on GPUs, and that users of AI technology can get tasks done 20 times faster than they otherwise would.

Huang, the high priest of AI, sets Nvidia share price on fire  

A tech tycoon talking up the benefits of AI and his GPUs should be expected, after all, surely that is part of the CEO’s job description. However, usually talking up one’s own product is not accompanied by an 8% surge in the stock price. This shows that the AI frenzy is not dead and buried yet. Questions are being asked about the AI theme: is it really transformative for business or is it a way to sink capex spending? Huang is singing from the AI hymn sheet, but then why wouldn’t he. However, there is no doubt that his words have gravity. Nvidia was the third best performer on the S&P 500 yesterday and semiconductors was the best performing sector on the main US index, rising more than 6%.

We continue to think that the real test for AI stocks and Nvidia, in particular, will be Q3 earnings season. The market will want to hear directly from Nvidia’s customers about two things: 1, how GPUs and AI functionality is transforming their businesses and 2, how they are transforming the bottom line and impacting profits. If AI infrastructure is not generating the expected return, then patience with chipmakers could dry out, regardless of what Huang says.

We think that the surge in Nvidia’s share price was also driven by money waiting on the sidelines. Some of this could be retail demand who have not given up on the AI dream. There may be more fuel in the tank for this AI rally, but we still think that the real test will come during the Q3 earnings season.

Will traders cash out after Nvidia’s surge?

Nvidia has become a barometer of market sentiment. When it rallies, it has the power to boost global risk sentiment, and when it falls it can weigh on sentiment. European shares are expected to open higher later today, commodities are higher, and the Brent crude price is back above $70 per barrel after rallying on Wednesday. Gold is also higher after falling on Wednesday, it is now only $5 from the record high reached at the end of August. Interestingly, Nvidia’s share price fell back slightly in the post-market trading late on Wednesday. Thus, Nvidia’s share price could be at risk from profit taking on Thursday. This stock is incredible volatile, its volatility is above 50, compared with 17 for the overall S&P 500.

ECB: Watch for forward guidance

Ahead of today’s ECB meeting, European bond yields are mostly flat. The ECB is expected to cut interest rates for the second time this year. The euro has been weaker vs. the USD in the lead up to this meeting, however, it found good support at $1.10, and is rising from here as we wait for the meeting this afternoon. While a rate cut is expected, any forward guidance will be scrutinized closely. The ECB is still divided, and there are some notable hawks on the board, especially from Germany. Thus, there is a chance that the ECB will not give any forward guidance and remain data dependent when it comes to future rate cut decisions. This could be considered a ‘hawkish’ outcome, which may see the euro rally further. Currently the market expects a further 38 basis points of cuts from the ECB between October and December. If this number drops, then it could be euro positive.