Yields and chips

The first day back after the long weekend brought traders back down to earth. A weak sale of US 2 and 5-year notes, and Federal Reserve’s (Fed) Neel Kashkari’s comments that the Fed cannot rule out hiking the interest rates as a next move sent the US treasuries lower yesterday. Happily, Mr. Kashkari isn’t a voting member this year, but his words saw a swift reaction from the Fed hawks. The US 2-year yield spiked to 4.98%, the 10-year yield advanced past 4.55% and the US dollar index rebounded after testing the 200-DMA to the downside.

The broad-based recovery of the US dollar sent the EURUSD lower yesterday before it reached the 1.09 resistance. Inflation expectations in the Eurozone fell to the lowest levels since 2021. All eyes are on a series of Eurozone inflation updates that are due to hit the ground starting from today. Right now, the divergence between a more hawkish Fed – that debates the necessity of another hike – and the European Central Bank (ECB) – that debates the possibility of back-to-back rate cuts in summer – remain supportive of a downside correction in the EURUSD. The major risk to the bearish euro outlook is Friday’s US core PCE data. If the April rise comes in at 0.2% on a monthly basis – as penciled in by analysts on a Bloomberg survey – it would be the smallest advance for the measure for this year and could help temper the Fed hawks.

Elsewhere, the divergence between central bank expectations continue to drive the price moves in FX. The euro-sterling is testing the critical support of 0.85, while the sterling-yen hit the 200 psychological, the highest level in 16 years. What makes sterling stronger today is PM Sunak’s decision to hold a general election on July 4th which simply zeroed the chances of seeing the Bank of England (BoE) cut the rates in June. But political uncertainties may not let the euro-pound comfortably trend below the 0.85 level.

In equities, the rising US yields weren’t supportive, but good news for technology stocks saved the day and kept the S&P500 little changed. Nasdaq eked out a small gain. Apple revealed that its iPhone shipments to China rose 52% in April following discounts from retail partners amid a difficult Q1. Apple was trading more than 2% pre-market but ended up the session flat, somehow. Nvidia, on the other hand, jumped 7% on news that Elon Musk’s xAI – which recently raised $6bn – will use Nvidia’s H100 GPUs. Cheers, Elon!

Cheap Chinese AI, anyone?

The news that China set a $48 billion fund to support domestic chip-makers didn’t resonated well across the Chinese AI-related stocks – to my surprise. PDD tanked 5% yesterday, Tencent is down by more than 1% and Alibaba is down by almost 4% in Hong Kong this morning.

The thing is, China must – and will - do whatever it takes to give the necessary support to its tech champions to cope with the severe international competition. The problem is, after the crackdown on its tech champions early 2020s, investors are hard to bring back on board. That makes the Chinese stocks both appetizing and terrifying.

Appetizing because they are cheap. PDD for example – the owner of Temu and a heavy AI investor – has a PE ratio of 20 which makes it a relatively cheap AI holding compared to Nvidia for example, which prints a PE ratio of around 66 today.

But terrifying because there are rising tensions between the West and China that prevents the Chinese AI companies’ from accessing the world’s most powerful chips. Because no one knows if the Chinese government would one day wake up and say ‘hey, let’s smash our technology champions’. And because there is a fierce competition among local players. Alibaba for example cut the prices of a bunch of AI services earlier this month by as much as 97% - a move that saw an immediate reaction from its competitor Baidu who replied that it will offer free services based on its Ernie AI models. But one thing is clear, from a valuation perspective, the Chinese AI stocks offer an unbeatable discount over the Western peers for those who are ready to take the China challenge.