What will the Fed do?

Thoughts of the Day

The US Federal Reserve is expected to keep its policy unchanged. There is less than 3% chance of a 0.25% hike, as indicated by the interest rates futures market. Chairman Powell’s post-meeting tone will be crucial; acknowledging that high bond yields are tightening credit conditions may suggest the end of rate hikes, potentially boosting risk sentiment.

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Day Ahead

The US ADP Employment Change is expected to show +150k jobs being added to the economy in October, an increase from +89k previously. The US JOLTS job openings are expected to contract to 9.2M in September from 9.61M previously.

The Federal Reserve is expected to keep interest rates unchanged at 5.5% in its monetary policy meeting. Expect the Federal Reserve to keep to the message that interest rates will be kept high for longer to stem inflation.

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What Happened Yesterday

Market Movements as of New York Close 31 Oct 23
  • Euro area inflation showed that prices rose +2.9% Year-on-Year in October, (vs +3.2% expected) down from +4.3% previously. The core inflation rate showed a +4.2% gain YoY as expected, lower than +4.5% previously. The prints are the lowest since July 2021. However, the EURUSD reaction to the data release was muted.
  • The US Treasury Yield curve inversion remained at 0.19% as the US 2-year bond yield rose +0.04% to 5.07% while the US 10-year bond yield remained at 4.88%.
  • The US stock futures drifted slightly lower through the early Asian hours with the S&P 500 futures falling -0.39% to a low of 4168 (from 4184). It then bounced +0.57% from the lows, reaching the 4192 level just before the New York session began.
  • The US stock market opened slightly higher from Monday and weakened slightly in the early New York session before gradually grinding its way higher through the rest of the New York session. Consequently, the S&P 500 closed the day higher at +0.65% (high: +0.69%, low: -0.33%), the Dow rose +0.38% (high: +0.43%, low: -0.43%) while the Nasdaq increased +0.52% (high: +0.59%, low: -0.72%).
  • [Earnings] AMD (NASDAQ: AMD, -0.55% on the day, +2.41% aftermarket) Earnings: 70 cents vs 68 cents expected. Revenue: $5.8 billion vs $5.7 billion expected. The stock price of AMD initially fell 4% as the company’s embedded segment revenue and gaming segment declined. But the stock price made a turn for the better as the company expects the data centre GPU revenue to be approximately $400 million in the fourth quarter (up from the $300 million forecast the company had given in August) and exceed $2 billion in 2024 as revenue ramps throughout the year (compared to $1.6 billion for the third quarter).
  • The crypto market remains on the quiet side with Bitcoin and Ether up +0.46% and +0.33% respectively..
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Headlines & Market Impact

Japan on standby to deal with ‘one-sided’ yen moves – top FX diplomat

Notable Snippet: Japan’s top currency diplomat Masato Kanda said on Wednesday authorities were on standby to respond to recent “one-sided, sharp” moves in the yen, escalating his warning to investors against pushing down the currency too much.

“Speculative trading seems to be the biggest factor behind recent currency moves,” Kanda, vice finance minister for international affairs, told reporters on the yen’s decline.

The situation surrounding yen moves has become “more tense” than before, he said, adding that authorities will “respond appropriately without ruling out any options”.

“We’re on standby,” Kanda said when asked about the chance of yen-buying intervention, though he declined to say what kind of action authorities could take and when that will happen.

The yen plummeted across the board on Tuesday, dropping to a 15-year low against the euro and a new one-year trough versus the dollar, after a minor step adopted by the Bank of Japan (BOJ) toward ending years of monetary stimulus failed to appease some investors who had expected a bigger move.

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Nvidia shares drop after report of cancelled China orders

Notable Snippet: Shares of Nvidia Corp (NVDA.O) dropped by about 5% to a near five-month low on Tuesday following a Wall Street Journal report that the artificial intelligence (AI) giant may be forced to cancel up to $5 billion worth of advanced chip orders to China in compliance with new U.S. government restrictions.

Nvidia was notified last week that AI chip orders scheduled for delivery next year to major Chinese technology companies, including Alibaba Group (9988.HK), TikTok owner-ByteDance and Baidu (9888.HK), are subject to the latest export restrictions announced by the U.S. Commerce Department, the Wall Street Journal reported, citing people familiar with the matter.

“The stock is getting oversold,” said Tom Plumb, chief executive and lead portfolio manager at Plumb Funds, which has Nvidia as one of its largest holdings.

“Previously, Nvidia has said this is not going to have a short-term impact but it’s more in the long term. We still expect a pretty strong quarter and think it’s a great long-term holding, although we are not adding any new positions because of the volatility,” Plumb added.

A Nvidia spokesperson said there is “high demand” for its advanced chips, which often require significant lead time to build, and that it is working to allocate orders to its “wide range of customers” in the United States and elsewhere.

What we think: This weakness in Nvidia may just be a correction as the Artificial Intelligence trend continues. The demand for chips will only increase as more efforts are directed towards the AI tech race.

Chinese tech giant Alibaba launches upgraded AI model to challenge Microsoft, Amazon

Notable Snippet:  Alibaba on Tuesday launched the latest version of its artificial intelligence model, as the Chinese technology giant looks to compete with U.S. tech rivals such as Amazon and Microsoft.

China’s biggest cloud computing and e-commerce player announced Tongyi Qianwen 2.0, its latest large language model (LLM). A LLM is trained on vast amounts of data and forms the basis for generative AI applications such as ChatGPT, which is developed by U.S. firm OpenAI.

Alibaba called Tongyi Qianwen 2.0 a “substantial upgrade from its predecessor,” which was introduced in April.

Tongyi Qianwen 2.0 “demonstrates remarkable capabilities in understanding complex instructions, copywriting, reasoning, memorising, and preventing hallucinations,” Alibaba said in a press release. Hallucinations refer to AI that presents incorrect information.

Alibaba also released AI models designed for applications in specific industries and uses — such as legal counselling and finance — as it angles in on businesses.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord