Where is the Fear?

Thoughts of the Day

Despite the unending war in Ukraine and the geopolitical tensions in the Middle East, stock market volatility is now at the lowest level last seen in the year before Covid. The VIX index, a measure of US stock market volatility, is often a measure of how fearful investors are because volatility rises when stocks are unstable, or the market is selling off. 

However, the VIX is now trading below 12, and these are levels that prevailed prior to 2020. Will volatility continue to drop as investors continue to buy the dip and stocks continue to grind higher? Or is this a sign that the market is getting complacent and something bad is about to happen?

Just last month, VIX spiked from around 15 to above 20 just last month when Iran attacked Israel (13-14 April) and Israel launched its reciprocal attack (19 April). Since then, volatility has dropped lower as no further escalation was seen. As the market has become accustomed to the new normal, expect volatility to stay low and the market to grind higher if we do not see any upside surprises on US inflation in the weeks ahead.
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CAPTCHA (Completely Automated Public Turing test to tell Computers and Humans Apart), as the name suggests, is meant to prevent bots from passing off as legitimate users. However, as can be seen above, it poses no obstacle to ChatGPT. We are still in the early stages of the AI boom and it will just get more difficult to distinguish between bots and humans as time passes.

Week Ahead

Memorial Day in the US. All US stock and bond markets are closed on Memorial Day.
Canadian PPI (+ 0.6% MoM expected vs +0.8% prev, -0.5% YoY)
Australian Monthly CPI Indicator (+3.4% YoY expected vs +3.5% prev)
Germany CPI (+2.4% YoY expected vs +2.2% prev)
US GDP 2nd Estimate (Growth rate: +1.5% QoQ expected vs +3.4% prev, Price Index: +3.1% QoQ expected vs +1.7% prev)
Tokyo Inflation (+1.9% YoY expected vs +1.6% prev)
Chinese PMI (Manufacturing: 50.5 expected vs 50.4 prev, Non-Manufacturing: 51.5 expected vs 51.2 prev)
Euro Area Inflation (Headline: +2.5% YoY expected vs +2.4% prev, Core: +2.7% YoY expected and prev)
US PCE Price Index (Headline: +2.7% YoY expected and prev, +0.3% MoM expected and prev; Core: +2.8% YoY expected and prev, +0.2% MoM expected and +0.3% prev)
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What Happened Yesterday

Market Movements as of New York Close 24 May 24 (26 May for Crypto)
  • US University of Michigan Consumer Data (Consumer sentiment: 69.1 actual vs 67.5 expected and 77.2 previous, 1 Year Inflation Expectations: +3.3% actual vs +3.5% expected and +3.2% prev, 5 Year Inflation Expectations: +3% actual vs +3.1% and +3% prev).
  • The US stock market opened slightly higher from Thursday. It then continued to trade higher after the release of the encouraging UoM consumer data and remained at elevated levels. The S&P 500 finished +0.70% higher on the day (high: +0.83%, low: +0.20%), the Dow Jones edged +0.01% higher (high: +0.40%, low: -0.12%) while the Nasdaq rose +0.99%  (high: +1.23%, low: +0.22%).
  • The crypto market traded just slightly higher over the weekend with Bitcoin up +0.80% and Ether up +1.10% as broad based risk sentiment improved.
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Headlines & Market Impact

Alibaba bets on AI to fuel cloud growth as it expands globally to catch up with U.S. tech giants

Notable Snippet: Alibaba on Thursday said it expanded its global cloud computing availability, while the head of the unit’s international arm touted the company’s AI products as a way to fuel growth.

The Chinese technology giant said it has expanded the availability zone of its cloud computing products to Mexico for the first time, and that it will build new data centres in key markets including Malaysia, Thailand and South Korea over the next three years.

“We want to have … more efforts and investments for our international data centres,” Selina Yuan, President of Alibaba Cloud’s international division, told CNBC in an interview on Wednesday.

The cloud unit was seen as a critical future business for Alibaba by previous CEO Daniel Zhang and current senior management. But growth has slowed significantly in recent quarters. This month, Alibaba executives said during an earnings call that the cloud division would return to “double-digit growth” in the second half of the current fiscal year.

To reignite that momentum, Alibaba is betting on its AI products and on signing up more customers. On Wednesday, Alibaba expanded its partnership with French luxury house LVMH, which has begun using the Chinese tech giant’s AI tools in China.

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Ueda says Bank of Japan will proceed cautiously with inflation targeting frameworks

Notable Snippet: The Bank of Japan (BOJ) will proceed cautiously with inflation-targeting frameworks, Governor Kazuo Ueda said on Monday, noting that some challenges are “uniquely difficult” for Japan after years of ultra-easy monetary policy.

In an opening speech to a BOJ-hosted seminar in Tokyo on central banking, Ueda said Japan has “made progress in moving away from zero and lifting inflation expectations.”

To achieve 2% inflation in a sustainable and stable manner, the BOJ “will proceed cautiously, as do other central banks with inflation-targeting frameworks,” he said.

“While many of the challenges we face are similar to those encountered by our counterparts, some are uniquely difficult for us,” the BOJ chief added.

Ueda noted that estimating the neutral interest rate accurately is particularly challenging in Japan, given the prolonged period of near-zero short-term interest rates over the past three decades.

“The absence of significant interest rate movements poses a considerable obstacle in assessing the economy’s response to changes in interest rates,” he said.

Ueda has said the central bank intends to hike rates to levels considered neutral for the economy, as long as growth and inflation move in line with its projections.

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Exclusive: Nvidia cuts China prices in Huawei chip fight

Notable Snippet: Nvidia’s most advanced AI chip it developed for the China market has got off to a weak start, with abundant supply forcing it to be priced below a rival chip from Chinese tech giant Huawei, according to sources familiar with the matter.

The flattening prices underscore the challenges Nvidia’s China business faces amid U.S. sanctions on AI chip exports and heightened competition, casting a cloud over its future in a market that contributed 17% to its revenue for fiscal 2024.

The growing competitive pressure in China also adds a cautionary note to investors in the U.S. semiconductor designer as its shares extended a stunning rally following Wednesday’s bumper revenue forecast.

Nvidia, which dominates the market for artificial intelligence (AI) chips, introduced three chips tailored for China late last year after U.S. sanctions prevented it from exporting its most advanced semiconductors.
That has seen H20 chips being sold in some cases at an over 10% discount to Huawei’s Ascend 910B – the most powerful AI chip from a Chinese company – two of the three sources told Reuters, declining to be identified due to the sensitivity of the issue.

“Our data centre revenue in China is down significantly from the level prior to the imposition of the new export control restrictions in October,” said CFO Colette Kress. “We expect the market in China to remain very competitive going forward.”

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Stock Indices

Phan Vee Leung
CIO & Founder, TrackRecord