French election, king Nvidia, and FedEx earnings

Nvidia has risen to the top of the global equity market, now what?

The biggest single stock story this week is the rise of Nvidia to briefly become the most valuable company in the world. Microsoft has recouped the top spot ahead of today’s trading session. Over the past 20 years, Nvidia shares have risen 61,051% including reinvestment of dividends corresponding to an annualised return of 37.8% compared to 10.2% for US equities. As we wrote in our equity update on 7 June, the rise of Nvidia and other mega caps has pushed the S&P 500 Index to historical index concentration levels that mathematically will lead to lower returns in the future as upper end of the index will not forever grab a higher index.

With volatility pushed to extreme lows and the market rallying it worth remembering that rallies will come to an end. This time things might unravel in a bigger way than what most investors believe. A recent Bloomberg Odd Lots podcast called The Big Trade Underneath the Strangely Calm Surface of the S&P 500, options experts discuss a big trade on Wall Street called “the dispersion” trade which is effectively a trade where traders go short the VIX Index (using futures) while simultaneously buying call options on a group of single stock names. If correlations among US stocks remain low and the VIX Index remains low then the trade makes a lot of money. In the podcast, it is mentioned that this trade has the size to upset markets in a big way if there is a shock that pushes the VIX Index higher in a short time span. So while the gains in US technology stocks feel good there might be trouble brewing underneath the surface.

What does Berkshire Hathaway’s trimming of BYD position tell us about China?

Last week we wrote about the EU tariffs on Chinese EVs as the global trade war continues to heat up. Germany and the China-EU business chamber were fighting to pull the measures in the other direction, but the hard truth is that the car industry is a national security interest for Europe, and there are a lot of evidence that China is subsidising its car industry. Canada has said this week that it is also planning tariffs on Chinese EVs.

This week, Berkshire Hathaway announced that it is trimming its position in BYD, China’s largest EV maker, to 6.9% from 7.02% indicating that the US investment firm is considering its Chinese assets. The geopolitics discussed above will continue to unravel global supply chains and trading relationships in the years ahead. In that process the most intensive export-driven countries such as China, Germany, and South Korea will suffer. Berkshire Hathaway’s move on BYD will likely end in the US company divesting all assets in China and instead focus on its Japanese assets and potentially look at India in the future.

Next week: ZEW, US consumer confidence, Tokyo CPI, France CPI, and FedEx earnings

• IFO: On Monday the important German IFO survey (survey among 9,000 firms in Germany) for June is published with estimates suggesting the expectations sub-index will rise to 90.6 from 90.4 in May. Given this week’s negative surprise on the ZEW survey a potential miss might be in the cards.
  
  
• US consumer confidence: Published Tuesday with estimates at 100.0 vs 102.0 in May supporting the recent indicators on the US economy that economic activity has soften a bit in June.
  
  
• Tokyo CPI: Released on Wednesday night (European time) with estimates for the June Tokyo CPI figure excluding fresh food and energy to rise to 2.0% YoY from 1.9% YoY in May. The Tokyo CPI reading is the first indicator on inflation trends for June in Japan and important metric for the market’s pricing of BOJ rate hikes this year.
  
  
• France CPI: On Friday, we get preliminary June France CPI estimated to show 0.2% MoM up from 0.1% MoM in May, but a cooling of the YoY figures to 2.5% from 2.6% in May.
  
  
• Earnings: Key earnings to watch next week are FedEx (Tue), Micron Technology (Wed), Nike (Thu), and H&M (Thu). From a macro perspective the FedEx earnings release is the most important one. Analysts expect revenue at $22.1bn up 1% YoY as the business has finally stabilised after falling prices post the Covid-19 pandemic. Investors will focus on the outlook for the operating margin as FedEx is executing an extensive cost reduction programme. On the US consumer economy, Nike earnings will be closely watched and especially since Nike’s growth rate has grinded to a halt in the previous two quarters. Analysts expect 0% YoY revenue growth.

Previous weekly equity market updates

• Tech rally, inflation surprise, and EU trade war (14 Juen 2024)
• AI bonanza drives new highs and dangerous index concentration (7 June 2024)
• Chinese setback, AI woes, and ECB decision (31 May 2024)
• Nvidia earnings, electrification boom, and bubbles (24 May 2024)
• New all-time high on speculative stocks comeback (17 May 2024)