Boosted by expectations of interest rate cuts from the Federal Reserve, the three major US stock indexes rose together last week. However, towards the end of the trading day, Nvidia's diving led to a high drop in the Philadelphia Semiconductor Index, and panic began to be released.
After the speech by Federal Reserve Chairman Powell, the outside world largely digested the prospect of a rate cut in June. In the absence of further catalysts, the flow of funds from technology stocks that have led the market since the beginning of this year may become a key risk to market volatility in the future.
Strengthening the employment market and the prospect of Federal Reserve easing
From the February non-agricultural report, the latest employment data seems to show cracks in the labor market. Although the number of new jobs added in February exceeded expectations, the US Department of Labor conducted a significant revision in employment numbers for January and December last year. At the same time, the unemployment rate has risen to 3.9%, the highest level since 2022, similar to previously released job vacancies and ADP employment reports.
Bob Schwartz, senior economist at the Oxford Institute of Economics, said in an interview with First Financial reporters that from behind the data, the distribution of employment growth is becoming more narrow, with healthcare, leisure and hotel industries, and government departments accounting for nearly three-quarters of new jobs. "In addition, slowing income growth, fluctuations in employment numbers in household surveys, and rising unemployment rates also indicate some signs of cooling down."
The yield of medium - and long-term US Treasury bonds has fluctuated and fallen, with the 2-year US Treasury bond closely related to interest rate expectations falling 4.7 basis points per week, returning to below 4.50%. The benchmark 10-year US Treasury bond experienced its largest decline in nearly five weeks, closing at 4.09%.
Federal Reserve Chairman Powell hardly disclosed any new information in Congress last week. He reiterated his previous views, focusing on the potential risks that may arise from rapid policy adjustments. However, Powell mentioned the possibility of interest rate cuts, which is not far from having confidence that inflation is moving towards the 2% target.
After investors digested the latest economic data and Powell's speech, federal funds rate futures showed that the expectation of a rate cut in May slightly increased to around 35%, and June remains the most popular option in the eyes of the outside world. The Dutch International Group (ING) wrote in a report that the Federal Reserve is increasingly inclined to gradually restore policies to more neutral levels, maintaining the view of June as the starting point for interest rate cuts as economic data further softens.
Schwartz told First Financial that the Federal Reserve will continue to focus on the direction of wage growth, which is crucial for sustainably pushing inflation back to its target. "Considering the recent volatility of data, the upcoming performance of CPI and PPI indicators is crucial. If the strong rise in CPI in January proves to be not accidental, the Federal Reserve's assessment of policy shift may face new adjustments.".
NVIDIA diving has attracted attention
Last week, the US stock market experienced ups and downs. After Powell's speech, market confidence in the June interest rate cut was boosted, driving the three major stock indexes to further hit historic highs.
The flow of funds shows that investors have increased their holdings of US stock funds for the fourth consecutive week. According to data provided by the London Stock Exchange (LSEG) to First Financial, the net inflow of US stock funds reached $1.2 billion last week. At the same time, commodity funds represented by gold and Bitcoin funds continue to gain investor holdings.
However, the upward trend abruptly came to an end in the late trading session. The chip giant Nvidia fell more than 5%, marking its largest daily decline since May 2023, with a market value evaporating by $130 billion, driving the Philadelphia Semiconductor Index back from record highs. Technical factors may be one of the reasons, and some industry insiders have indicated that after the stock price broke through $900, the relative strength index (RSI) of momentum indicators once climbed above 85, the highest since November 2021, indicating that the timing of the stock's correction is ripe.
Greg Bassuk, Chief Investment Officer of AXS Investments, pointed out that "Nvidia's leadership position provides greater room for its stock price to rise in the coming months. However, investors should also carefully consider some profit taking risks and hedge the downside risks of Nvidia's stock price in a timely manner."
Mizuho analyst Jordan Klein commented, "Nvidia's sharp decline is what is known as an upward fatigue phenomenon. When they (chip stocks) start to decline, you will see a sell-off triggered by quantitative trading, followed by retail concerns, which will only accelerate."
Jiaxin Wealth Management wrote in its market outlook that on the path of the stock index hitting a new high, it is mainly due to the continuous flow of funds into the semiconductor industry. However, chip stocks experienced a significant intraday reversal, which may indicate that the rebound was "too fast" and caused the Cboe Volatility Index (VIX) to rise by over 7% in the past week.
The institution believes that Nvidia has not yet shown any medium-term selling signals. From the perspective of volatility, this indicates that investors are seeking protection and anticipate higher short-term volatility. However, if Nvidia's diving further shakes investor confidence, the market may experience increased volatility in the coming week. According to Jiaxin Wealth Management's report, the potential issue is that if the technology sector falls in the coming weeks (such as with a 5% to 10% adjustment), the funds leaving will enter other areas of the market and provide support, which will intensify the pressure on the US stock market to peak in the short term.