AAA fears vie with AI frenzy

A look at the day ahead in U.S. and global markets from Mike Dolan

Two of the year’s dominant themes vied for investor attention overnight as the debt ceiling impasse threatened the U.S. government’s credit rating and chipmaking giant NVIDIA soared almost 30% on the artificial intelligence boom.

Even though White House and congressional Republican negotiators signalled some progress in debt limit talks, credit rating firm Fitch put its U.S. sovereign “AAA” rating on ‘negative watch’ due to rising risks the debt ceiling won’t be raised before June 1’s ‘X-date’ when Treasury runs out of money.

The tension further roiled the short-end of the U.S. Treasury bill market, further complicating cash management by investors and companies alike.

The combination of an outside risk of technical default, increasingly hawkish noises from Federal Reserve officials about even higher policy rates and persistently high core inflation readings in Britain and the rest of Europe took their toll.

One-month bill yields surged above 6% for the first time on Thursday, while 3-month yields climbing as high as 5.5% too – both now far above the Fed’s standing 5.0-5.25% target range.

The debt limit anxieties and the more aggressive Fed trajectory are now intertwining, with the dollar the clearest beneficiary as it climbed to two-month highs – a jump of more than 3% in little over two weeks. China’s yuan, Japan’s yen and Australia’s dollar all hit their lowest levels of the year against the resurgent greenback.

Futures markets now see a one-in-three chance the Fed will hike rates again next month – but a 50% chance of another tightening by its end-July meeting. Any hopes of easing by year-end are disappearing, with barely a quarter point cut from here now priced by December. There was almost 100 basis points of 2023 easing in the market earlier this month.

But trepidation in the debt and currency markets contrasted with tech and AI-led buoyancy in stocks – with NVIDIA’s post-bell results on Wednesday blowing forecasts out of the water.

The world’s most valuable listed semiconductor company, and fifth biggest U.S. stock, forecast second-quarter revenue more than 50% above Wall Street estimates, and said it is boosting supply to meet surging demand for its artificial-intelligence chips used to power ChatGPT and similar services.

Shares in Nvidia rocketed 28% after the bell to trade at a record $391.50. The gain increased Nvidia’s stock market value by about $200 billion to over $950 billion.

And stocks related to artificial intelligence also jumped sharply in extended trade, adding almost $300 billion in market capitalization.

Rival chipmaker Advanced Micro Devices jumped 10%. Microsoft and Alphabet, which are both rushing to incorporate generative AI into their Web search platforms, each rose about 2%. AI software maker and Palantir Technologies, which recently launched its own AI platform, gained about 8%.

European chipmakers such as ASML also rallied in the slipstream, gaining as much as 6% on Wednesday.

And so for all the debt limit and interest rate angst, the tech frenzy sent S&P500 futures 0.6% higher before than bell and Nasdaq futures up 1%.

Significantly, the Nvidia results now mean that the forecast annual aggregate profits drop for S&P500 companies in Q1 has vanished with more than 96% of firms now reported – and with it the assumption that a technical earnings recession had unfolded in the first three months of the year. Retails such as Costco and BestBuy top the slate on Thursday.

Elsewhere, rearview picture of Q1 was less bright. German stats showed Europe’s biggest economy did actually contract 0.3% in the first quarter, thereby entering technical recession.

Mounting geopolitical worries also hit Chinese and Hong Kong stocks hard on Thursday.

And it wasn’t a great day for short-sellers either. The practice of seeking to profit off bets that a stock will fall is a key focus for U.S. prosecutors and there will be more activity by the Justice Department in coming months, a top department official said.

Events to watch for later on Thursday:

* U.S. Q1 GDP revision, weekly jobless claims, Kansas City Federal Reserve’s May manufacturing survey, Chicago Fed’s May national activity index, April pending home sales

* Boston Federal Reserve President Susan Collins, Richmond Fed President Thomas Barkin speak. European Central Bank annual report presented by ECB Vice President Luis de Guindos

* U.S. Treasury auctions 7-year notes

* U.S. corporate earnings: Costco, Best Buy, Ralph Lauren, Dollar Tree, Autodesk, Ulta Beauty, Medtronic, Marvell, Workday

(By Mike Dolan; Editing by Toby Twitter: @reutersMikeD)

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