Pay to play

The week starts with gains in most Asian indices, and futures are in the positive in the early hours of the trading week. The S&P 500 posted its strongest week since late June on the back of robust earnings, further appetite for technology stocks, and hopes of progress in the Ukrainian war. Trade and tariff chaos have been, for now, left behind – which has translated into improved sentiment in the Stoxx 600, although the concrete implications will come to investors’ attention in waves as data flows in and shows the damage.

But this Monday morning, attention is on Ukraine and optimism that there could be progress. Gold is trading lower, and crude oil is under pressure. The price of a barrel finally cleared a critical Fibonacci support last week, near the $65.20pb level, and is now in a medium-term bearish consolidation zone with trend and momentum indicators suggesting room for a deeper slide, while the RSI indicator is not yet near the oversold level. The ample supply and cloudy demand outlook support the bearish camp, yet any disappointment on the Ukraine front could rapidly reverse the latest decline and send the price of a barrel back above the $65pb level.

Falling energy prices is good news for inflation watchers: they should help keep inflation in check, and that’s important for those expecting the Federal Reserve (Fed) to cut interest rates as early as next month. This week, the US will reveal its most-watched CPI figures. Both headline and core CPI are expected to have risen in July; core inflation remains sticky near the 3% level – above the Fed’s 2% policy target – which in normal times should justify a ‘no cut’ from the Fed next month. But alas, times are not normal, and the increasing pressure from the White House – along with the replacement of outgoing members by dovish, White House-friendly members – suggests that rate cuts will come, no matter what. Whether they could ease borrowing costs is yet to be seen.

If inflation is higher than expected, investors will likely scale back September cut expectations and send the US 2-year yield higher. If the data points to lower-than-expected numbers, investor reaction could be two-sided: either they believe the numbers are accurate and top up dovish Fed expectations – which would result in lower short-term yields – or they will question the accuracy of the government data after the BLS chief was fired two Fridays ago for having announced unpleasant revisions to US jobs data. For now, the US 2-year yield is recovering the post-NFP decline, the US dollar remains under pressure from dovish Fed expectations, the majors including the EURUSD and Cable extend gains, while the USDJPY continues to see resistance near the 148 level.

In individual news, the big story of the day is that Nvidia and AMD will pay 15% of their Chinese chip sales to the US government, according to the FT — an effort to reduce export-restriction risks toward China and increase visibility on their Chinese revenues. The idea of paying the US government to soften export policies — originally designed to control national-security risks — is an unusual move. If the US government is willing to exchange national-security risks for money, that would be good news for Nvidia and AMD. However, this arrangement will hardly guarantee the end of export restrictions, as the US government is not primarily driven by financial considerations — especially when it comes to national security issues.

TSMC shares – seen this morning as a proxy for market reaction to the news – are up by more than 1%, hinting that investors fully back the companies’ tolerance for lower margins on their Chinese business if it means more stability on the business front.

Now that we’re in the tech space, AI investors will be watching CoreWeave earnings this week – an AI-cloud company backed by Nvidia that recently went public and had a rough summer. The company is expected to announce around $1bn in revenue, a loss of roughly $0.20, and a high concentration of clients – as 77% of its revenue came from Microsoft and OpenAI last quarter. But the data-center business, energy, and cybersecurity are the backbones of AI adoption. If you like AI, you should also have exposure to these essential side sectors. Note that cybersecurity stocks have been under pressure this summer, partly due to macro and rate risks, but also due to seasonal weakness and because they’re in the middle of a firewall refresh cycle. Price pullbacks could be an interesting opportunity to strengthen exposure.