Global stock markets under renewed pressure: Nvidia's performance and Powell's speech are major events!

Last week, the continuous strong economic data in the United States, the increasing deficit combined with the massive issuance of government bonds, and the market's growing concerns about the Federal Reserve's long-term maintenance of high interest rates ("Higher for longer") after the release of the Fed meeting minutes, have pushed the yield on 10-year US Treasury bonds, known as the "anchor of global asset pricing," to its highest closing level since 2008. As a result, stocks and other risky assets have suffered across the board.

From a theoretical perspective, the 10-year Treasury yield is equivalent to the "r" indicator on the denominator side of the important valuation model in the stock market - the DCF valuation model. Analysts generally use the 10-year Treasury yield as a benchmark to set the "r" value. When the denominator level is higher, stock valuations, especially for high-risk technology stocks and other risky assets, naturally collapse continuously, assuming that other indicators have not changed significantly. This trend has already been reflected in the US stock market, with the S&P 500 index falling for three consecutive weeks, marking the longest weekly decline since February.

Under the impact of the "anchor of global asset pricing," global stock markets experienced their most brutal week since February last week. However, traders expect that the major challenges facing the stock market are far from over. In the coming days, the market will still face the impact of some key events, especially the second-quarter performance of AI chip giant NVIDIA (NVDA.US), the strongest support for the "AI faith," and the speech by Federal Reserve Chairman Jerome Powell at the Jackson Hole Global Central Bank Annual Symposium, which has attracted close attention.

Global investors focus on NVIDIA, the strongest support for the "AI faith"

Before Powell's speech at the Federal Reserve's symposium in Wyoming on Friday, global investors will pay close attention to the crucial earnings report released by AI chip giant NVIDIA after the US stock market closes on Wednesday (Thursday morning Beijing time) to determine market risk appetite.

This chip giant is currently the fourth-largest component stock of the S&P 500 Index. The far better-than-expected revenue outlook for the second quarter announced by the company in May has completely ignited the global investment frenzy around artificial intelligence (AI), thereby propelling the S&P 500 Index into a technical bull market this year. It can be said that NVIDIA is the core force behind the global "AI faith."

Last week, NVIDIA's stock price rose against the trend by nearly 6%, with a cumulative increase of nearly 200% since the beginning of the year, closing at $432.99 per share last Friday. Whether the strongest driving force behind the rebound in the US stock market and even global stock markets, the AI frenzy, can continue will be revealed on Thursday morning Beijing time. **Currently, Wall Street has high expectations for NVIDIA's performance, but if the company fails to meet its expected targets, the momentum of the AI frenzy may temporarily pause and have an impact on other companies, such as Microsoft (MSFT.US). Google (GOOGL.US), Meta (META.US), and AMD (AMD.US), as well as other tech giants, have experienced significant impact on their stock prices, as well as global stock markets.

The explosive demand for GPU chips from global enterprises for developing AI models like ChatGPT is the most important reason for Nvidia's better-than-expected Q2 performance outlook. Analysts initially estimated Q2 revenue to be $7.2 billion, but Nvidia stated that it would achieve approximately $11 billion in revenue for the quarter, representing a growth of about 64% compared to the same period last year. Wall Street analysts are predicting that this target will be met this week, with the stock price having significant room for further growth.

According to data compiled by investment research platform Seeking Alpha, Wall Street analysts have a consensus rating of "Buy" for Nvidia, with an average target price of $518.29, indicating a potential upside of nearly 20%.

Citigroup analysts maintained a "Buy" rating for Nvidia with a target price of $520 prior to the earnings announcement. UBS stated that investors should "stick to the end" before the company releases its Q2 results on August 23, and raised Nvidia's target stock price from $475 to $540, reiterating a "Buy" rating. Baird stated that Nvidia may experience "another supercycle" driven by artificial intelligence, reaffirming an "Outperform" rating and raising the target stock price from $475 to $570.

Morgan Stanley, a Wall Street financial giant that has been bullish on Nvidia's stock performance this year, pointed out, "We believe the recent sell-off is a good entry point because despite supply constraints, we still expect significant growth in Q2 earnings, and more importantly, strong visibility for the next 3-4 quarters." They added that Nvidia is their top investment choice in the semiconductor sector. Morgan Stanley has a "Overweight" rating for Nvidia with a target price of $500.

Nvidia will announce its Q2 financial results on August 23. Analysts generally expect the company's Q2 revenue to reach $11-11.1 billion, with earnings per share of $2.08. Morgan Stanley predicts that Q2 revenue will exceed expectations by $500 million to $1 billion, primarily driven by strong data center business. Looking ahead to the quarter ending in October, Morgan Stanley estimates Nvidia's quarterly revenue to be between $12.5 billion and $13 billion, higher than the current Wall Street consensus expectation of $12 billion. **

Will the "Master of Expectation Management" reset market expectations?

Powell then drew a conclusion for this week. According to statistics compiled by Bloomberg Intelligence (BI), since the millennium, the speeches of the Federal Reserve Chairman at meetings have usually boosted the stock market, with the S&P 500 index averaging a 0.4% increase in the following week. However, last year's situation is still fresh in the minds of traders: BI data shows that after Powell's speech, US stocks fell by 3.2% within a week. At that time, he warned of maintaining restrictive policies to combat inflation.

"This may be the policy aspect they are most concerned about in the future: not how much to raise the federal funds rate, but how long to maintain it at this level." Former senior Federal Reserve official Brian Sack said. "If they are willing, there is still a lot of operational space to tighten financial conditions in this way."

Maintaining higher interest rates for a longer period of time, known as "Higher for longer," is becoming the mantra of the Federal Reserve, which is known as the "Master of Expectation Management," at least guiding market pricing trends this year and early next year, rather than the "Much higher rates from here" that the Federal Reserve has repeatedly emphasized from last year to the beginning of this year. Now the market generally expects the end of the Federal Reserve's rate hikes and worries about "Higher for longer" are rising, with expectations that high interest rates will continue at least until March next year.

The risk factor this time is that the Federal Reserve is inclined to further tighten policies this year and the prospect of maintaining higher interest rates for a longer period of time. At a time when expectations of a "soft landing" are rising across the board, unexpected hawkish remarks from Powell may affect market expectations for economic growth. This situation may also jeopardize Wall Street analysts' profit expectations, especially for those high-flying technology stocks.

Jackson Hole Pattern - US stocks usually rise in the week following the Federal Reserve Chairman's speech

However, in the long run, the Federal Reserve's interest rate path is crucial, with three more Federal Reserve policy meetings scheduled for 2023. In the interest rate market, traders are betting on a pause in rate hikes next month, with less than a 25% probability of a rate hike in November. CPI data released this month shows that inflation rates continued to decline in July, but strong retail sales data also shows that US consumers remain resilient. If it turns out that inflation pressures persist, this may prompt the Federal Reserve to adopt more aggressive policies. With the increasing selling pressure in the US stock market last week, the S&P 500 index has experienced three consecutive weeks of decline for the first time since February. Investors' interest in options contracts that bet on more losses has also increased.

According to data compiled by institutions, more than 25 million put options were traded in the US stock market on Thursday, the highest level since the banking turmoil in March, while the demand for call options remained at average levels.

The S&P 500 index fell 4.8% in August, marking the worst performing month so far this year. The Chicago Board Options Exchange Volatility Index (VIX), which measures the expected volatility of the index, reached its highest level since May. Although a weak stock market in the strictest sense is unlikely to cause market panic, derivatives traders will certainly take note of this upward trend in data.

Data compiled by Citigroup Group shows that the scale of buying call options has dropped to the lowest level this year compared to building positions in a bearish manner. Call options are seen as an important indicator of bullish positions. Similar trends can also be seen in broader indicators, including the extent of put and call option selling as indicators of bullish and bearish bets on the market.

This positioning trend has drawn greater attention to the Jackson Hole Symposium. Dennis Debusschere, President of 22V Research LLC, described the situation before the conference as "complicated," with rising US Treasury yields putting pressure on long-term stock valuations and the struggle against inflation far from over.

In a report to clients, he stated, "Don't expect Powell to wield the hammer and deal a heavy blow to the market like in 2022. We believe Powell will not change his data-dependent stance, and in the face of rising yields and underperformance of risk assets, Powell's attitude may not be seen as 'hawkish.'"

Stephanie Lang, Chief Investment Officer at Homrich Berg, said, "Investors are betting on the notion that inflation is under control and the Fed can declare policy victory, but this notion has not yet become a reality - it is the biggest risk facing the stock market." "At the same time, unless NVIDIA can translate the power of artificial intelligence into strong profit growth, the upward trend in the first half of this year will be difficult to sustain."