US AAA rating under scrutiny: doveish comments in Fed minutes not enough to calm markets: Market update from HL’s head of equity research

by | May 25, 2023

US AAA rating under scrutiny. Doveish comments in Fed minutes not enough to calm markets.

·        Fed minutes gives hope for pause in rate rises

·        Oil rallies on surprise fall in US inventory and Saudi sabre rattling

·        NVIDIA’s Q2 revenue forecast smashes expectations

·        Fitch puts US credit rating on watch

·        German consumer confidence due later today

·        FTSE down a further 30 points in early trading

Derren Nathan, head of equity research, Hargreaves Lansdown:

“The prospect of the US government being unable to meet its financial obligations continues to be a key influence on investor sentiment in global equity markets. Comments by Republican House Speaker Kevin McCarthy that both sides of the negotiating table were “still far apart” weighed on yesterday’s session on Wall Street. The S&P 500 lost 0.7% with broad based declines across most sectors. The Nasdaq Composite didn’t do much better with a drop of 0.6%. There were a few bright spots. The energy sector held its ground reflecting a 2% jump in Brent crude oil prices to over $78 per barrel. This was on the back of a small weekly decline in US crude inventories, surprising analysts who had expected an increase of 455 million barrels. Meanwhile, Saudi energy minister, Prince Abdulaziz bin Salman’s warning to those betting against a fall in oil prices, raised the prospect of further production caps at next month’s OPEC+ meeting.

A softening in tone in the minutes of May’s rate setting meeting at the Federal Reserve may have prevented a greater slide in US equities. Whilst additional rate rises ‘may be appropriate’ the need to do so has become more uncertain with opinion seeming to become more divided around the table.

After the bell, chip giant NVIDIA provided some relief to traders. The share price climbed even higher into the stratosphere, up nearly 25% in after hours trading, as investors digested the first quarter results. Revenues pf $7.2bn were down 13% against the same period last year but ahead of $6.5bn consensus forecast. But it was guidance for about $11bn of revenue in the current quarter, more than 50% more than market forecasts, that caused most of the excitement. The explosion in AI, driven by the emergence of intelligent chatbots like Chat GPT is helping NVIDIA to buck the trend in an otherwise weak semiconductor market. The valuation now stands at an eye-watering 23 times forecasted full year sales and nearly 60 times earnings. With analyst’s predicting sales growth of just 21% these multiples look a little rich, suggesting that either growth needs to accelerate to justify their heady heights, or that the valuation will moderate. The race is getting closer and it’s likely that analysts will upgrade their forecasts today. With no full year guidance given by the Company, how much remains to be seen.

There could be further pressure on US equities today after ratings agency Fitch put the United States triple A credit rating on watch for a possible downgrade, sparking a further increase in Treasury bill yields.

European shares took a heavier hit yesterday with the Stoxx 600 down 1.8% led by falls in car makers, travel stocks and financial services. It’s through that lens that traders will be keeping a close eye on German consumer confidence data due later today. The FTSE 100 fell in line with its European peers yesterday, and was down a further 0.4% to 7,597.22 in early trading today.”

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