The week kicked off with a pause in the equity rally on both sides of the Atlantic Ocean. The Nikkei index is mostly flat on Tuesday and the yen consolidates above 151 following yesterday’s threat from a Japanese official about a potential intervention to stop excessive bleeding in the yen. The Japanese will likely intervene if the USD/JPY surpasses the 152 level.
Elsewhere, the dollar index gave back field yesterday as new home sales unexpectedly fell in February. A $66bn US 2-year bond auction, on the other hand, saw a tepid demand, the yield settled near 4.50%. The 2-10 year of the US yield curve remains inverted for the longest stretch on record. But there is no recession in sight just yet; the US expected to print a 3% growth last quarter, down from nearly 5% printed a quarter before. The Federal Reserve’s (Fed) massive balance sheet and the huge government spending explain why the higher yields never slowed the US economy. Friday’s core PCE print – the Fed’s favorite gauge inflation – may print a 0.3% monthly rise and a stable 2.8% yearly rise. But at this point, I’ve come to conclude that nothing will derail the Fed cut expectations. And the fact that the Fed will, on top of it, slow the pace of its QT is soothing for risk sentiment. The S&P 500 opened the week slightly lower, we could see some profit-taking before the long Easter weekend, but market volatility remains low.
Apple’s AI Battle
Apple (NASDAQ:AAPL) is offered nearly $170 per share despite chatter that the company could team up with the Chinese Baidu (NASDAQ:BIDU) – the Chinese equivalent of Google (NASDAQ:GOOGL) that’s also active in AI, in the hope of boosting its iPhone sales in China. Broadly speaking, Apple’s effort to catch up with the AI developments through partnerships is interesting. If the company nails the right partnerships and gets the right offer on its devices, investors could tolerate the lack of in-house AI developments. But the problem is that, when you rely on tools developed by others, you accept that competition could also get them. In the particular case of Apple, the Korean Samsung has already got its smartphones powered by Baidu, therefore it will be hard for Apple to stand out with the same offering.
But zooming out of Apple, the next phase of AI should be the extension of the benefits from the companies that power the AI tools – like semiconductors and data centers – to companies that implement the AI models and grow their business on it. Apple could fall in this second category if it finds the right partnerships and the right strategy. For now, investors remain skeptical.
Improved Commodity Appetite to Boost FTSE 100
A period of loosening policies will likely support equity valuations beyond the Big Tech, back bond valuations, but also commodities. Rebound in Western manufacturing, Chinese stimulus, and geopolitical risks should back copper, aluminum, gold, and oil. Copper futures trade with a 20% discount from the pandemic peak on COMEX, while gold consolidates near $2170 per ounce, close to the ATH levels reached earlier this month. US crude on the other hand is back above $82pb, as bulls eye a further advance to the $85pb mark in the continuation of the actual positive trend. Trend and momentum indicators remain supportive of a further rise, and we are not yet close to overbought conditions. I also think that AI investors should enlarge their scope to the energy necessary to fuel powerful AI computations. And the name of the controversial uranium is being pronounced timidly by some investors and analysts. The uranium futures have got a significant boost since the war in Ukraine started, and despite the efforts to shift toward alternative and clean energy sources, like wind and solar, none offers a sufficiently large scale to satisfy humanity’s increasing hunger for energy, except uranium.
If commodities perform well, the British FTSE 100 – heavy in energy and mining stocks – should also see a boost. The index rebounded more than 3% since last week, as some investors divest from the US and European stocks that trade near record to invest in British blue-chips that trade with around 50% discount to their Western peers. The FTSE 100 is relatively cheap, it offers an interesting exposure to commodities and the index could claim a fresh high, above the 8000p mark, if appetite for commodities continues to rise on the back of a softer outlook for global central banks and persistent geopolitical tensions.