26/02/2024

Taking center stage this week was undoubtedly Nvidia, which exceeded consensus expectations and consolidated its position as a leading player in the field of AI technology. With a market capitalization increase of over 700 billion dollars in 2024, the company's valuation now stands at around 2 trillion dollars.

Good corporate news have once again propelled U.S. equity indices to reach new all-time highs after a brief hiatus the previous week. Closing near the 5,100-point mark, the S&P Index reflects the widespread interest in the current AI boom. The flip side of the coin, of course, is that the upswing is still limited to a handful of large technology companies. There is increasing pressure on fund managers to align with the bullish momentum of the Magnificent Seven, while the ineffectiveness of short positions in these stocks has prevented a rise in bearish bets despite their impressive climb. In fact, the percentage of borrowed shares for this group of companies is limited to 1% of the total, which is the lowest level since 2015. Meanwhile, less than 70% of US market stocks closed higher for the week, although the S&P 500 ended with a weekly gain of 1.7%.

Over in Europe, improved leading indicators sparked investor optimism, leading to stock market increases averaging over 2%, with peripheral markets outperforming. The Eurostoxx 50 index hit new highs not seen since 2001, while the Stoxx 600 finally managed to exceed its previous all-time highs from January 2022. Consumer discretionary, industrials, and financials reigned supreme on the European stock market, while consumer staples and energy companies showed weakness over the course of the week.

The performance of the Japanese market was remarkable, reaching an important milestone despite the public vacation on Friday: after nearly 9,000 trading sessions, the Nikkei 225 index surpassed its previous all-time high set in December 1989. Over the past 12 months, the Japanese index has risen 44%, driven by optimism about the country's possible exit from deflation and improvements in corporate governance.

On the macroeconomic front, the increased uncertainty surrounding inflation has heightened anticipation for the upcoming price data. The focal points of the week will be the preliminary CPI figures for the Eurozone in February and the US core PCE deflator for January. In addition, the release of personal income and spending data for January is expected to show robust income growth and improved spending stability following the vacation season excesses and adverse weather conditions that kept people indoors. Meanwhile, the ISM manufacturing index is expected to approach the 50.0 point mark after 15 consecutive months of contraction. In Europe, better news is expected on the inflation front after the slightly surprising uptick the previous month. All components except energy are expected to play a role in this general disinflation, with the services sector slowing for the first time in three months. Despite this, the ECB will maintain its stance that further evidence of price moderation is needed before initiating monetary easing measures.

Currently, stock indices are sitting at historic peaks and are significantly overbought from a technical standpoint, heightening the possibility of near-term corrections. Nevertheless, it is probable that investors will step in to repurchase these corrections, provided that the prevailing narrative of a smooth economic transition remains intact and the investment surge in AI technologies persists, as we anticipate. We therefore maintain our favorable positioning to fixed income and equity assets for another week.

A potential additional risk factor looms over the upcoming days: as failure to reach an agreement between Democratic and Republican leaders may trigger a partial U.S. government shutdown starting on March 1, with the possibility of extension from March 8 onwards. Moody's, the sole major rating agency upholding a AAA rating for U.S. sovereign debt, placed the country on negative credit watch last autumn, citing heightened political polarization as a contributing factor. While a government shutdown may result in a temporary adverse effect on the US economy, the repercussions of losing Moody's rating are far more critical. This could lead to increased financing costs for the Treasury and slow the nation's economic growth.