As the markets open, Nvidia’s impressive quarterly earnings have bolstered U.S. stock futures, despite concerns over hawkish Federal Reserve meeting minutes, escalating military tensions around Taiwan, and the announcement of an early UK election.
Nvidia continues to thrive amid the AI boom, with its stock soaring 7% in after-hours trading. The company’s forecast for second-quarter revenue at nearly $28 billion, well above analyst estimates, along with a 10-for-1 stock split, drove its shares above $1,000 in extended trade, adding $140 billion to its market value. This surge has lifted the S&P 500 futures by 0.5% and Nasdaq 100 futures by almost 1%.
Market Reactions and Central Bank Policies
The ongoing rise of Wall Street has significantly reduced implied equity volatility, with the VIX “fear index” dropping to its lowest level since November 2019. Similarly, Treasury market volatility is subsiding, with the MOVE index falling to its lowest since February 2022, indicating a potential pause in Fed rate hikes.
Despite some hawkish signals from the Fed’s latest meeting minutes, suggesting readiness to raise rates if needed, the market impact was minimal. This is partly because the minutes predated softer April inflation data, and recent data, such as Wednesday’s housing figures, suggest a cooling economy. As a result, U.S. Treasury yields saw only modest increases, with markets focusing on upcoming weekly jobless claims and May business surveys for further guidance.
UK Election and Economic Indicators
The unexpected announcement of a UK election for July 4 has added to market uncertainties. Despite the Labour Party’s strong lead in polls, indicating a likely victory, the announcement has spiked sterling volatility. Two-month implied volatility for the euro/sterling pair rose to over 4%, reflecting market jitters.
The UK’s April inflation data, particularly stubborn core inflation readings, has dashed hopes of a June rate cut from the Bank of England, even putting an August move into question. This has resulted in higher gilt yields and pushed sterling to a two-month high. The FTSE 100 fell slightly after the election announcement, with UK utility shares dropping nearly 6% due to potential political risks.
Global Economic and Geopolitical Developments
In Europe, business activity grew at its fastest pace in a year, driven by robust service demand, though manufacturing showed signs of recovery. This was reflected in the HCOB preliminary composite Purchasing Managers’ Index (PMI), which rose to 52.3 in May, surpassing expectations. Meanwhile, UK business activity cooled, posing challenges for Prime Minister Sunak’s campaign.
In Asia, Chinese shares underperformed, with significant losses in mainland and Hong Kong markets, as geopolitical tensions heightened. China’s military conducted drills around Taiwan, escalating regional tensions. U.S. Treasury Secretary Janet Yellen highlighted these concerns, noting that G7 finance ministers would discuss China’s industrial overcapacity and its impact on global economies during their meeting in Stresa, Italy.
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