Dow Soars on Tech Weakness: What Do US Capital Flows Indicate?

Last week marked a notable upturn for the Dow Jones Industrial Average,breaking a sluggish streak that had persisted since June.The influential tech company Nvidia,which had recently achieved the top position in market capitalization,faced significant stock price fluctuations,dragging the tech sector downward and prompting investors and analysts alike to reassess the industry's future and valuation.This unrest was exacerbated as a number of investors exhibited a desire to cash out on profits.

In the coming week,volatility in the market remains a pressing concern as the financial results of Micron Technology are set to be unveiled alongside personal consumption expenditures (PCE) data.These reports could spell significant implications for market movements.

The suspense surrounding a possible rate cut for September remains palpable.Recent economic data from the U.S.offered a mixed bag of indicators.A crucial marker of consumer spending,the total retail sales in the U.S.grew a mere 0.1% in May,with April’s statistics being revised downward into negative territory.This underscores the impact that persistent inflation and high interest rates are imposing on American households,forcing them to prioritize essential purchases and cut back on discretionary spending.

As a pivotal forward-looking indicator,the Conference Board’s Leading Economic Index fell to 101.2 in May,marking its third consecutive monthly decline.This drop was driven primarily by a fall in new orders,weakened consumer sentiment regarding future business conditions,and a reduction in construction permits.Additionally,the housing market has faced increasing pressure this month,as supply constraints have driven up housing prices and kept mortgage rates elevated.

Nonetheless,the notable rebound in the S&P Global Purchasing Managers' Index (PMI) for June could suggest an uptick in business activity toward the end of the second quarter.The composite PMI climbed to a 26-month high,and corporations reported a decrease in pricing pressure,rekindling hopes of a soft landing for the economy.

In an interview with reporters,Bob Schwartz,a senior economist at Oxford Economics,noted that the overall U.S.economy remains resilient.He pointed out that while retail sales show a slowing trajectory in consumer spending for the second quarter,the service sector continues to exhibit solid growth trends."

Over the medium to long term,treasury yields have remained relatively stable,with the closely watched 2-year and 10-year U.S.treasury yields rising by nearly 5 basis points over the past week.Futures tied to the federal funds rate indicate that there is about a 60% chance that the Federal Reserve might initiate a rate cut in September,while markets continue to monitor the prospect of two rate cuts later this year.Reports from the Canadian Imperial Bank of Commerce (CIBC) and Capital Economics hinted that the Fed could commence a monetary easing cycle in September.

Federal Reserve officials have also emphasized a data-driven approach in their recent discussions.Fed board member Philip Jefferson mentioned that the Federal Open Market Committee (FOMC) may consider rate cuts later in 2024,but this would depend on further evidence confirming a sustained improvement in inflation.Richmond Fed President Tom Barkin stated that he remains open to policy decisions based on incoming data.

Schwartz advised that the return to deflationary trends seems to be on track,with the upcoming PCE figures from May being of utmost importance.He posited that if these figures reflect a continued trend seen in the consumer price index (CPI) coupled with several inflation reports prior to the September meeting,a rate cut could be highly probable.However,he underscored that the direction of the labor market will remain a pivotal factor.

As investment flows show a preference for safer bets amidst this uncertainty,changes in the style of the U.S.stock market became evident last week,with the Dow Jones Industrial Average,representing cyclical sectors,recording its largest weekly gain in nearly two months.In contrast,stocks within the tech sector,particularly those associated with the artificial intelligence boom,displayed a pattern of rising sharply only to retreat.

Since May,the momentum has been largely driven by Nvidia and other tech heavyweights.A recent survey by Bank of America revealed that long positions in tech stocks have established themselves as the most overcrowded trade for fifteen consecutive months.

However,following Nvidia's ascendancy to the top of the global market cap rankings,its stock price plummeted,evaporating over $200 billion in market value within just two days.This steep decline was triggered by CEO Jensen Huang's stock sell-offs,ongoing skepticism regarding the company's valuation,and the expiry of options,all of which compounded the pressure on stock prices.

Emily Roland,co-chief investment strategist at John Hancock Investment Management,remarked,“Tech stocks remain in the spotlight.I can't recall a single stock rattling the market like Nvidia has; it truly is a key driver of market direction.” She expressed uncertainty over whether the AI-driven rebound has reached its zenith.Signs are emerging that even Nvidia,influential enough to sway the market,may be experiencing a slowdown in its momentum.

Investment trends indicate that uncertainty surrounding Fed policies has nudged investors towards risk aversion.Data from the London Stock Exchange Group (LSEG) showed that U.S.stock funds faced a withdrawal of $8.37 billion last week,following a staggering sell-off of $21.54 billion the previous week,with large-cap funds alone seeing outflows of $4.88 billion.Concurrently,there was $21 billion in net selling of money market funds,pointing toward a decrease in risk appetite.

Charles Schwab's market outlook suggested that deteriorating technical indicators for tech stocks imply that recent gains may necessitate a period of consolidation.Behind Nvidia's adjustment was a relative strength index (RSI) that had crept into an overbought territory,which contributed to an abrupt 7% daily price fluctuation.While it may be premature to conclude that the tech run has come to an end,certain factors could catalyze a shift,particularly if investor confidence wavers and those chasing high prices decide to cut their losses.

Schwab further noted that the coming week would be critical in assessing whether the tech stock correction has come to an end.If the weakness persists,it could indicate a rotation of funds into other market sectors that have recently underperformed,particularly energy and financial sectors,which have shown signs of investment interest.Their report underlined that Micron Technology’s performance could be pivotal in determining whether the AI surge can rejuvenate,while the performance of the inflation gauge PCE will influence market risk appetite.Overall,volatility continues to loom as a potential pressure point.