Nvidia fails to hit high bar

News flow was generally light over the week, but there was some positive data from the US that should ease concerns that the world’s largest economy is on the verge of a recession. Company reporting was also relatively light, with the most significant statement coming from artificial intelligence (AI) chipmaker Nvidia.

The bar was set very high for the company after it soared in valuation and its results were good, but not quite good enough, hitting the wider technology sector. Nvidia lost almost $200bn from its valuation in the wake of the statement. However, markets appeared to shrug off the Nvidia disappointment later in the week following some positive economic data from both sides of the Atlantic

European equities hit record highs on Friday morning as investors greeted news that inflation is slowing in several major economies. The benchmark STOXX 600 index gained for a fourth straight week. US equities were hit by the downbeat sentiment following Nvidia’s fires, but UK equities rose – and the FTSE 100 is trading close to a new all-time high itself.

The FTSE 100 was up 1.3% by mid-session on Friday, with the more UK-focused FTSE 250 trading flat.

30 October Budget

Prime Minister Sir Keir Starmer warned the government needs to increase taxes substantially due to what it claims is a £22bn "hole" in the public finances. Chanceller Rachel Reeves delivers the first Budget statement of the Labour administration on 30 October, with Sir Keir noting it is “going to be painful”.

Labour has ruled out raising taxes on "working people", including value added tax, income tax and National Insurance. So which taxes might go up – and will there be a wealth tax?

Banks shares were under pressure, with NatWest, Barclays and Lloyds all hit after the Financial Times cited a former senior Whitehall official as saying that banks could be targeted in the October budget. The newspaper reported that the official suggested a levy could raise several billions of pounds.

Rachel Reeves’ spending review and the UK interest rate outlook. Charles Stanley Direct’s Chief Analyst Rob Morgan speaks to Erica Whyte about the market reaction, what we know so far, and what might lie ahead. Listen here.

Economics

Markets had already priced in a US interest rate cut in mid-September before Federal Reserve Chair Jerome Powell spoke at the central bankers’ annual conference in Jackson hole, Wyoming. His comments last Friday did nothing to convince markets that they were wrong. It was now time for policy to “adjust”, Mr Powell conceded, adding that his confidence had grown that inflation is on path to 2%, and that cooling in labour markets is ‘unmistakeable’. But the Fed chair did not give the market any timescale for future cuts. Mr Powell said the bank was increasingly focused on the job market, as it gains confidence that the US was moving past the surging prices that started during the pandemic.

Indeed, US data releases were supportive of the Federal Reserve’s narrative. US second-quarter economic growth was stronger than initially reported. Gross Domestic Product (GDP) rose 3% year on year in the three months to the end of June. This was ahead of the initial estimate of 2.8%. Economists had expected no change. Also, Americans lined up for unemployment benefits at a lower rate in the week ended 24 August. Initial jobless claims fell by 2,000 to 231,000, broadly in line with market expectations for a reading of 232,000. This supports the belief that the US labour market was softening but is not in a serious freefall. These data points may give the Federal Reserve more confidence that the US is heading for a soft economic landing ahead of its interest rate decision in mid-September.

Summer sales at UK clothing retailers helped shop prices to record their first annual fall in almost nearly three years in August, according to the British Retail Consortium (BRC). Prices were down 0.3% annually, the lowest rate since October 2021. Fashion stores offered discounts to try and tempt shoppers kept away by wet weather and the cost-of-living crisis. Food prices continued to rise, but at a slower pace, the BRC said.

German inflation eased to 2% in August, below the 2.3% forecast by analysts. Prices in Spain also eased more than expected, with EU-harmonised inflation coming in at 2.4% in August, its slowest pace in a year. The data strengthened hopes that the European Central Bank would cut rates again in September.

Analysts at investment bank UBS downgraded their forecast for China’s growth this year and next, citing a deeper-than-expected property market slump. UBS now expects gross domestic product (GDP) to increase 4.6% in 2024, down from an earlier estimate of 4.9%. For 2025, UBS sees growth at 4%, down from 4.6% previously.

Ratings agency Moody's raised its Indian growth forecast in both 2024 and 2025. It cited signs of improving rural demand and now expects India's economy to expand 7.2% in 2024, up from a previous forecast of 6.8% previously, while growth for 2025 is expected at 6.6% versus its prior 6.4%. "These forecast changes assume strong broad-based growth and we recognize potentially higher forecasts if the cyclical momentum, especially for private consumption, gains more traction," Moody's said.

Energy

Management at China's state-run oil group CNOOC believes fossil fuels will be a stabilising factor in global energy demand for the foreseeable future. The comments were made as the company set a record output target for 2024, with an aim to pump between 700-720 million barrels of oil equivalent for over the year, or 3% to 6% above the level of 2023.

Trade wars and consumer reticence is making the transition from the internal combustion engine to electric vehicles more difficult.

Geopolitics

Canada will impose a 100% tariff on imports of China-made electric vehicles (EV) after similar announcements by the US and European Union. The country also plans to impose a 25% duty on Chinese steel and aluminium. Canada and its Western allies accuse China of subsidising its EV industry, giving its car makers an unfair advantage.

Shares in French spirit makers such as LVMH, Remy Cointreau and Pernod Ricard rallied after China's commerce ministry said it will not impose provisional anti-dumping measures on brandy imported from the European Union (EU). Remy makes some 70% of its sales from cognac, with China one of its largest markets for the brandy, and its most profitable. The French cognac industry makes up almost all of China's EU brandy imports.

Companies

Nvidia delivered another strong set of quarterly earnings, beating expectations across all end market segments, apart from in the automotive sector. However, its share price declined after the earnings were released. The company beat Wall Street’s revenue estimates by 4%, but this was a significantly lower level than the average of 12% seen in the previous four quarters. Management provided more clarity on delays to its new AI chip, Blackwell. It is still set to begin shipping in the fourth quarter, with management expecting “several billion dollars in Blackwell revenue” during that period. This suggests the delay’s impact may be less significant that some investors feared. The tech-heavy Nasdaq Composite fell over the week.

GSK shares gained after it announced that the Delaware Supreme Court would review a previous decision allowing expert evidence in the Zantac litigation – an important step in the company’s defence against claims that the drug causes cancer.

Life insurance company Prudential reported a mixed set of first-half results. Key financial metrics were close to consensus estimates, but growth moderated much quicker than seen at its peer AIA. Growth was broad-based and there has been positive sales moment in the second half so far. Margin performance was also resilient.

Bunzl shares hit a new record high after the distributor raised its interim dividend by 10%, launched a £250m share buyback and raised its outlook for the year. Management upped its annual guidance for adjusted operating profit, helped by an improvement in margins. The company continues to be highly acquisitive and has bought eight businesses in the year to date.

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