Major U.S. and European stock indices have now fully recouped last Friday’s losses, driven by positive developments in the ongoing tit-for-tat tariff negotiations, which continue to bolster risk assets. President Trump has postponed the implementation of 50% tariffs on the EU, extending the deadline from 1 June to 9 July.
Meanwhile, concerns about the sustainability of the U.S. fiscal deficit have intensified, as evidenced by the 30-year Treasury note yield climbing above 5% following the passage of the so-called "Big Beautiful Tax Bill." With tax cuts heavily front-loaded and spending reductions largely deferred, the deficit is projected to widen to 7% of GDP over the next two years, although it is still expected to provide modest economic stimulus in the medium term. Coupled with diminished growth headwinds from lower tariff rates, market expectations for cuts by the Federal Reserve rate in 2025 have moderated, now anticipating only two rate cuts compared to four projected on 7 April.
In terms of market positioning, the strength of retail buying pressure moving into last week started to weaken following the markets relatively fast advance, although weakness following the rating downgrade has sparked renewed interest in US stocks by the cohort. The positioning of Institutionals remains muted while Hedge funds positioning in US stocks was largely unchanged during the week, in an overall bearish positioning, while Long Only’s marginally increased in length, but still at lower levels than seen in early 2023. CTAs are currently in a neutral positioning, while volatility control funds still have substantial room to add to risk as realised volatility continues to drop significantly. As a result, higher yields money market fund assets have surpassed the USD7trn mark, and with the institutional length in equites far from exuberance levels, we still see favourable risks for further length in equities from current levels.
The key event this week will be Nvidia’s earnings release on Wednesday with the stock trading near the upper end of its recent range, having surged over 50% from its 7 April low, sitting in technically overbought territory, suggesting a challenging backdrop for the earnings report. Despite elevated spot levels in the name, institutional positioning in the broader US tech sector remains undemanding, with both Hedge fund and Mutual fund positioning substantially underweight. In terms of valuation, at a 28x PE, NVIDIA is now trading at the lower end of its 5Y valuation range. Nvidia is expected to report a strong fiscal 1Q26 with robust GB200 chip demand in hyperscalers and Tier-2 clouds, although potential lost sales in China due to H20 restrictions may temper gains, with the focus on GB300 transition, macro/tariff impacts, and margin pressures from the early production costs of Blackwell.
In a rather calm week for economic data, interest will be focused on the PCE print on Friday, for which the April reading is forecast to rise 0.1% MoM (prev. 0.0%) and 2.5% YoY (prev. 2.6%).
We maintain our Long QQQ Jan26 565 calls.