In line with our expectations in our previous weekly note, CPI miss? Risks to the upside, major US and EU stock markets set a record high, on the back of the cool CPI print breaking a recent trend of hotter-than-expected prints, and which together with relatively weak retail sales and job data, lifted markets expectations for interest-rate cuts later this year. The QQQ is now entering price discovery and currently approaching the upper bound of the rising diagonal. Absent any re escalation of geopolitical risks following the latest news out of Iran, we expect the QQQ to reach our target of 470-475 over the next few weeks.
Following the previous week’s exuberance on the back of the latest CPI miss and amidst a quiet week ahead in terms of macro releases, market attention will be focused on Nvidia's 1Q24 earnings on Wednesday, given the majority of earnings in the US and Europe are out of the way. NVIDIAs 1Q23 results marked the beginning of the AI frenzy, as a 19% EPS beat added nearly USD300bn in AI stocks market cap in a single day and 20% to NVIDIA, which has now tripled in value in a year. The implied 1D earnings move is currently at 9%, which is not a major premium to the average earnings move of 8.5% though regardless it remains of particular interest given the size of the implied move is the equivalent of the market cap of a company of the size of SAP. In the options space the skew is inverted for the one-week tenor, where the implied volatility of 105 calls is higher than the implied vol of 95 puts with the largest open interest on calls at a strike of USD1000 (+8%).
After Friday’s expiration, the market has lost roughly USD4bn in dealer gamma, from c.USD6-7bn before expiration, where it saw one of the largest weekly increases in long gamma. Spot SPX has been slowly grinding up close to the short gamma levels for dealers of around 5300-5400, which could further reinforce the market move to the upside, should NVIDIA results beat expectations again.
Liquidity impulse continues to be favourable for equities and appears to be reversing to the upside as reflected in US balances with the FED which we see supportive for risk assets. Skew in the SP500 has also dropped significantly to the 6% percentile over a 52-week period reflecting a resumption of bullish market expectations, which is also seen in options traded in Chinese equities, where volatility has been increasing in line with spot prices.
Given our ongoing bullish bias for risk assets in the short term, we maintain our July24 470 calls on QQQ (Nasdaq) proposed in our 6 May note Plunge protection team to the rescue.