Investing in financial products involves risk to your capital.

IBKR Resources

Useful Tools and Information

Close Navigation
Learn more about IBKR accounts
Gold Diggers > AI Gold Ahead of FOMC

Gold Diggers > AI Gold Ahead of FOMC

Posted July 31, 2024 at 11:15 am

Steve Sosnick
Interactive Brokers

Today’s theme song: Gold Digger by Kanye West

So far today, we see three key themes.  First, while Microsoft (MSFT) was the latest stock to raise concerns that spending on artificial intelligence was slow to result in profitability, investors greatly preferred to hear from AMD that the spending nonetheless continues apace.  Second, the relationship between tech stocks and the yen reversed, as the yen rallied sharply after the Bank of Japan raised rates overnight.  Third, none of the month-end vibe shift could be occurring if investors had serious concerns about today’s FOMC meeting.

In yesterday’s piece we highlighted the risk that MSFT could report good numbers yet sell-off anyway.  That proved to be the case.  We also noted, but without detail, that AMD earnings could also prove consequential.  How’s that for burying the lead?  After Alphabet’s (GOOG, GOOGL) comments last week and MSFT’s cloud division’s results yesterday, it was becoming questionable about when these expensive investments in chips, data centers, and software will pay off. 

Then AMD told us that they are selling chips as fast as they can make them, and that their order book remains full.  It does seem unsustainable that companies would continue to load up on the infrastructure required to develop and implement AI if that isn’t an especially profitable activity, but that trend doesn’t seem to be abating yet.  MSFT confirmed that they will be increasing their aggressive capital spending nonetheless.  Throw in a well-timed Nvidia (NVDA) upgrade from Morgan Stanley along with investors who might have decided that they no longer want to appear underinvested ahead of month-end, and off we go.

Today’s rally broke the recent relationship between a stronger yen and lower NDX.  There was a solid reason for that relationship – many leveraged investors had been borrowing low-yielding yen and using the proceeds to buy higher yielding or higher momentum assets – and the rapid rise of the yen – from about 162 to 152 in a matter of days – forced many to exit those trades.  That ended today.  The yen rose sharply today, trading briefly below 150 after the BOJ raised rates by 10bp, but that had no impact on the mad rush back into tech this morning.  Again, we wonder how much of that was considered “excess” de-risking ahead of month-end, but once again, tech momentum triumphs.

Yet none of this would be occurring today if investors weren’t sanguine about this afternoon’s FOMC meeting.  Bluntly, if folks were truly worried about what Chair Powell might say this afternoon, then they wouldn’t be bidding up stocks with abandon.  And it’s not just stocks.  Treasury yields are lower across the curve, led by the long end.  While this morning’s rally has pushed SPX back into positive territory for July (up about 1%), and cut NDX’s losses to about -1.7%, the moves in rates have been quite dramatic.  The 10-year yield is down about 35 basis points and the 2-year down about 40bp during the month.  Much of that comes from the assumption that the Fed will cut rates at each of the three remaining meetings this year.  Considering that this is at odds with the most recent “dot plot”, which projected just one, a key feature of today’s press conference will be to see if Powell confirms the FOMC’s projections or subtly backs the market’s enthusiasm for cuts.

Considering today’s broad-based equities rally, it is not surprising to see options traders carrying that enthusiasm into this afternoon and the rest of the week.  The IBKR Probability Lab shows peak probabilities for SPX options expiring today and on Friday to be above current levels, about 5545 for today (vs. 5525 now) and 5575 for Friday.  Investors are expecting “Goldilocks in a Suit” to tell us that the economic porridge is not too hot and not too cold – just right. 

IBKR Probability Lab for SPX Options Expiring July 31st, 2024

IBKR Probability Lab for SPX Options Expiring July 31st, 2024

Source: Interactive Brokers

Past performance is not indicative of future results

IBKR Probability Lab for SPX Options Expiring August 2nd, 2024

IBKR Probability Lab for SPX Options Expiring August 2nd, 2024

Source: Interactive Brokers

Past performance is not indicative of future results

Join The Conversation

If you have a general question, it may already be covered in our FAQs page. go to: IBKR Ireland FAQs or IBKR U.K. FAQs. If you have an account-specific question or concern, please reach out to Client Services: IBKR Ireland or IBKR U.K..

Leave a Reply

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.

Disclosure: Probability Lab

The projections or other information generated by the Probability Lab tool regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Please note that results may vary with use of the tool over time.

Disclosure: Options Trading

Options involve risk and are not suitable for all investors. For information on the uses and risks of options read the "Characteristics and Risks of Standardized Options" also known as the options disclosure document (ODD). Multiple leg strategies, including spreads, will incur multiple transaction costs.

This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.