Tech selloff: a blip or a valuation reset?

00:00:00: Hi everyone and welcome to Swisscodes daily market talk.

00:00:04: It's Monday, eighth of June.

00:00:06: technology stocks are facing their first meaningful test in months.

00:00:10: as a combination of rising yields some profit taking I'm growing.

00:00:15: questions about AI spending pressure the sector since Friday.

00:00:19: unsurprisingly membership makers are being particularly hard since then.

00:00:24: at The same time it is said that some investors out there may be freeing up some cash ahead of the highly anticipated SpaceX IPO that's due later this week.

00:00:35: So, the key question now is whether This Is A Healthy Correction a rotation to The Next Hot Trade or the start Of A Deeper Revaluation?

00:00:43: We will talk about all that and more but before we do as always please keep in mind that opinions are my own And this not financial advice.

00:01:01: Again, it may be happening.

00:01:03: Correction in some hot pockets of the AI trade are giving signs off and giving ends since last Friday on a setoff different factors.

00:01:11: First, there's the US jobs data that came in last Friday stronger than expected by analysts.

00:01:16: I would actually expect a stronger-than-expected read In terms of job figures in the?

00:01:21: u.s combined with relatively soft wages.

00:01:24: growth to eco not That badly across risk assets in a set up where rising inflation and rising inflation Expectations make a federal reserve rate hike increasingly likely.

00:01:36: so Expectedly this song us job additions be sent DOS two year yield to four point twenty percent level from around full percent before the data was released on Friday.

00:01:45: But, The latter hit global stocks pretty hard actually harder than I thought starting with technology names.

00:01:51: The thinking is that rising borrowing costs would reduce their present value of future earnings and can weigh on investment spending.

00:01:59: but not only does rising inflation expectations and rising borrowing cost have been in place since a while now without necessarily bothering technology investors, meaning that a strong jobs data released on Friday was not only responsible for NASDAQ's nearly five percent slab on Fridays trading session.

00:02:20: And to give a broader context, Van Axe my conductor ETF sold off more than nine percent on Friday.

00:02:28: Macron which has become the bellwether of the latest ship rally tanked thirteen percent.

00:02:33: and The Korean Cosby Index Which is shoulder by two membership makers there Samsung and SK Hynex Is down by more then five percent this morning.

00:02:42: at the time I'm talking here It's again halt trading today but this time because it was being sold too aggressively.

00:02:51: So back to why?

00:02:51: Why the bloodbath that we saw on Friday across technology is not only due to a stronger jobs data, but as I discussed on Friday.

00:03:00: there are rumors right now that investors who serve the chip way would be tempted to take their profits free up some cash.

00:03:10: That could be one of the reasons that exacerbated the sell-off we saw across the chip makers.

00:03:16: But more fundamentally and, more importantly two major news actually justified a hefty slump that we saw in chip stocks since last week And threatened to deepen losses.

00:03:25: One A report from NVIDIA suggesting it's next generation Vera Rubin platform would use far less dram memory than previously expected.

00:03:36: Remember, this was one of the risks that I was pointing at in my May twenty seven three port that new chip infrastructure among other technology advances in the sector could eventually come and decrease need for drama away on membership makers profit expectations.

00:03:53: so Friday's news from envidia just did that it suggested memory to function.

00:04:01: And second, while anthropic release a report calling for safeguards that could slow or temporarily halt frontier AI development raising concerns that spending on AI infrastructure may also lose some momentum.

00:04:16: So, latter two combined with stronger than expected jobs data from the U.S and ROCOM's Coaches Revenue Outlook for its AI chip have taken a fair amount of air out of balloons since last Friday.

00:04:28: It is now to be seen whether this downside correction would continue or whether the buyers will already take opportunity to jump back in.

00:04:36: obviously given the strength and size of the rally over the past few months, a deeper downside correction in technology would be needed to bring valuations back to healthier at more fundamentally meaningful levels.

00:04:47: But AI hype and future expectations have gone so out-of control that dreaming is part of the pricing game today!

00:04:54: And there's no certainty we will actually see this down side correction get deeper.

00:05:00: but let's see for those who still like looking into numbers the valuations make sense.

00:05:07: Take micro as an example, The company's trading PE ratio has climbed about forty times.

00:05:13: that's around one hundred and forty three percent above a ten year median of sixteen point.

00:05:19: eight times all else equal to stock would need to fall below the four hundred dollars per share To return to its historical average valuation based on trailing earnings now.

00:05:30: Of course such comparison ignores completely the significant earnings growth expected from the AI-driven surge in marry demand because, in fact, migrants' forward PE ratio now stands near eight and a half times.

00:05:43: Suggesting that analysts expect profits to rise sharply in the coming quarters due to the AI demands as a result of return to historical valuation multiples does not necessarily require it collapse toward four hundred dollars per share, but if AI needs slow due to technology advances and or slower adoption we could see investor enthusiasm cool down.

00:06:05: And pull micron lower price.

00:06:07: wise I would say that a pullback to seven hundred dollar per share level which relieves some of the pressure without necessarily damaging the medium term positive trend in microns stock price.

00:06:18: now broadly speaking The good news is that US futures also just an ugly start despite the Asian technology sell-off this morning.

00:06:26: Now that futures are actually in their positive territory at the time, I'm talking here so we're just before European open.

00:06:34: but for European indices it is quite another story unfortunately because the SUX futures down by more than one percent right now and thats basically due to rising oil prices.

00:06:46: And for the

00:06:47: U.S.,

00:06:47: while sentiment remains quite fragile due to geopolitical concerns around Middle East, higher energy prices as a result of it and rising yields this morning.

00:06:56: So there are many factors in play right now into big week in terms of geopolitical news flows, economic data and space XIPO.

00:07:04: so I would say that despite early positiveness across US futures risk here also looks two-sided.

00:07:11: Speaking about Geopolitical News The middle east ceasefire is increasing agile with parties attacking each other.

00:07:17: So I wouldn't even call this a ceasefire anymore, nobody's actually seizing fire as the result.

00:07:23: crude oil is up by full percent This morning funding inflation expectations across to globe and pressuring yields higher.

00:07:31: speaking of economic data last week CPI report showed that the higher energy prices sent European inflation above three percent mark last month and slowed growth as well.

00:07:42: The Euro area GDP contracted point two per cent in the first quarter of this year versus a mega-point one person expansion expected by analysts, the latter combined with Friday's stronger than expected US jobs data pushed to your dollar under a bus.

00:07:58: The pair is now flirting with the one fifteen support to the downside with room for further weakness on more hawkish shift in federal reserve expectations versus pretty much the same thing for European Central Bank, meaning a rate hike.

00:08:12: In next meeting and maybe one or two more rates hikes due to the second half of this year depending on inflationary pressures which itself depends on Middle East tensions.

00:08:22: but before going that far On Wednesday This week The US will unveil its latest inflation data And U.S headline inflation is expected to have climbed percent level due to higher energy prices, so that's twice as much as the Fed's two-percent policy target at even more.

00:08:43: So if figure above the full PUSM mark would clearly grant a rate hike into this fall in the US and activity on funds futures now assesses nearly sixty percent chance for an October rate hike.

00:08:55: And obviously the same bullish move in the US dollar and Fed expectations is pressuring the Dollar Yen above the one hundred six level with growing unease from Japanese officials, but not intervention just yet at current levels of potential further upside in The Dollar Yens still looks increasingly limited.

00:09:15: to question here whether there will be array type to stop the yens bleeding later this month or both.

00:09:25: For short term positions, it's just simpler than that whether we could see the dollar yen come down sharply another round now.

00:09:32: And finally, speaking of SpaceX IPO.

00:09:35: Well, SpaceX is expected to price its IPO on June eleventh and begin trading on June twelfth making this week a key test of investor appetite for the largest IP of all times.

00:09:47: interestingly trading in hyper liquid which has a decentralized crypto exchange where traders can actually speculate on assets such as space X through synthetic contracts points at more than twenty percent decline SDSC contracts since the beginning of June, hinting at some cooling and speculative enthusiasm ahead of the SpaceX IPO.

00:10:09: Although it is not a reliable indicator of actual investor demand for the SpaceX listing later this week!

00:10:16: The real test will be on Friday.

00:10:29: This episode of Market Talk has been helpful and it's been insightful to you, so please do not hesitate to leave your comments, reactions or questions below as usual.

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00:11:01: So I will meet again tomorrow And until then good day trading.

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