Xe Morning Update - Your daily market wrap

Developments in markets for Thursday 26 February.....

• Snapshot: S&P500/Nasdaq?? yields??, crude oil??, gold??dollar Index??
• AUD/USD:??retains positive backdrop, supported around 0.7070 
• Positive risk sentiment evaporates despite Nvidia's 4Q earnings beat
• Nvidia falls close to 6% on doubts the chip makers ongoing dominance
• Day ahead: CPI for Tokyo, U.S. PPI; U.S. equity markets remain key driver

Each morning we bring you up to speed with the latest market news, including the events and themes that are impacting currencies and other related asset classes......

Positive risk sentiment that punctuated Wednesday's sessions has faded through Thursday as the rotation out of the AI trade continues despite another bumper earnings report from Nvidia. With around 60 minutes remaining in U.S. trade, the Nasdaq is down over oner percent whilst the S&P500 drops around half a percent. Deeper intraday losses have been pared through afternoon trade - at its nadir, the Nasdaq was down over 2%.
 
The dollar is stronger against all its G10 peers, the dollar index (DXY) advancing around a quarter of a percent, testing strong resistance at 98.00 but again unable to sustain price action above. The US dollar maintains its upward momentum against the euro, pound, and yen, but faces challenges when compared to the Australian dollar and remains stable relative to the New Zealand dollar.
 
During the Asian afternoon, the Australian dollar advanced beyond 0.7130, forming a double top a few pips shy of 0.7140. However, as European markets opened, selling pressure on the Aussie emerged, inducing a drop back below 71 US cents. The decline accelerated in the first hour of U.S. trading, coinciding with a notable downturn in equity markets. Locating support a few pips south of 0.7070, AUD/USD improves back through 0.7000 as the end of the U.S. session approaches.
 
Price action from the past half dozen days remains choppy but with a clear upside bias as AUD bulls appear well positioned to test 12 February swing high located a few pips shy of 0.7140 – also a 3-year high.
 
Current market direction may be shaped by evolving opinions around artificial intelligence as well as persistent geopolitical tensions between the U.S. and Iran, both of which are key narratives influencing investor sentiment in the near term.

US equity markets as at time of morning update release and may not represent session closing prices  

Despite Nvidia's fourth quarter earnings report exceeding both revenue and profit forecasts, in addition to encouraging guidance, doubts remain whether the dominant chipmaker can maintain its sizeable gross margins moving forward. At session lows Nvidia shares were down close to 6% - the reaction a reminder of intensifying skepticism around the sustainability of AI related spending and whether this will generate meaningful revenue gains.
 
Nvidia leads the market in supplying accelerator chips - specialised processors built to manage the vast data requirements of artificial intelligence model development. These chips are not only essential for training AI systems but also play a critical role during inference, the phase where AI software interprets and responds to real-world data inputs.
 
Nvidia's data center unit, which is responsible for its industry-leading AI accelerator and networking products, had revenue of $62.3 billion in the quarter. That compares with an average analyst estimate of $60.4 billion.
 
As the month draws to a close, several factors may pose challenges for Nvidia. The company's share price, which leveled off in October, has since moved mostly sideways, showing a slight tendency to decline over recent months. These headwinds will also affect the broader market. Whether it be anxiety over AI profitability, worries over AI's disruptive impact on several sectors or concerns surrounding the private-credit market, there are several reasons to think next month may be a rough one for U.S. equity markets.
 
A pronounced pullback for U.S. equities would negatively impact positive correlated risk currencies such as the Australian and New Zealand dollars.
 
Shifting the focus to the day ahead, major data releases present via CPI for Tokyo, Canadian GDP and Producer (wholesale) prices in the U.S. Geopolitics is not likely to influence Friday's session given U.S. x Iran talks have been paused ahead of a resumption next week. "Significant progress" was used to describe the outcome of this week's negotiations, in turn inducing a 5%+ pullback in oil prices.
 
Whether the New Zealand dollar can end the week above 71 US cents will largely depend on the performance and direction of U.S. equity markets.
 
Enjoy your weekend!

Stuart Talman (stuart.talman@xe.com)
Xe Corporate

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