NAS100 Resilient Despite Hawkish Fed & Reports for Chip Bans to China

Hawkish Fed

After 10 consecutive rate increases, the US Fed hit the pause button earlier in June, but its updated projections imply an additional 50 basis points worth of rate hikes within the year^[1]. Although Chair Powell has not fully committed to this outlook, he has become increasingly hawkish since his post-decision press conference.

During his participation on ECB's Forum on Wednesday, he expressed the belief that there is "more restriction coming" due to high inflation and "very strong" labor market. More to it, he did not take off the table consecutive moves on rates, essentially embracing the policy outlook of the last meeting. ^[2]

Markets expect the central bank to hike by 0.25% in July, but are not yet convinced of the need for more tightening after that. At the time of writing, CME's FedWatch Tool assign the highest probability to rates rising to 5.5% next month, in what will be the peak. ^[3]

AI Chip Export Ban

Silicon Valley has found the next best thing in generative Artificial Intelligence (AI), which has propelled the tech sector higher, following a very bad 2022. Tech giants such as Microsoft and Alphabet, are facing off for supremacy, while chip maker Nvidia, who has enabled this revolution and is one of my Top 10 Stocks for Q3 2023, already rides the AI wave.

However, strained Sino-US relations threaten to undermine the AI optimism. Washington has been trying to reassert its semiconductor dominance and has already imposed sanctions on high-end chips to China late last year ^[4]. A Wall Street Journal report this week, indicated that the US is looking to place new restrictions on Artificial Intelligence chips. ^[5]

Stocks of Nvidia and rival AMD opened lower on Wednesday after the WSJ report, but managed to cover most of the losses and traded higher in extended trading. Nvidia's CFO downplayed the effect of such action, seeing no immediate material impact, but warned of the potential long-term ramifications according to Reuters ^[6]. More export curbs, are likely going to be just a bump in the AI boom and chip makers may be able to work their around their those restrictions.

Micron Beat

Chip maker Micron (MU.us) is one the companies impacted by the US-China trade wars, since Beijing banned the purchase of Micron's products in May, after failing a network security review ^[7]. Despite noting "significant headwind" from that action, the firm posted strong results for Q3 FY2023 and offered encouraging forward guidance, on Wednesday after US markets closed.

This was driven largely by the AI revolution, with its CEO saying that the recent acceleration of AI is "driving higher-than-expected industry demand for memory and storage for AI servers" ^[8]. Micron's stock gained in after-hours trading following the results.

NAS100 Analysis

The tech heavy index is facing some headwinds in the second half of the month, after the Fed signaled more hikes ahead, despite the pause. More to it, the report for an AI chip export ban threatens to undermine the main driver behind this year's bull run.

This creates risk for a pullback, but strong catalyst would be required for a test of the EMA200 (14,447-90). Daily closes below it could spark deeper correction, but the downside is well protected.

However, NAS100 actually moved higher yesterday and has a profitable week, looking past the above factors and helped by Micron's strong results. As such, it remains in control with the ability to set higher highs (15,301). The road to new record highs remains open (16,771), although this may prove elusive in the near-term.

Markets now will be looking forward to Friday's PCE inflation update, which is one of the key data points Fed policymakers will take into account, for their rate decision in July.