Alphabet lifts the AI trade, investors love a Fed put and stakes rise ahead of Budget

Key Points

• Nasdaq posts best gain since 12 May as tech shares rebound
• Alphabet stock surges on Gemini AI and chips deal with Meta
• UK bank stocks rally as reports suggest Budget won’t see tax raid on sector
• Sterling positioning goes defensive ahead of tomorrow’s Budget

The Nasdaq Composite jumped 2.7% yesterday, its best day since 12 May, as tech shares roared higher, lifted by a surge in Alphabet. Shares of the Google parent jumped over 6% as investors decided it might be winning the AI race over OpenAI after the release of the latest iteration of its Gemini AI model. Although it seemed to lift all boats it’s also potentially not good for some stocks in the space. Nevertheless, it was a strong day for the broader market as the S&P 500 rallied 1.55% to close at 6,705, just a whisker below its 50-day moving average at 6,713, which it had briefly broken above.

Winner-takes-all could sink some ships…investors liked Broadcom as it helps design and build Alphabet’s custom chips while Nvidia and AMD fell after-hours on reports Meta will use Alphabet chips for its data centres. Alphabet advanced a further 2.6% on the news. Competition is something Nvidia has not really faced – until now?

Tech shares led gains in Asia overnight but there is a more muted response in European equity markets in early trade on Tuesday with gains of around the 0.25% mark for the major bourses.

Hot money is still skittish…Record outflows for Bitcoin – according to FactSet the iShares Bitcoin Trust ETF has seen a record $2.2bn outflow this month, eight times more than it saw in October. But BTCUSD has recovered $87k as it’s ridden on the risk relief rally.

Part of the reason for Monday’s rally was the Fed put: More dovish comments from Fed officials nudged markets closer to believing a Dec rate cut is happening. Mary Daly of the San Francisco Fed said a vulnerable jobs market justifies a move next month. Fed governor Waller also advocated for a Dec cut. The odds of a reduction in the Fed funds rate next month are shortening, up to 80% for a cut of 25bps, but only a few days ago it seemed almost off the table. There is a lot of noise and a lot volatility around this, which seems a little odd considering I think next year we get new Fed chair to run it hot anyway.

On the data front it’s a busy day in the US where we get PPI inflation and retail sales figures before pending home sales, house prices and the Richmond Fed manufacturing index.

UK: Market positioning if pointing to a sizeable downside move in sterling following tomorrow’s Budget in the UK. According to CME the put-call ratio is 4:1 in the lasts week, indicating traders are worried about a decline. GBPUSD continues its steady climb to test its 20-day moving average at 1.313 and we are considering the potential for a break below 1.30 on the Budget should it fail to land cleanly. We expect heightened volatility around this event so watch out.

And there is ample reason to think it won’t. For starters it’s hard to see how the Chancellor can pull off tax hikes that won’t crimp growth, forcing the Bank of England into more aggressive rate cuts (that’s the best outcome we can foresee). At worst it’s going to be a currency-toxic combination of fiscal tightening of the most productive bits of the economy, sharp contraction in growth, deeper monetary easing and the cherry on the top of a political crisis as labor MPs start to move on the Reevers/Starmer leadership. If we see a sharp move up in gilt yields – say because the market doesn’t believe that spending restraint pencilled in for the end of the parliament is possible – this could precipitate a negative feedback to sterling as markets would price in political uncertainty re the leadership and inevitably start to fret over a more left-leaning govt and endless tax-and-spend. Remember, Reeves has hung her hat on the bond market – her future is in the hands of the bond vigilantes. If Reeves threads the needle and delivers respectable tax cuts and the bond market continues to give her a pass as the only truly credible candidate as Chancellor, sterling could see a big pop in a relief rally.

Don’t forget to sign up to our post-Budget webinar where we’ll be running through all the important changes, and what it means for your money and investments.

Bank shares though are jumping again on reports that they will be spared from a tax raid in the Budget…starting to tire of all this speculation. Lloyds, NatWest, Barclays all rose about 3%. They had come off in the last fortnight following a report suggesting a tax raid was back on the table, after the FT had originally said they would be spared. Here I looked at what changes and tax hikes are likely in the Budget.

Elsewhere, EasyJet shares were lower despite beating annual profit expectations and raising its target for its holidays business to £450mn. Underlying profit rose 18% to £703mn, easily ahead of the consensus analyst forecast of £669.4mn. Its holiday business contributed £250mn of this – hitting target ahead of schedule. Meanwhile Kingfisher shares rose 5% after it raised profit guidance following a solid quarterly update. The DIY group now expects FY adjusted profit before tax of £540mn-£570mn, up from a previous range of £480mn-£540mn. Despite soft markets in the UK and Poland it’s making good progress on costs and margins.

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