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Nvidia Corp’s excellent earnings report quickly diverted attention away from concerns about worrisome inflation data and the Federal Reserve’s uncertain path to lower interest rates.
To know whether the rally will persist, it is essential to remember that, despite AI hype, investors are no longer impulsively buying any AI-associated companies.
On the other hand, as earnings season ends, the markets could lose a crucial catalyst for further growth. And, of course, we keep a close eye on the latest macroeconomic data.
If it turns out that price growth accelerates again, even the most optimistic investors may temper their enthusiasm due to the looming threat of further rate cuts and the resulting economic challenges.
Another factor to consider is the ongoing struggle in the U.S. Congress to avoid a shutdown, with the risk of a temporary cessation of government operations.
A partial government shutdown looms if a budget or measures to reduce spending are not passed by March 1. Failure to pass by March 8 would result in a total government shutdown.
However, the Nvidia report was not the only highlight of the past week. There was another significant development in the world markets: Japan’s Nikkei 225 index reached its highest point since 1989.
The problem is that this was not primarily due to an economic rebound (the country is going through a recession) but to technical factors such as the weakening of the yen – take a look at the USD/JPY chart.
Since January 2023, the yen has depreciated by 17.7% against the dollar. Thus, despite the Nikkei’s 51.41% growth since 1989, its dollar value is still lower than it was over 30 years ago.
It is also worth noting that since 2010, the Bank of Japan has been acquiring ETFs on Japanese stocks and now owns more than 10% of all Japanese stocks.
Had the regulator not injected funds into the market, the trajectory of the Nikkei would remain uncertain. However, the central question is how the government plans to offload such a substantial volume without triggering a market crash.
In short, the markets’ unbridled optimism does not accurately reflect economic realities. As for the optimistic outlook, it is less abundant than one might suppose.
