Tech sell-off dents risk appetite

US stock indices marked the end of summer and the first full trading session of September by closing sharply lower yesterday. All the majors came under sustained selling pressure, with the biggest losses suffered by tech. The NASDAQ 100 fell 3.3%, closely followed by mid-caps, with the Russell 2000 shedding 3.1%. Market darling NVIDIA slumped 9.5%, taking its total decline from its all-time high back in June to 23.3%. Have we seen peak-NVIDIA, or is this simply a healthy correction? Much depends on growth in generative AI, along with the ability of other chip makers to offer up some competition. Stock indices closed near their lows last night, not helped by yesterday’s ISM Manufacturing PMI, which, while up on last month’s reading, was below expectations, and remains firmly in contraction territory. The selling has continued this morning with the S&P 500 briefly breaking back below 5,500. Last week, the index came frustratingly close to taking out its record high of 5,670 from mid-July, shortly before the stock market plunge from a month ago. That sell-off was triggered by the unwinding of the Japanese yen carry-trade, followed by an unexpectedly weak US Non-Farm Payroll number. The latter suggested that the US economy may be slowing faster than anticipated, just after a Federal Reserve monetary policy meeting left the key Fed Funds rate unchanged. Fast forward a month and equity markets had recovered most of their early August losses, until yesterday. And this Friday sees the latest update on Non-Farm Payrolls, with the next Fed rate decision to come less than a fortnight later. There is some nervousness out there as investors prepare for the payroll release. But before that, we have the latest JOLTS Job Openings update this afternoon, with weekly Unemployment Claims and the monthly ADP report tomorrow. Further weakness in the labour market won’t raise the probabilities of a rate cut this month, as that already stands at 100%. But it could shift the dial as far as expectations for 25 or 50 basis points is concerned. If this week brings evidence of a sharp slowdown in the labour market, then that will increase the probability of a 50 basis points cut. While the market has been pricing in aggressive rate cuts since last October, they may not react favourably to a large reduction, as this could signal problems for the US economy going forward.