The S&P 500 edged higher on Tuesday, but the day’s real signal came from the credit market: Nvidia’s five-year credit default swap spread widened even as the stock jumped roughly 4%. Analyst Michael Kramer reads the divergence as a warning that equity investors may be ignoring.
A gap has opened between what stock traders and credit traders think about Nvidia, and it may matter more than Tuesday’s quiet rally in the S&P 500. The index closed up 38 basis points, a move driven more by falling implied volatility than by conviction.
Nvidia’s credit warning
Nvidia rose roughly 4% on Tuesday while its five-year credit default swap spread widened to 60.6 basis points. That spread has climbed from about 42 basis points on June 22 to more than 60 by July 14, even as the shares moved from around $192 after bottoming on June 26 to about $211 on Tuesday.
Widening CDS spreads usually track falling stock prices, so the two readings point in opposite directions. According to Kramer: “Something, therefore, appears misaligned in the market.” Either the spread tightens again, or the concern in the credit market eventually reaches the share price.
Cooler inflation, hawkish Warsh
The CPI report came in cooler than expected on both the headline and core measures, which pulled Treasury yields lower. The move was sharpest at the front end, with the 2-year yield losing eight basis points to close near 4.20%.
Yet Fed Chair Kevin Warsh struck a hawkish note in his House testimony, arguing that inflation remains too high and that more must be done to reach the Fed’s target. That raises a question the analyst poses directly: has the market priced in the possibility of another rate hike? Kramer notes the 2-year yield could move toward the 4.35%-4.40% range from here.
Yen keeps sliding
The dollar barely gave ground against the yen despite the softer inflation print. The yen strengthened by just 12 basis points, with USD/JPY closing around 162.25.
The pair has hugged its 10-day and 20-day moving averages, and Kramer argues the path of least resistance still points toward a weaker yen. A breakout above the 162.50 area could send USD/JPY toward 166, a level last seen in the mid-1980s. On Nvidia, Kramer’s read is blunt: if the credit market is picking up something equities have missed, the recent rally is unlikely to last.
Source: Investing.com
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