Bank of England holds Base Rate; Nvidia dethrones Microsoft as the largest company

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The Bank of England held the policy interest rate unchanged today. 7-2 was the voting result of the Monetary Policy Committee (MPC) that concluded on 19 June. Thus, the Base Rate is held at 5.25 percent.

In doing so, many are wondering why the central bank did not follow the European Central Bank (ECB) in lowering the policy rate. After all, UK’s inflation rate has already hit the Bank’s 2 percent target. The Bank’s argued that while the

MPC’s remit is clear that the inflation target applies at all times reflecting the primacy of price stability in the UK monetary policy framework. The framework recognises that there will be occasions when inflation will depart from the target as a result of shocks and disturbances. Monetary policy will ensure that CPI inflation returns to the 2% target sustainably in the medium term.

In other words, the Bank is waiting for further confirmation that the low inflation rate is here to stay. Who knows, some external events like a sudden increase in geopolitical tensions fuelling a spike in oil prices may cause inflation to rebound. The bank just did not want to take that risk.

Moreover, the Bank observed that there is “considerable uncertainty around estimates derived from the ONS Labour Force Survey means that it is very difficult to gauge the evolution of labour market activity.” They don’t really know how strong (or weak) the labour market really is at this point.

As such, the Bank prefers to play it safe for the moment, and holds the Base Rate steady for the eighth meeting (see below). But according to the MPC statement, the Bank did not rule out a rate cut in the August meeting either, saying that “the Committee will keep under review for how long Bank Rate should be maintained at its current level.”

We just have to be patient for the macroeconomic trends to establish in a different direction.

Source: BBC

Inflation aside, another issue worth discussing is this:

Will these future rate cuts fuel a massive asset bubble?

Already, the ‘Magnificent Seven‘ is sitting on an aggregate market capitalisation of $15 trillion (!). Perhaps you’ve missed it, Nvidia (NVDA) dethroned Microsoft (MSFT) this week as the biggest stock in the world by market capitalisation. The GPU maker is valued at a staggering $3.335 trillion ($700 billion larger than the entire FTSE 100). Even more stunning is its chart. Here is the weekly bar chart for Nvidia – a gravity-defying rally into the financial stratosphere.

Naturally, many are questioning now whether AI is a frothy bubble. Some say yes; some think no. Old timers, however, will tell you that a powerful rally like Nvidia’s is unlikely to sustain over the long term. Sooner or later, it will peak. At what price, though? That’s a question nobody really knows. Already the stock has performed beyond the wildest dreams of many optimists. Most analysts and brokers are bullish on the stock; no sells or market underperform ratings.

Experience tells us that when everyone is on one side of the trade you have to be extra careful. The booming AI sector is underpinned by three factors:

  • A new, exciting technology –  ChatGPT, Dalle-E, Generative AI
  • Relatively cheap credit – during 2022/3, real interest rates were negative
  • Not a recessionary economy – the US economy performed better than expected

These conditions are not unlike the ones we saw back in the nineties when the dot-com stocks boomed (then crashed). Many are drawing investment lessons from that episode:

Source: TD (Feb 24) 

At this point, the transformative impact of the new technology is still being worked out. Therefore, it will continue to suck in more investment demand for the AI-concept stocks like NVDA. The trick when riding an investment mania is to stay in it until the latter stages. Crude indicators like the 150-day moving average are helpful in maintain capital discipline and getting out when the uptrend exhausts. No doubt these technologies will change the world. But by then the market may already have move on.

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