Company Interview / "Nvidia could trigger volatility..."

Key points:

Anticipation around Nvidia's earnings and market impactInfluence of company buybacks and trend-following funds on the US marketObservations on Aussie market dynamics and RBA's inflation strategy

Chris Weston from Pepperstone discusses the significant anticipation around Nvidia's earnings, highlighting the company’s $3.1 trillion market cap and the expected 9.5% volatility. Chris notes CEO Jensen Huang's ability to consistently exceed market expectations, though he warns of potential sell-offs post-announcement.

Regarding the broader market, Chris sees US stocks at an all-time high, crediting company buybacks and systematic trend-following funds. He mentions the opaque but substantial influence of volatility funds, contributing to current market dynamics.

Local markets also get attention, with Chris noting strong performance and potential challenges, especially with RBA’s inflation management tactics. He observes positive sentiment despite mixed global signals, including the US dollar's fluctuations and China’s economic moves

Full unedited transcript below:

0:11

We've got a special guest in the studio, Chris Weston, joining us from Pipestone, which is a rarity. Normally I'm speaking to you remotely. So good to have you in town. Yeah. We'll get to the reason why you're in town in Sydney in just a moment. But look, interesting to see what we saw, particularly overnight out of the States. Volumes are way down. In fact, is this all about Nvidia?

0:31

This is just waiting for that number to drop tonight. Yeah I feel like there's there's definitely an element of that involved. I mean it's the implied volatility or the expected movement up or down. It's about 9.5% for a company with $3.1 trillion of market cap. That's staggering. But it's kind of what we've been used to in the last few earnings season. When they come out with earnings after market. 620 is going to be the time, you know, you should see some fireworks coming through, not just in the initial reaction where they've got to be expectations by at least $2 billion. Um

1:04

but then you know, when Jason Huang Jensen Huang steps up onto the mic, um, he's the rock star of the world. You want a man like him being your CEO because he just hits the sweet spot every single time. But, you know,

1:15

yeah, we could see a sell the news coming through because expectations are so high. And then when he steps up, you could see a rally. So it's very difficult to trade. I'm not going to tell you where the share price is going to be, because it could be a bit of a bit of a topsy turvy rally or rise or fall, but, um, yeah, the market is expecting fireworks. What happens in the video will spill out into the semis, into the QS, into Nasdaq futures. And it's just probably a good idea just to just to hold off a little bit until we actually get the facts coming through. How would you view the management of the company? I mean, you're sort of singing his praises essentially, but given they beat the market every time an expectations rise and they keep rising, they still meet them. Well, I think if you want to talk about Jensen Huang, all you want to talk about the sell side and the perennially being under the market. But the way it works is, you know, the sell side, the investment banks come out with a with a number of around 31 billion. The by side, the hedge funds mark up and positioned themselves around sort of

2:14

sort of 33 billion. So about 2 billion over. And then, you know, you've got the rest of the market just above that situation. So that's kind of where you are like you you don't really take the the investment bank research numbers on, on face value. You just know they're going to come out and beat. They're going to beat on revenue. They're going to be on earnings per share by way gross margins. That's an interesting business because you know their last loss they're about 78%. They're expected to drop down 75% and then plateau for the rest of the year. So we're at peak margins for the company. But 75% I mean you'd be happy about that. But

2:46

you know, time and time again, what you're what you're looking for is, is a company who just just knows what investors want to hear and then just goes for it. You want inspiration, you want innovation, you want monopolistic qualities. But you're also worried a little bit about future government involvement in those monopolistic policies, because you've got such high pricing power and the chips that they're producing and the data centers that they're offering it are so expensive that at some stage that's a real, real concern for investors. But right now, yeah, Jensen Huang just knows what to say to to keep the share price looking ticking along nicely. Well and of course Nvidia a good reason why we're seeing the US market uh continue to reach record highs. Yeah. How would you describe the momentum you're seeing in the market at the moment, particularly given how the month began and where we are right now?

3:35

Yeah, I mean it's a market at all time. Highs is pretty pretty good. I mean, we had that hiccup on the on the 5th of August, which feels like a bit of a bad dream and it's sort of just gone behind us. But corporates now a massive buyers of their own stock. I mean, part of the reason why we've come back to where we are at the moment is, is the buybacks from from the companies themselves have been prolific. And, you know, they're the biggest buyers of stocks in the markets. But as the market's gone up you've gone you know you've got systematic trend following funds. The CTAs putting massive money into the market volatilities. There's been big sellers of volatility in the market. And there's this whole insurance pension fund industry which are dynamic to volatility. You know it's called vol dynamic funds and they literally as the as the is the realized volatility goes down. The amount of money that they put into the market goes up. And these are really opaque flows. You know, a lot of people don't even know they exist. But they're huge billions and billions of billions of dollars. And as the volatility goes down market's going up. People are chasing. And we're all time highs at the moment. There's a

4:35

lot of flow based effects really kicking into the market there. Well speaking of which. Then flows. And that's the reason you're in town. You were talking about eye trading. How is that change. What does I do in terms of, you know, what we're seeing and flows and what what's the future hold in. Yeah, I mean it's a massive subject. But you know, I think if you're looking at the, the institutional world, um, you know, you've got your citadels and Renaissance capitals and they're doing a whole heap of different factors. But, you know, they've they've effectively got the machines,

5:09

um, you know, searching out patterns, searching out, you know, relationships between markets. Um, in a split second, being able to say, well, this is the sort of typical relationship you have when it sort of widens too much. You know, you go long. Schultz closes the gap and that provides a lot of liquidity to markets, their market making. There's a whole different types of various factors. But you know, it's very, very high frequency. You know, this is the stuff that you and I, um, will never even understand. I mean, the MIT graduates, the smartest guys doing quantum computers, but they're about 70% of the market now in the S&P. You know, um, but I think, you know, there's a lot of people now who are who are realizing that, yeah, you want to have a in terms of trading, you want to develop a trading strategy. You want to be able to understand its edge. Um, and to do that, you know, you can use generative AI and ChatGPT to actually, you know, build a strategy, um, test it, find out where its edges, and actually then, you know, put all the

6:09

details of the trades you're doing into into generative AI and effectively, you know, understand where you're going wrong and where you're going right in, in great detail is your new risk manager, essentially. But I mean, I could spend hours doing this. But, you know, I think in, I think in five years time, you know, the idea of looking at a chart is going to be obsolete. All right. Because because I is going to do it for you. Well, you know exactly what you have like a bespoke training tool in AI. Well, I mean, look, trading is about for me is about finding repetition, repetition and behaviors patterns and trying to find a probabilistic situation if that's going to continue. Well, I can look at a chart and I'm looking at a pattern. It's a behavior. And I'm understanding what's the potential for it to do it again. You can you can put those into a machine learning model into a into into ChatGPT if you want and ask it if you if you give it the data, it'll actually be able to do hundreds and thousands of samples and actually be able to tell you exactly what's going on. So why would I need to look at that? Everything can be

7:09

broken up into into a number now. You know, sentiment. Um, yeah. Everything patterns, everything can be put in and it can tell you the probability of things happening in the future. And I think that that's really where we'll be for a lot of traders. I mean, maybe not the investors, but. Yeah. Um, I think for traders you'll be everyone will be using that in the future. How's your job security looking in the future as a result?

7:33

Well, I think my job is to try and teach people how to use this stuff. I've been spending the last six months trying to work it out for myself, and I'm, you know, getting there. But the more I look at this, I think, yeah, this is the this is the way that everyone will be doing it in the future for sure. Chris, let's take a look at what's going on locally on the market, because it is all about earnings at the moment. But nonetheless, we're sort of dragged by that momentum. We're seeing more globally as well. What's your view of where the Aussie equity market is trading at the moment? It's looking pretty good isn't it? I mean, again, you know, we're at risk of a double top and like similar to the S&P. I mean I think it probably would be helpful if we had a bit more of a lower inflationary today. But I don't think anyone's too concerned because we know that the RBA put a huge amount of weight back on the quarterly numbers, and the trimmed mean number did fall 30 basis points as well. Um, I think it'd be, yeah, it'd be nice to have a bit more of a pop from China today. I mean, the Chinese equity market, the Hong Kong market is a bit lower, despite JD.com coming out and doing a big, big share buyback. So we probably like to bend the tailwinds from there. But

8:33

you know we're at all time highs. I think a lot of people would take that again. Um, can we push through to an all time highs? Obviously we'd like to see that. But um, yeah, I think we're beginning to see some good numbers and hope from Nvidia. And hopefully, you know, we'll get a good leads in from that. But yeah I think Hong Kong's looking pretty interesting. Now if we could if we were to see a bit more capital flowing into that part of the market and we were to see, you know, starting to trend a little bit on a more positive fashion, then I think we'd start taking a few more tailwinds from that situation as well. And how you see the Aussie track at the moment did receive a bit of a bump off the back of that inflation number, which came in slightly higher than perhaps analysts or economists had expected. But of course all about where the US dollar is trading at the moment. Yeah, yeah I mean it's all about the US dollar. Um, and we have obviously seen a sharply weaker US dollar as people are pricing in more and more rate cuts with about 100 basis points for the year, which,

9:23

you know, I've been arguing it's a little bit too much. I you know, they're going to have to pull a 50 basis point from one of the three meetings to to get that. But yeah, the market, the Aussie, the US has been hit pretty hard. And you know it's been a question of which currency you want to trade on the back of that. And the Aussie is a high bead to play. So you're going to do quite well. The other factor is now that we are starting to see a slightly weaker, slightly stronger Chinese yuan against the US dollar as well. And we do often take, you know, tailwinds from a stronger yuan as well. So

9:51

yeah, like I think the problem with the Aussie is a little bit like gold. It's like what? Pick a reason as to why it's you know why it's rallying. People always say, oh, it's more a reflection of the Australian economy. It's not if you want to trade deals, the economy, you do it against the Kiwi dollar, perhaps against the euro. Um, but against the US dollar, it's really more, you know, does it, does it, does it rally on risk factors because equity markets are rallying. It takes in that positive sentiment there. You know is it down to terms of trade. You know the industrial metals for example. And ferrous metals. Yeah. Is it because Chinese equities are rallying. There's there's there's a whole heap of reasons that you can pick on something in one given day. And then we sort of, you know, after the fact say, oh yeah, it was because of that. But um generally speaking, at the moment I think it's, you know, the US dollar is weaker. Equity has been positive trending by the Aussie dollar as a proxy of.