Nasdaq Rallies, Shaking Off Short Sellers... Deutsche Bank: "Further Rally Faces Test"

▲ US Stock Market, Artificial Intelligence (AI)/AI Generated Image

New York stocks marched to all-time highs, overcoming the shock of interest rate hikes. The Nasdaq index hit a new record, and the S&P 500 index approached the 7,800 mark. This surge caught investors off guard who had reduced positions expecting a market correction. The artificial intelligence (AI) boom and a sharp drop in international oil prices acted as the dual drivers of the stock market rally.

Ozan Tarman, Global Macro Vice President at Deutsche Bank, stated in an interview with CNBC on September 22 (local time) that "the Federal Reserve's (Fed) benchmark interest rate hike has been absorbed very smoothly by the stock market," adding, "market consensus accepts that the interest rate hike is proceeding for legitimate reasons." Tarman explained, "The stock market is on an upward trajectory driven by the AI boom, and key factors affecting short-term and long-term interest rates are delivering positive surprises."

The sharp drop in international oil prices due to easing tensions in the Middle East was crucial for short-term interest rate stability. Following discussions about a potential summit between US President Donald Trump and the Iranian President, Iran's Revolutionary Guard Corps expressed willingness to negotiate, conditional on the lifting of the naval blockade. Consequently, West Texas Intermediate (WTI) crude oil prices slipped below $100 per barrel. Tarman pointed out, "Just a week ago, an excessive premium was attached to the worsening situation, but the market has begun to price in the possibility of de-escalation of military conflict," adding, "the fall in oil prices eased the burden of short-term interest rates, narrowing the gap between the Fed and the market."

Long-term interest rates and the upside of the stock market were driven by AI innovations from big tech companies. The success of Meta Platforms' new AI assistant, Muse, provided a tailwind for tech stocks across the board. The situation where hedge funds had reduced their positions in anticipation of a September correction after statements from Anthropic and Elon Musk ironically led to a painful rally in the form of a short squeeze.

However, voices of caution were raised against excessive optimism that the market would effortlessly accept more than three, even up to five, interest rate hikes. Tarman pointed out, "While the market is absorbing three rate hikes of 75 basis points (0.75 percentage points), the view that there will be no problem even with a 150 basis point (1.50 percentage points) hike is somewhat an overheated collective psychology." This is because if the pace of tightening is too fast in a 'K-shaped economy' structure where the gap between income brackets widens, the impact on middle and lower-income groups is inevitable.

The relative advantage of the US market compared to Europe and the Bank of Japan's monetary policy variables were also noted. Despite political and fiscal instability in Germany and France, global funds continue to weigh on the robust performance of US companies. US Treasury Secretary Scott Bessent's stance on stabilizing government bonds and Japan's trend of additional interest rate hikes are considered key variables that will determine the future direction of global liquidity.

[Article Key Summary]

-Deutsche Bank Vice President Ozan Tarman diagnosed that the Fed's interest rate hikes were smoothly absorbed by the market, leading to the Nasdaq's record-high rally.

-Expectations of easing tensions from Iran led WTI crude oil prices to fall below $100, and the success of Meta's AI Muse increased upward pressure on the stock market.

-While the market is absorbing three interest rate hikes, the view that it can withstand a 150bp hike is overheated, and caution was urged.

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