Record bond issues, massive leverage, earnings season and high yields

Just looking at the title of this comment, you can see that we're probably in for an interesting week, and it'll be just like Hitchcock's. Tension in the markets already increased significantly on Friday, when NVIDIA had the worst session since the pandemic, falling by 10%, which was due in particular to Super Micro Computer, which did not present preliminary results, as it did in previous quarters, but only announced in a statement that it would publish quarterly results on April 30. Investors who a month ago were raising their expectations regarding the company's results in consensus reports probably decided that it had nothing to boast about and started selling shares in a hurry. It could have pulled it off the entire AI/semiconductor sector.

Huge supply of US debt and high yields

From April 22 to 25, the US Treasury Department will want to place record amounts of debt. On April 22, 13- and 26-week bills worth USD 140 billion will go on sale. Meanwhile, on April 23, 2-year bonds for USD 69 billion will be placed, on April 24, 5-year bonds for USD 70 billion, and on April 25, 7-year bonds for USD 44 billion.

From this point of view, this week investors may still put a lot of pressure on the high yields of US bonds, because record supply means pressure on the price, and pressure on the price means a possible increase in yields. Hence, the market will pay particular attention to the yield of 2-year bonds, which fluctuate around 5%. Will investors demand interest rates above this level just before Friday's PCE inflation data and Thursday's US GDP data?

CHECK: How to invest in ChatGPT and AI? Stocks and ETFs [Guide]

Huge leverage in an uncertain and volatile market

As the note shows Goldman Sachs published by Reuters, global hedge fund lending rose to its highest level in five years in the week to April 19. Banks provide hedge funds with leverage, essentially a loan to finance investments, which increases the hedge funds' profits but can also increase losses. Gross leverage, or total debt, reached 270% after increasing 2,6 percentage points from the previous week, Goldman Sachs said.

As a rule, leverage can be higher when the market is calm and not exposed to high uncertainty and fluctuations. High leverage in a turbulent market sounds like leveraging a decrease in volatility... but what if this volatility does not decrease? It is then a double risk. You could say that hedge funds are going all out, taking record leverage with relatively high expected volatility, playing on its decline. However, if they fail, we will likely all feel the effects.

Company results this week

NVIDIA will report its results only in a month, SMC and AMD will report the results on April 30, while this week, Tesla and VISA will report the results on Tuesday after the session, on Wednesday after the META session, and the most interesting seems to be Thursday, when we will know the results of Microsoft, Alphabet and Intel, also after the session. ExxonMobil will publish its results on Friday before the session.

An exciting week awaits us, with additional key data from the US economy, including GDP and PCE inflation, released on Thursday and Friday.