The US lifts AI chip export restrictions, leading to a rise in US stocks, while the tax cut bill leads to a sell-off in US bonds and a weaker dollar.

In mid-May, the U.S. Department of Commerce lifted export restrictions on Chinese AI chips, which boosted U.S. tech stocks and led to impressive performances by related funds. The Congressional tax cut bill has raised concerns about the fiscal deficit, resulting in a sell-off of U.S. Treasuries, pushing the 30-year yield above 5%, and a weaker dollar index. European stock markets, influenced by U.S. policies, experienced mixed gains and losses.

U.S. Lifts AI Chip Export Restrictions, Tech Stocks Lead Gains

In mid-May, the U.S. Department of Commerce announced the lifting of AI chip export controls that were imposed during the Biden administration and targeted China, marking an easing of U.S.-China tech tensions. This move was well-received by the market, particularly benefiting semiconductor and AI-related companies. Nvidia CEO Jensen Huang stated at the Computex event in Taipei that past export restrictions not only failed to curb China's AI development but also prompted Chinese companies to accelerate their own R&D, resulting in Nvidia's market share in China dropping from 95% four years ago to 50% now.

Huang pointed out that the export restrictions prevented Nvidia from selling H20 chips to China, leading to billions of dollars in inventory write-downs. He emphasized that China accounts for 50% of global AI research talent and is the second-largest market globally, and not participating in it would be a significant loss for U.S. companies. He urged the U.S. to accelerate the global spread of AI technology to consolidate its technological leadership.

This policy shift spurred a strong rebound in U.S. tech stocks. According to Lipper data, as of May 19, U.S. equity funds performed well over the past week, with funds like Morgan Stanley U.S. Advantage, BlackRock U.S. Growth, and Franklin Templeton Innovation Technology Fund all recording gains of over 3%. Among them, Morgan Stanley and Franklin Templeton funds saw gains of over 10% in the past month.

Tax Cut Bill Triggers Bond Market Turmoil and Dollar Weakness

Meanwhile, the U.S. Congress is reviewing a large-scale tax cut bill proposed by former President Trump, which includes significant reductions in personal and corporate tax rates. Even with the Republican majority in Congress, the bill faces resistance from fiscal hawks. Moody's recently downgraded the U.S. sovereign credit rating, citing debt levels far exceeding government revenue, and predicted that U.S. debt would rise from the current $36 trillion to $58 trillion over the next decade.

The market reacted sharply. The yield on 30-year U.S. Treasury bonds briefly surpassed 5%, hitting a new high for 2023, indicating growing investor concerns about the U.S.'s long-term fiscal situation. Bond prices fell and yields rose simultaneously, reflecting doubts about the sustainability of U.S. debt.

The dollar also came under pressure. The dollar index has fallen about 10.6% from its January high, marking the largest three-month decline. On May 20, the dollar fell to 144.095 against the yen, hitting a two-week low. Analysts pointed out that the dollar's weakness is related not only to bond market turmoil but also to Federal Reserve officials' cautious outlook on the economy, with rising market expectations for future rate cuts.

Fund Flows and Rising Risk Aversion

According to EPFR data, from May 8 to 14, 2023, U.S. equity funds saw a net inflow of $19.84 billion, the highest among major global markets. Analysts noted that lifting AI chip export restrictions not only helps U.S. tech companies re-enter the Chinese market but also has the potential to restart cross-border AI supply chain cooperation, drawing capital back.

Amid rising risk aversion, gold prices also increased. On May 21, spot gold was reported at $3,300.72 per ounce, up 0.4%; U.S. gold futures rose 0.6% to $3,304 per ounce. The weaker dollar made gold, priced in dollars, more attractive to holders of other currencies, driving up demand.

Mixed Results in European Stock Markets

Against the backdrop of increased global market volatility, major European stock markets had mixed results. On May 21, the UK's FTSE 100 index rose slightly by 5.34 points to close at 8,786.46, up 0.06%; Germany's DAX index rose 86.29 points to close at 24,122.40, up 0.36%. In contrast, France's CAC 40 index fell 31.93 points to close at 7,910.49, down 0.40%.

Other European markets showed similar trends. Italy's stock market rose slightly by 0.09%, while Austria and Poland's markets fell by 0.74% and 0.95%, respectively. Overall, European markets were influenced by U.S. policy changes and local economic data, with investor sentiment leaning towards a cautious approach.

The US lifts AI chip export restrictions, leading to a rise in US stocks, while the tax cut bill leads to a sell-off in US bonds and a weaker dollar.

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