- Steadier bonds and AI optimism help stocks to bounce back; Nvidia eyed.
- US dollar edges up as Fed independence fears ease slightly.
- But inflation and borrowing concerns keep risk appetite in check.
Wall Street pins hopes on Nvidia after Fed drama
Shares on Wall Street closed higher on Tuesday, brushing aside President Trump’s persistence in trying to sway minds at the Federal Reserve, which has led to a steepening of the US yield curve, with investors instead focusing on AI darling earnings release due later today.
The risks of the Fed’s independence being compromised by political interference cannot be underestimated as it’s seen as the cornerstone of financial stability not just in the US, but also globally.
Trump’s firing of Fed Governor Lisa Cook jolted markets yesterday. But as this will likely take some time to fully play out after Cook said she will file a legal challenge against the decision, a more pressing matter for the markets is the latest earnings update by Nvidia, which could set the tone for the entire tech and AI sector.
Despite demand for AI chips remaining strong, as big tech firms continue to invest heavily in AI tools, Nvidia has been caught up in Trump’s trade war with China. Sales to China have been hit by Trump’s restrictions on chip exports, while Beijing has been boycotting Nvidia’s downgraded AI chip designed specifically for the Chinese market. Moreover, Nvidia has agreed to Trump’s demands to pay 15% of its revenue from China to the US government.
Hence, even if Q2 earnings meet or surpass the estimates, there’s a risk that the company’s revenue guidance for the upcoming quarters might fuel concerns about the outlook.
Nevertheless, optimism prevailed yesterday and all three of Wall Street’s major indices ended the session higher, with a jump in Eli Lilly stock providing an additional boost.
US Dollar rebounds amid mixed data, steadier Treasuries
A slightly calmer Treasury market also aided the improvement in sentiment as well as the US dollar. Despite all the talk of the US dollar losing its status as the world’s number one reserve currency, neither the Fed’s dovish pivot nor Trump’s constant attacks on the central bank have led to a sharp enough selloff that would push the to fresh lows.
The fact that the US economy doesn’t appear to be falling off a cliff is underscoring the strong support forming around the recent lows. This view was reinforced by the latest durable goods orders, which increased by a solid 1.1% m/m in July when excluding volatile categories such as defence and aircraft orders.
However, separate data released yesterday showed that the jobs hard to find index found within the consumer confidence survey rose again in August. This index is positively correlated with the unemployment rate and therefore suggests there’s been a further weakening in the .
Euro leads the slide in FX markets
Elsewhere in the currency markets, the EUR/USD and GBP/USD are under some pressure as concerns about the mounting deficits in France and the UK have put French and British yields back in the spotlight. The French government is at risk of collapse as it’s expected to lose a vote of no confidence scheduled for September 8, while the UK’s Labour government is struggling to get to grips with the country’s finances.
France’s 10-Year is down from yesterday’s highs when it spiked on the news of the confidence vote but remains elevated. UK yields, meanwhile, have been creeping higher this month on low expectations that the Autumn budget will do much in reducing the deficit.
The euro is one of the worst performers today, along with the kiwi, while the pound and yen are both about 0.3% weaker versus the dollar.
The Australian dollar is also sliding even though Australia’s monthly inflation rate jumped much more than expected in July to 2.8% y/y versus 2.3% y/y expected, hurting RBA rate cut odds.
Oil and gold unable to stretch recent gains
In commodities, oil futures are declining for a second day, as worries about a supply glut are offsetting the latest geopolitical developments. Ukraine’s recent drone attacks on Russian oil refineries have caused significant damage to Russia’s refinery capacity. Moreover, Washington’s secondary tariffs on India come into effect today, taking the total rate to 50%, after the country refused Trump’s demands to stop buying oil from Russia.
But oil’s brief rally late last week and early this week ran out of steam on Tuesday, pointing to minimal market panic.
Gold had a better session yesterday, climbing to a more than two-week high of $3,393.67, but the dollar’s bounce back today has cut its advance short.
