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Morning Bid: As Nvidia awaited, Treasuries absorb new deluge

[August 28, 2024] A look at the day ahead in U.S. and global markets from Mike Dolan

Nvidia's post-bell earnings update on Wednesday is keeping stock markets everywhere in a holding pattern, while U.S. Treasury markets appear to be absorbing the latest torrent of debt sales quite comfortably.

The wait for the world's most dominant artificial intelligence chipmaker's earnings has sucked all the oxygen out of the early part of the week, so large now is the influence of the $3.1 trillion-valued firm on wider stock indexes.

Equity options traders are expecting Nvidia's report to spark a more than $300 billion swing in its shares over the day ahead. Pricing anticipates a stock move of almost 10% on Thursday - larger than the expected move ahead of any Nvidia report over the last three years.

The stock gained more than 1% on Tuesday and was marginally higher in out of hours trading early on Wednesday. S&P500 and Nasdaq futures held steady.

The stakes are higher than ever, given the recent creeping doubts about AI overspend and the lack of end product so far for the new tech. Apple's planned announcement on Sept. 9 of a new iPhone with new AI functionality, however, may ease some of those concerns.

And it's a big earnings day more broadly for Big Tech - with Salesforce also reporting and CrowdStrike updating following a July flub that sparked a worldwide computer outage.

But while the S&P500 has stopped short of new record highs awaiting the Nvidia results, the market remains buoyant with the Federal Reserve now finally set to cut interest rates in three weeks' time.

Nowhere has that been clearer than in the ease with which Treasury sold another $69 billion of two-year notes on Tuesday. Demand was stronger than forecast and, at 3.86% early on Wednesday, 2-year yields are eyeing 15-month lows.

Another $70 billion of 5-year paper hits the street later today, with the total of bills and coupons up for grabs this week alone surpassing half a trillion dollars.

Treasury is frontloading the new debt in short maturities and almost three quarters of that huge total this week is in bills with tenors of less than 12 months - a move that will see some benefit to debt servicing costs as Fed rates tumble.

But the good reception for the new two-year notes and with one eye on how all those bills eventually get refinanced over the years ahead, the inverted yield curve between two and 10 years narrowed to just 3 basis points - its smallest in three weeks.

The latest U.S. economic releases provide little bar to those souped-up easing expectations - now running at as much as 104 basis points over the remainder of the year.

Although consumer confidence rose to a six-month high in August, Americans are becoming more anxious about the labor market - the cooling of which is now front and center of the Fed's focus.

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A NVIDIA logo is shown at SIGGRAPH 2017 in Los Angeles, California, U.S. July 31, 2017. REUTERS/Mike Blake/File Photo

And despite multiple supply anxieties from the Middle East to Libya, oil prices were on the wane again on Wednesday - and still clocking year-on-year losses of more than 5%.

The dollar was pretty mixed on all that. Its DXY index was a touch higher as the euro retreated following some soft euro zone lending data and expectations that the European Central Bank will now cut for the second time next month before the Fed even gets going.

Dollar/yen was a touch firmer despite relatively hawkish Bank of Japan comments. BOJ Deputy Governor Ryozo Himino restated the central bank's intention to continue lifting interest rates if inflation stayed on course, while closely monitoring financial market conditions.

In politics, the latest national opinion polls continue to show Vice President Kamala Harris marginally ahead of challenger Donald Trump and she remains favorite to win at bookmakers - with the latest Reuters/Ipsos poll showing her also ahead on her economic policy stance.

Harris and running mate Tim Walz are expected to interview with CNN TV on Thursday.

Trump, meantime, faced a revised federal indictment on Tuesday accusing him of illegally trying to overturn his 2020 election loss, with prosecutors narrowing their approach after a U.S. Supreme Court ruling that former presidents have broad immunity from criminal prosecution.

In Europe, British Prime Minister Keir Starmer warned on Tuesday of a 'painful' budget ahead and travelled to Berlin on Wednesday to meet German Chancellor Olaf Scholz.

Sterling has been buoyed since before Labour's recent election win in part on expectations the new government will ease relations with former European Union partners and seek to soften some of the economically-damaging post-Brexit agreement.

Key developments that should provide more direction to U.S. markets later on Wednesday:

* Federal Reserve Board Governor Christopher Waller in India and Atlanta Fed President Raphael Bostic speaks

* US corporate earnings: Nvidia, Salesforce, CrowdStrike, HP, NetApp, JM Smucker, Cooper Companies, Bath & Body Works

* US Treasury sells $70 billion of 5-year notes, sells two-year FRNs

(By Mike Dolan, editing by Gareth Jones; mike.dolan@thomsonreuters.com)

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