Morning Bid: Pre-Nvidia hesitation obscures record high

A look at the day ahead in U.S. and global markets from Mike Dolan

Wall Street stocks are back just shy of new record highs, lapping up the likely start of Federal Reserve easing next month but wary of Wednesday’s quarterly update from artificial intelligence behemoth Nvidia (NASDAQ:NVDA).

There were three main reasons cited for this month’s early “head fake” for stocks – a return of jobs-related recession worries, a puncturing of the short-yen, short-volatility trade and creeping doubts about AI overspend and its ultimate promise.

Recession fears have been doused to some extent by data seen since the July employment report and Fed chair Jerome Powell’s clear indication on Friday that “the time has come” to ease back on policy rates.

And the speculative yen ‘carry trade’ and excessively low volatility gauges have returned close to more normal levels.

But earnings from $3.1 trillion megacap Nvidia, the second most valuable U.S. stock, are now awaited with bated breath to see if the AI theme is still on track.

Nvidia, whose stock is up more than 150% this year, is expected to report more than a doubling of its second-quarter revenue but the bar is now so high to impress the market, there’s some trepidation about guidance ahead.

The stock is valued at about 37 times its forward earnings, compared with an average of around 29 for the top six tech companies on the benchmark index that includes the chipmaker.

Results from Dell (NYSE:DELL) and Salesforce (NYSE:CRM) this week also add to the tech picture.

Nvidia shares fell back about 2% on Monday in advance of its report, knocking back the main indexes in the process and stopping the S&P500 less than 0.3% from new records.

But it was up marginally ahead of Tuesday’s bell – as were index futures.

Facing a heavy week of Treasury debt sales, where some $183 billion of 2-, 5- and 7-year notes go under the hammer, Treasury yields have backed up slightly despite the Fed optimism. First out of the traps on Tuesday is $69 billion of two-year paper.

Irking Treasury yields additionally has been a pop higher in world crude oil prices this week amid renewed tensions in the Middle East and outages in Libya, although U.S. crude gains have been modest and remain negative year-on-year.

The latest test of U.S. economic resilience comes with a readout later on consumer confidence for August, but Friday’s release of the Fed-favored PCE inflation gauge probably marks the biggest macro data release of the week.

The dollar index recovered marginally from Monday’s lowest level in more than year – in line with firmer Treasury yields.

But 100 basis points of Fed easing remains in futures prices to the end of the year – implying that markets think at least one of the Fed’s three remaining 2024 meetings will deliver a 50bp cut.

San Francisco Federal Reserve President Mary Daly on Monday said “the time is upon us” to cut interest rates, likely starting with a quarter-percentage point reduction in borrowing costs. Asked if there is anything that could derail a rate cut at the U.S. central bank’s Sept. 17-18 policy meeting, Daly told Bloomberg TV that it “would be hard to imagine at this point.”

The yen slipped back too, however, helping Japan’s Nikkei higher.

Chinese mainland stock markets fell back, with news of 100% Canadian tariffs weighing on shares of electric vehicle and steel makers and downbeat comments about domestic demand dragging on e-commerce shares. It was a more mixed picture in Hong Kong, with financials steadying the Hang Seng.

European stocks were higher, led by miners.

BHP Group (NYSE:BHP) said it will focus on growing its copper business through existing and incoming projects after its failed attempt to buy Anglo American (JO:AGLJ) as it reported a better-than-expected 2% rise in annual underlying profit.

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