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MARKETS

U.S. stocks experienced a chippy session on Tuesday, but the Dow managed to notch another record close as investors tread cautiously ahead of Nvidia's (NVDA) much-anticipated earnings report. This is the one that could either lift all boats or sink the entire fleet. With Nvidia holding a hefty 7% of the market cap weight, directional bets were scarce—no one wants to go all-in when the 800-pound gorilla is about to shake the room. Nvidia’s influence is undeniable, making it nearly impossible to take your eyes off it.

Outside of Nvidia, the bears are definitely being kept on a tight leash as the Fed’s rate-cut cycle is about to begin. Still, the persistently low VIX volatility signals that vol control funds, which were offloaded earlier this month, are slowly rebuilding their positions. If the quants have their calculations right, we could see a hefty bid of anywhere between $20 and $40 billion rolling in over the next week. It’s the proverbial "quiet before the whirlwind," with investors positioning themselves for what could be a significant move in either direction.

However, I think it's wise to take anything resembling a market forecast with a hefty pinch of salt, especially when we're deep in the late-August doldrums, where liquidity is about as thick as a rake handle. Toss in the usual month-end antics and the Nvidia earnings bombshell that’s poised to either lift or sink the entire market, and you’ve got the perfect storm for unpredictability.

But let’s set all that aside for a second. No matter how things twist and turn between now and when we start hanging up our holiday stockings, the macro-policy landscape shifted tectonically last week, thanks to Jerome Powell’s Jackson Hole address. The only way to thread this needle is by navigating a macro environment where inflation stays in its lane, and the Fed’s rate cuts hit that sweet Goldilocks zone—not too hot, not too cold—just right to keep unemployment in check and prevent the economy from face-planting. In short, the Fed needs to stick this landing, or we’re all in for a bumpy ride.

OIL MARKETS

Meanwhile, oil traders are riding the ups and downs of a geopolitical teeter-totter. One moment, tensions are pushing prices up; the next, cooler heads are keeping things from spiralling out of control. While the Middle East and Eastern Europe continue to smoke, Libya is immediately spotlighted. The eastern government’s threat to halt oil production seems more bark than bite, with any disruptions likely to be short-lived. So, the focus shifts back to the broader macro picture, and it’s not exactly rosy. Downside risks are piling up, with weaker Chinese demand, bloated inventories, and surging US shale production all contributing to increasingly bearish oil price forecasts.

FOREX MARKETS

In the Forex markets, USD/JPY is in a full sell-on-rally pattern, capping any upside, with 145 as the ceiling of the new market range. The odds of a 50 basis point cut in September increased overnight, and the fall in oil price opened up more downsides in the New York session. There’s not much in the way of crucial economic data making waves in the Forex market at the moment, so this trade is all about the anticipated policy divergence between the FOMC and the BoJ. It’s a delicate dance, but the direction of travel remains clear.

Yen traders will be on high alert for any signs of hawkish confirmation when Bank of Japan Deputy Governor Ryozo Himino takes the stage. This comes on the heels of BOJ Governor Kazuo Ueda's first public comments since the central bank's 'hawkish hike' in July. Ueda didn't hold back on Friday, maintaining a hawkish tone and making it clear they are far from finished hiking. This rhetoric bolsters the argument for further tightening this year, potentially exceeding the modest 7-10 basis points of rate hikes currently priced in for 2024.

ASIA MARKETS

Asian markets are likely to tread cautiously on Wednesday, and for good reason. Two key factors are set to keep traders on their toes: lingering jitters over the U.S. economy’s health and the high-stakes earnings report from Nvidia due later in the day. But let’s not forget the elephant in the room—China’s floundering economy, which casts a long shadow over the region.

Sure, U.S. and global stocks edged higher on Tuesday, but let’s not get carried away. Treasury yields barely budged, so it’s hardly a "green light" for Asian investors to hit the gas.

With macro catalysts in short supply, expect regional news flows to take center stage today, with China’s economic struggles adding an extra layer of uncertainty.

It's a day to watch the tape rather than play it.

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