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While the S&P 500 stayed in neutral territory, Nvidia’s (NVDA) stunning rally propelled the Nasdaq to a fresh record high. Shares in the AI darling have surged 20% over the last three trading days, boosting the company’s market cap to an astonishing $2.8 trillion.

However, the broader market isn’t basking in unbridled optimism. U.S. Treasury yields, the benchmark for global borrowing costs, spiked to four-week highs on Tuesday after a lacklustre U.S. debt auction. This yield surge comes amidst a flurry of hawkish remarks from Federal Reserve officials, notably Neel Kashkari, who hinted that the dot plots “certainly won’t [reflect] more than two cuts.”

Tuesday’s post-Memorial Day stock market appeared calm on the surface, with the S&P 500 closing with a modest 0.02% gain. Yet, this placid exterior masked strong and conflicting undercurrents beneath.

While the major indices showed little movement, significant forces were at play. The seemingly stable market masked a flurry of activity driven by contrasting influences. The ongoing tech boom, exemplified by Nvidia’s remarkable rally, continues to buoy the Nasdaq, propelling it to new record highs. Conversely, rising U.S. Treasury yields tighten financial conditions, creating a more cautious backdrop.

Investors are juggling mixed signals: optimism from the tech sector’s impressive performance against the backdrop of potential inflationary pressures and hawkish Federal Reserve commentary.

The market has been gearing up for a benign inflation print from the US PCE on Friday. Still, certainty is as elusive as a summer breeze in this unpredictable macro environment. Despite positioning for lower inflation, whether the FOMC’s actions are sufficient to achieve price stability remains the key question. As Kashkari and others have underscored, it’s a waiting game: the data we get over the coming months will be crucial in determining if the Fed has done enough.

While Nvidia’s surge has put investors on cloud nine, the overall market remains cautious. Rising Treasury yields and cautious Fed commentary cast long shadows, reminding investors that volatility and uncertainty are never far away.

Asian markets may be more sensitive to tightening financial conditions from rising U.S. yields on Wednesday than the tech boom stateside. 

OIL MARKETS

Oil prices surged as tensions in the Middle East escalated. An Egyptian soldier was killed earlier this week in a clash with Israeli forces at the Rafah border crossing. Israeli tanks have also advanced into the center of Rafah, leading to clashes with Hamas forces. Meanwhile, Houthi militants have resumed attacks on vessels in the Red Sea, with a merchant cargo ship being targeted by a missile overnight.

The physical market has experienced some recent softness, but there are signs of increased demand as the driving season begins, which has helped to boost prices. Initial data suggests that there has been a significant number of holiday trips in the U.S. over the Memorial Day weekend, marking the traditional start of the driving season. Additionally, air travel has been strong, with the Transportation Security Administration reporting a record 2.9 million travellers screened at U.S. airports last Friday.

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