- US Treasury announcement impact fades as markets regain composure
- Nvidia and Warsh set the stage for next week’s performance
- Strong earnings and low volatility support equities, as investment houses remain bullish
- Weekly technical analysis flags correction risks
Markets settle down after Treasury announcement
Financial markets are trying to find their footing after yesterday's exaggerated reaction to the US Treasury buyback announcement. A simple liquidity-related update, with its operation size being a drop in the ocean compared to the outstanding volume of long-term Treasury bonds, came at a sensitive time when investors were extremely concerned about the elevated bond yields. Coupled with the thin liquidity conditions, one could understand the oversized reaction, although the connection between the Treasury buybacks and the Fed’s large-scale asset purchase programmes has yet to be established.
Interestingly, compared to other assets such as bitcoin and gold that almost immediately surged, US equity markets reacted calmly, with the newsflow contributing to the recovery seen during the European session. This lack of movement came as a surprise since equity investors are usually exceptionally quick to react to breaking news. However, the summer lull, lingering concerns about AI investments and valuations, next week’s pivotal events, and the fact that a recent survey from a US-based investment bank revealed extreme equity allocation levels among fund managers, may have played a key role in limiting risk appetite during yesterday’s session.
Pivotal events next week
This week’s earnings announcements have confirmed that this earnings season has been exceptional, with almost every S&P 500 company reporting positive EPS surprises. Interestingly, US consumers and retail firms have managed to beat expectations, somewhat contradicting the recent retail sales reports that spooked investors.
Next week, Nvidia is scheduled to announce its Q2 results after US markets close on Wednesday, August 26. Anything short of a generous beat of the $2.10 EPS and $91-$94bn revenue forecasts and more robust guidance for Q3, especially as reports highlight that China has been easing its own limits on Nvidia H200 chips, could prove quite damaging for risk sentiment.
Technology stocks are in need of a boost as, following the solid start of the month, they have been underperforming. On the other hand, healthcare stocks – Moderna stock skyrocketed on Wednesday – have been leading the rally in August followed by energy stocks.
Additionally, the countdown to Fed Chair Warsh’s debut at the Jackson Hole Symposium has already commenced. He is scheduled to speak on Friday, August 28 and unsurprisingly expectations about his speech will dominate market movements until then. Will he be ready to announce major changes to the inflation framework, present his views about the short-term policy direction, or might he opt for a low-key speech, reducing the importance that the annual Jackson Hole Symposium has gained under his predecessor?
Mixed performance but banks remain upbeat about outlook
It has been a challenging month for US equity indices as the strong performance in the first week of August gradually abated, with most indices trading in the red this week, led by Nasdaq 100. On a monthly basis, US indices remain in the green, posting 2%-4% gains, marking a small reversal from the challenging performance during both June and July.
Despite the unconvincing moves, the exceptional earnings season and the softer September Fed rate hike expectations, most investment houses remain relatively upbeat about the short- and medium-term outlook for US equities, despite the obvious challenges from both the Middle East developments and domestic factors such as the ballooning federal debt.
Interestingly, another reason for this upbeat outlook could be the muted volatility profile of US stock markets. The one-month VIX index is hovering at the lowest level of the year, a rather confusing situation considering the significant events of 2026, and importantly, considering the busy schedule ahead, which includes the September Fed meeting and next week’s two key events. As Chart 4 below shows, the traditionally negative relationship between daily changes in the S&P 500 and VIX indices has strengthened during Trump’s second presidential tenure.
Correction time?
A good measure of stock market exuberance is the distance between the current S&P 500 level and the 50-week simple moving average (SMA). Chart 5 below shows a 10% gap between the S&P 500 index and its SMA, which is close to the average gap that tends to precede corrections. The combination of disappointing Nvidia earnings and a hawkish speech by Fed Chair Warsh could negatively impact risk appetite, putting equity indices into reverse, with the 7,500 area being the first solid support area.