Chip rally lifts South Korea's Kospi

US stock index futures had a mixed start this morning, but then all the indices pushed back into positive territory as the morning session progressed. Investors reacted positively to earnings reports from some major tech players after last night's close.

AI cloud company CoreWeave, surged 17% on better-than-expected earnings and revenues and an unexpectedly large increase in its operating income margin. Super Micro Computer, the data centre infrastructure giant, was up 9% this morning after a strong set of results and positive forward guidance for the next quarter.

Meanwhile, chip giant Nvidia confirmed its partnership with six major financial institutions to raise over $500 billion to build and develop data centres and other AI-related infrastructure. Some commentators have compared this latest move to spread risk beyond the hyperscalers to a wider market to the slicing and dicing of subprime mortgages into Mortgage-Backed Securities (MBS). Ultimately this resulted in huge losses for MBS buyers and led to the Great Financial Crisis.

Yesterday, the Dow and S&P 500 lost 0.3% while the NASDAQ fell 0.6%. This was the second successive negative session, although the losses were again relatively modest. The small cap Russell 2000 bucked the trend and tacked on 0.3%. Today brings the latest insight into US inflation via the Consumer Price Index (CPI).

Source: TN Trader

Economists are forecasting another month of softening inflation pressures, although today's data for July is unlikely to see another steep drop like the one seen in June. Core CPI (which excludes food and energy) is expected to fall to 2.5% year-on-year, from 2.6% previously.

Headline CPI is forecast to drop to 3.4% year-on-year from 3.5% last month. Another decline would certainly help the Federal Reserve as it would take the pressure off the central bank to raise interest rates this year. The Fed has been obsessed with the prospect of higher inflation particularly since oil prices have rebounded as the war between the US and Iran drags on. In fact, any uptick in inflation probably has far more to do with AI-related spending.

But that aside, last week's dismal Non-Farm Payroll report has forced the Fed's FOMC to refocus on the other plank of its dual mandate. That is, maximising full employment. Last Friday's numbers, which followed an unexpectedly weak reading in the previous month, have raised fears that there may be some underlying weakness in the US economy. Again, this makes it less likely that the FOMC will want to tighten monetary policy this year. But should today's CPI come in hotter-than-expected, then the Fed has a problem.

As things stand, there's a 50-50 chance of a 25-basis point rate hike at the Fed's September FOMC meeting. This could change dramatically should today's inflation data surprise, in either direction. With all the major US stock indices consolidating at, or near, record highs, investors remain particularly sensitive to any sign that price pressures are proving stickier than hoped.

European stock indices pushed higher on Wednesday, following in the wake of the US futures. Most European indices are consolidating near record levels despite the apparently relentless surge in crude oil prices. This surge is due to growing uncertainty over when, and how, the US war with Iran will conclude, and the vital chokehold of the Strait of Hormuz be reopened.

Source: TN Trader

Attempts at diplomacy unravelled further after President Trump demanded that Tehran pay direct compensation for the conflict. Iran responded saying that the Strait of Hormuz will remain closed until the US meets its own demands, including compensation from the US and an end to its naval blockade of Iranian ports. The crisis deepened further as Iran-aligned Houthi rebels launched fresh strikes on military supply vessels.

Interestingly, the UK's FTSE 100 is lagging somewhat, having pulled back from its all-time high hit at the end of last month. But its junior sibling, the FTSE 250, is keeping up with Europe having traded at a fresh record high this morning. As with the US, investors will focus on this afternoon's CPI release while quarterly earnings updates come from Cisco, Coherent and Cerebras amongst others.

Forex pairs were generally quiet this morning as traders prepared for the US CPI update at 13:30 BST. The US dollar was a touch firmer across the board, and the cash Dollar Index bounced off Asian-Pacific session lows to approach prior support, now resistance, around 99.60.  

Expectations concerning what the Federal Reserve may do at its next monetary policy meeting in mid-September remain split. The CME's FedWatch Tool shows that investors are 50:50 over whether the Fed leaves rates unchanged or hikes by 25 basis points. Meanwhile, the likelihood of at least one 25-basis point rate hike before year-end is at 78%. This seems high given last week's poor Non-Farm Payroll report which follows on from another set of weak labour market numbers in the previous month.

Despite this, the Fed still seems more concerned about inflation picking up again, so today's CPI, and tomorrow's PPI, could lead to some wild market moves, should the numbers miss expectations. As far as the Fed is concerned, the worst outcome would be for inflation to come in hotter than expected. This would present them with a dilemma, putting additional pressure on them to hike rates even as the US labour market shows signs of weakening.

So far, the prospect of rate hikes has supported the dollar while equities have simply shrugged off the prospect of higher borrowing costs.

Meanwhile, the Japanese yen continues to underperform despite the risk of further intervention to strengthen the yen and Bank of Japan (BOJ) tightening. This week's Summary of Opinions from the BOJ's July meeting struck a notably more hawkish tone than the headline decision suggested, reinforcing the case for an earlier move away from ultra-loose settings.

Source: TN Trader

Gold rallied overnight making back most of yesterday's losses and pushing back above $4,400, close to the highest level seen since June 5. It was a similar story for silver which exploded higher overnight, making back all of yesterday's losses while closing in on $67 per ounce. All this has happened despite the ongoing recovery in the US dollar.

Source: TN Trader

Traders are looking ahead to today's CPI report for fresh clues on the Fed's policy path. This looks likely to drive the dollar and shape the near-term direction of both precious metals. Meanwhile, hopes of an imminent conclusion to the US war with Iran, and a swift reopening of the Strait of Hormuz, have faded.

An adviser to Iran's Supreme Leader said the waterway will stay shut until the US meets Tehran's demands, while Iran-backed Houthi rebels escalated attacks on vessels in the Red Sea and Bab el-Mandeb, particularly those linked to Saudi Arabia. Last week's US Non-Farm Payroll report showed a continued cooling in the US labour market.

Despite this, the CME FedWatch tool still assigns a 78% probability of at least one 25-basis point hike before year-end. Elevated Treasury yields alongside persistent geopolitical risk should continue to favour the safe-haven dollar.

Crude oil was little changed on Wednesday but holding on to gains made over the past seven days. Traders kept a bid under oil as deadly attacks on vessels in the Red Sea and Gulf of Oman heightened concerns over global shipping routes, even as diplomats signalled some progress toward reopening the Strait of Hormuz.

Source: TN Trader

Pakistan's defence minister suggested Washington and Tehran were nearing agreement over the Strait of Hormuz, with parallel talks between Iran and Oman also said to be advancing. But US-Iran negotiations hit fresh obstacles, with Tehran demanding concessions including the release of frozen Iranian assets and a US withdrawal from regional conflicts. President Trump instead called for Iran to pay reparations.

Yesterday Iranian-backed Houthi rebels killed six people in an attack on a cargo ship in the Bab el-Mandeb Strait, the first reported fatalities from Red Sea shipping attacks in more than a year. Hours later, US forces said they had fired on a container ship attempting to break the navy's blockade of Iranian ports in the Gulf of Oman.

Bitcoin was little changed on Wednesday as traders sat on their hands ahead of this afternoon's US CPI update. Bitcoin has spent most of the last four weeks trading between $66,000 and $62,000. This week's disclosure of further coin sales by top crypto treasury holder Strategy has weighed on prices as has news that the passage of the Clarity Act through Congress has been held up for at least another month.

It's a data day, and the front-month VIX sitting in the mid-16s says as much about the mood as anything else. All eyes are on this afternoon's CPI print and the weekly oil inventories, with the Strait of Hormuz once again dominating the news. A deadly Houthi attack in the Red Sea, a US strike on a Panamanian-flagged container ship and a Pakistani claim that a US-Iran deal is close - one which Tehran has just as quickly denied. President Trump continues to insist Iran should pay reparations; Iran, for its part, is talking about charging for cargo passing through the Strait it controls.

Elsewhere, single-stock stories remain the order of the day, particularly in tech. Cisco reports after the bell this evening, alongside recent IPO Cerebras, and will be watched closely given its Dow-component status.

Away from earnings, cybersecurity is increasingly being framed as the next big beneficiary of the AI spending cycle, particularly as AI-enabled hacking becomes a more prominent theme. Riot Platforms tie-up with Anthropic in the crypto-mining space added another data point to that story, while OpenAI is said to remain confident of an IPO this year.

On the policy side, BoJ/US efforts to support the yen through intervention have so far met with only limited success, and September is currently priced at roughly 50/50 for a Fed hike. With the US midterms increasingly being framed as the prediction markets next big event.

Much still resting on this afternoon's inflation number, the broad message from markets today is one of waiting. Little is likely to move decisively until the CPI print lands at 1:30pm BST (8:30am ET).

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