Sentiment Stays Soft As Nvidia Earnings Loom

WHERE WE STAND – It’s all about rates this morning, with the rally seen across the Treasury curve in yesterday’s session the only story that really matters.

In terms of those moves across the Treasury curve, gains were seen throughout, as the belly underperformed, with benchmark 5-10 year yields falling over 10bp on the day, with the 10-year yield slipping to its lowest level since mid-December, as the curve bull flattened.

There were, naturally, a few catalysts for these chunky gains. Many will, given the time of month, point to the unusually large month-end duration extension, with Bloomberg Indices estimating said extension to be at 0.12yrs into the end of February, notably bigger than the 12-month average of an 0.08yrs extension, thus sparking outsized buying flows.

Further strengthening the case for receiving flows being a big driver of the upside in Treasuries, and FI across DM, was the notable tightening in swap spreads, which tightened by 2bp in the 10- and 30-year segments of the Treasury curve, while the 10-year Bund swap spread touched record lows, at -5bp. This latter move is a surefire sign of the market bracing for increased Bund issuance, in order to fund a rumoured €200bln increase in defence spending, while Treasury spreads tightened after comments from Dallas Fed’s Logan nodded towards the Fed tilting purchases towards shorter-term maturities in order to better mirror the composition of Treasury issuance. That, of course, could change if Secretary Bessent does indeed pull off plans to pivot away from bill sales.

Jitters over the state of the US economy also drove a portion of Treasury demand, with last week’s soft data (PMIs & UMich), as well as poorer than expected Walmart guidance, continuing to weigh. Yesterday, these jitters were worsened by dismal consumer confidence figures from the Conference Board, with the index falling to 98.3, well below expectations, and the biggest MoM decline since August 2021.

Fundamentally, the risk/reward for long fixed income positions looks incredibly favourable here, with the bull case for bonds being a simple one – it’s easy to imagine scenarios where the Fed deliver 50bp, 100bp, or 150bp of easing this year, it’s almost impossible to imagine them delivering that magnitude of hikes in the next ten months, in turn presenting significant potential upside, with limited downside.

All of this, combined, has also seen a dovish repricing of Fed policy expectations, per the USD OIS curve. Money markets now discount 55bp of easing by year-end, up from 33bp just a week ago, and a path that is more dovish than the 2x 25bp cuts outlined by the Fed’s December ‘dot plot’. To me, in fact, such a path is probably overly dovish at this stage, given the tight labour market, and upside inflation risks associated with potential tariffs from the Trump Admin. I wouldn’t be at all surprised to see a degree of this dovishness unwind, once the month-end noise is out of the way.

Elsewhere, yesterday, it certainly wasn’t a ‘Turnaround Tuesday’ for equities, with the S&P 500 and Nasdaq 100 sliding once more. For the stats-focused folk out there, yesterday was the S&P’s 4^th down day in a row, marking the worst such run this year, while also being the third day running that the Nasdaq 100 has shed over 1%, the first time that kind of a streak has been seen since last August.

Clearly, the aforementioned macro jitters continue to exert significant pressure on sentiment, with conviction to ‘buy the dip’ also lacking, ahead of eagerly-anticipated earnings from Nvidia after the close today (on which, more below). Once that risk is navigated, I’d be an advocate of upside in equities resuming, with recent macro jitters likely overblown given tariff uncertainty and one-off factors skewing January data, while the typical poor end-Feb equity seasonality is also coming to an end.

That said, it does look like there’s a degree of momentum unwind going on here as well, with gold shedding 2% yesterday, and other recent market darlings coming under significant selling pressure too, with the ‘Magnificent Seven’ springing to mind here.

In any case, it would be nice if someone would wake the G10 FX market up. Recent ranges continue, by and large, to be respected by most majors, with the EUR failing to make much headway north of 1.05, cable not yet ready to venture north of 1.27, while even the typically high-beta AUD & NZD don’t appear particularly perturbed by the slump in US equities. The JPY is the only mover of note, as USD/JPY yesterday slid below the 149 figure for the first time since last October, likely amid haven demand.

LOOK AHEAD – Here we are then, the day has arrived, the most important stock in the world is set to deliver the most important earnings report the market has ever seen; until the next one, naturally.

I jest, on the subject of Nvidia (NVDA), who report after hours today, approx. 9:20pm GMT/4:20pm ET. Expectations see adjusted EPS at $0.84 in Q4 25, up from $0.81 in the prior quarter, on revenues of $38.2bln, up from $35.1bln in the prior three month period. Of more importance than the figures, though, will likely be NVDA’s guidance, as participants seek to gauge whether this stonking pace of earnings growth, and importantly gargantuan margins around the 75% mark, can be maintained, as competition in the sector intensifies.

Given the emergence of Deepseek in recent weeks, and the potential that AI models can be built using older, fewer, and cheaper NVDA chips than had previously been thought, risks around the AI theme more broadly have become increasingly two-sided. As such, participants seem likely to severely punish any earnings, or guidance, misses, with options tied to the stock pricing a move of +/- 8.5% in the 24 hours following the release.

Given NVDA’s chunky index weighting, 8.3% in the Nasdaq 100, and 6.3% in the S&P 500, the quarterly figures are likely to have a considerable impact on markets at large, particularly considering the way in which the stock is viewed as a ‘bellwether’ for the tech sector at large.

Besides NVDA, today’s data docket is barren, with conviction likely to be lacking ahead of the earnings release.