26 Aug - PCE & Nvidia Earnings Day

In terms of geopolitics, the most interesting development yesterday was the market's reaction to Operation Economic Outcast, which was not at all what you might have expected. Rather than pushing oil higher, the sanctions announcement has now sent Brent down almost 8% in the two sessions since it was made. There are two potential reasons for this. The first is that Pakistan's army chief concluded a one-day visit to Tehran, with reports suggesting he carried a proposal worked on with Qatar involving potential sanctions relief under the existing memorandum of understanding. That is the same mediation channel that produced the pause back in July, so it carries some weight. The second reason is more interesting, which is that the sanctions themselves landed considerably softer than the market had feared. Bessent confirmed that countries trading with Iran will be given a specific timeline to wind down those links rather than facing immediate penalties. After all the talk of an "economic D-Day" and "the single greatest financial offensive ever marshalled against an adversary," a grace period reads as a good deal less disruptive than the rhetoric implied. Underneath it all, substantial volumes of crude do also continue to move through the Strait, with some shipments operating discreetly, the market keeps rediscovering that this closure is a rather porous one.

There is a detail in how oil fell that I think is worth keeping an eye on going forward. Brent closed around $88.40 against Monday's $93.10, a fall of roughly 5%, while US Oil fell to around $80.60 from $84.50, a fall of roughly 4.6%. So Brent did fall further than US Oil, but by less than half a percentage point, and I would not want to overstate what a gap that size tells us on its own.

The reason it is worth tracking, though, is what the spread between the two represents. US Oil is landlocked American crude that reaches the sea through Gulf Coast terminals, while Brent is the seaborne international marker that carries the world's fear about whether tankers can actually get out of the Persian Gulf. That means the difference between them is effectively a live gauge of how much Hormuz risk premium is still sitting in the price. If Brent begins to fall consistently and meaningfully faster than US Oil over a run of sessions, that is the market telling us it no longer believes in a supply disruption, and it would be a far more reliable signal than any single day's headline move. At the moment the gap is too small to draw that conclusion, but it is the right place to look for it.

One important caveat, though, and it is a big one for the inflation picture. Diesel has not moved. The US national average is $5.62 a gallon this morning, fifteen cents dearer than it was a week ago, while Brent fell almost 8%. That is significant, as inflation figures respond to refined products rather than to crude. If Brent falls but diesel does not, the disinflationary benefit never actually reaches the data. The tightness appears to have moved from crude into products, and the consumer sees no relief regardless of what the headline benchmark does.

Forex

The falling oil price has had a knock-on effect in the bond market, with yields retreating for a second session. The 10-year sits near 4.70% and the 30-year near 5.23%, both well off the near two-decade highs we saw last week. Lower oil eases inflation expectations directly, whilst the weak consumer confidence figure added to the effect, coming in at a seven-month low of 89.4 with the expectations component sliding 7.8%.

The more significant driver, though, came on Monday, when it was reported that the Treasury could use its near $1 trillion General Account to fund the bond buybacks. That reframes the programme entirely. When Bessent announced the doubled buybacks last week, the market assumed they would be funded by selling short-term bills, and the rally fizzled within a session precisely because analysts did not believe $4 billion per operation was enough to move a market where yields had hit multi-decade highs. The General Account changes that arithmetic completely, giving the Treasury something closer to $950 billion of firepower.

I would make two points about that. The first is that Bessent has called this a "Treasury Twist," which is a deliberate echo of Operation Twist, a programme run by the Federal Reserve in both 1961 and 2011. So we now have the Treasury running a monetary policy tool from the fiscal side, which is a further blurring of the boundary between the two institutions and arguably more significant than the size of the buybacks themselves. The second is that drawing down cash reserves to buy your own long-dated debt is functionally a form of quasi-monetisation. It is not QE, as no money is being created, but the effect on the curve is similar and it is being done by an authority with an explicit interest in lower borrowing costs rather than by a central bank with an inflation mandate. That is exactly the sort of thing that erodes confidence in a currency over time, even while it works mechanically in the short term.

Elsewhere it was a quiet session, with the dollar modestly weaker across the board. The Aussie has been the standout overnight following the CPI release, gaining a further 0.27% and reaching 0.7189 at its high.

Indices

A constructive session, with the S&P rising around 0.2%, the Dow up around 0.2% for a third consecutive winning day, and the Nasdaq climbing roughly 0.45%. Falling oil and retreating yields did the work.

The notable move was in Nvidia, which snapped its longest losing streak in around four years, climbing 1.5% for its first up day in eight. The last time it fell seven consecutive sessions was 2022, and despite that drawdown it remains up more than 13% year to date. There was also a constructive note on the infrastructure side, with Freedom Capital Markets expecting CoreWeave's 2026 adjusted operating margins to rise from 1% in the first quarter and 5% in the second to 7% in the third and 15% in the fourth. Given the entire AI capex debate turns on whether any of this spending produces returns, margin expansion at the infrastructure providers is a genuine piece of evidence for the bull case.

Which brings us to tonight. Nvidia reports after the close, and it does so having just broken a seven-session losing streak, which means expectations have been reset lower going in. That cuts both ways. A beat lands on much cleaner positioning than it would have a fortnight ago, but a miss confirms everything the last seven sessions have been telling us. The questions I will be looking to answer are the ones we have been asking for weeks. Will we continue to see falls on anything short of perfect earnings? Does the rotation from growth to value continue? And crucially, is the AI spending actually generating a return yet, or are we still being asked to take that on faith?

Precious Metals

Gold was essentially flat yesterday at around $4,660, while silver closed near $68.70 having touched $69.95 during the session. That is now a third failure at $70 in three sessions, and the metal has got within touching distance of the level and been rejected. $70 is clearly proving to be a genuine ceiling in the short term.

What I would highlight is that yields fell for a second session and gold did not sell off. Under the framework we have been using for most of this year, falling yields should have been unambiguously bullish for gold, and yet it went nowhere. But look at why yields are falling. They are falling because the Treasury is buying its own debt with its own cash reserves, and that reason is itself the bullish argument for metals. This is the confidence trade, and it explains why gold is holding these levels rather than either surging or correcting.

That said, today is the real test. PCE is released at 1:30pm UK time, with core forecast at 0.2% monthly against 0.1% previously, and it is the Fed's preferred inflation gauge landing two days before Warsh speaks at Jackson Hole. A hot print gives the Fed a reason to lean hawkish on Friday, which would pressure the metals and might finally give us the retracement we have been waiting for. A soft print does the opposite and likely sends gold on again without me. As I have said throughout, the fundamentals here remain strong for the medium and long term, but I am still not prepared to chase a market that has run this hard into two major catalysts in the space of three days.

Today's Market Drivers

• US Core PCE, 1:30pm UK time - The Fed's preferred inflation gauge and the most important release of the week for both the dollar and the metals, landing two days before Warsh speaks at Jackson Hole.

• US Preliminary GDP, 1:30pm UK time - Released alongside PCE and forecast to hold at 1.5%, giving us a read on whether the economy is genuinely slowing beneath the strong survey data.

• Nvidia Earnings, after the US close - The definitive read on the AI trade, coming immediately after a seven-session losing streak was snapped.

• Crude Oil Inventories, 3:30pm UK time - Worth watching given oil has now fallen two sessions running and the Brent-US Oil spread is telling us the war premium is coming out.