A look at the day ahead in U.S. and global markets from Mike

Dolan

In an extraordinary round trip over the past week, world markets

have rebounded sharply from days of turbulence - thanks in part

to Bank of Japan almost apologising on Wednesday for its role in

the ruckus - and traders now try to figure out what's next.

Japan's benchmark Nikkei stock index returned to

Friday's close at one point earlier - completing a near 5,000

point, 12% roundabout in just three days and ending Wednesday's

session about 1% higher.

As volatility gauges subsided back toward long-term

averages, the BoJ's influential deputy governor Shinichi Uchida

underscored the market recovery by saying the burst of market

volatility that followed last week's interest rate rise and

promise of more may in turn force the central bank to hold back.

"As we're seeing sharp volatility in domestic and overseas

financial markets, it's necessary to maintain current levels of

monetary easing for the time being," Uchida said in a speech to

business leaders in the northern Japanese city of Hakodate.

At the heart of the problem over the past week was that the

BoJ move seemed to puncture an estimated half trillion dollar

yen-funded currency 'carry trade', catapulting the currency

higher in the process. About two-thirds of those short yen

positions may have already been unwound, according to estimates

by JPMorgan.

The dollar/yen exchange rate has now rebounded 4%

from Monday's 7-month low to reclaim a foothold above 147.

The VIX 'fear index' of U.S. stock market volatility has now

returned to 23 - almost a third of Monday's peak and back closer

to its historic average of 19.3.

Along with more sober assessments of the likelihood of U.S.

recession any time soon, Wall Street's recovery looks set to

continue later today - with futures for all major indexes

all up more than 1% ahead of the bell.

To the extent that global growth jitters were part of the

market hiccup of the past week, Chinese trade numbers for July

also helped settle things down a bit. Although Chinese export

growth missed forecasts, imports were ahead of expectations.

Attention then switches back to the fundamentals of the

earnings season and supercharged Federal Reserve rate cut bets.

If worries about pricey tech stocks and a reappraisal of the

artificial intelligence theme was another reason for last week's

upheaval, then Super Micro Computer's ( SMCI ) miss overnight

may keep nerves jangling in that sector.

Super Micro's gross margins came in below estimates as high

costs tied to the production of servers with the latest AI chips

weighed on profits and sent its shares down 14%.

The read-across to other major chipmakers was limited so far

- with AI torchbearer Nvidia ( NVDA ) still up 1.5% in

pre-market trading on Wednesday.

What's more, overall second-quarter earnings remain

impressive. Aggregate annual S&P500 profit growth is tracking

13.7% - more than two points higher than pre-season estimates,

according to LSEG data.

And there are some big winners despite the recent tech

wobble. Uber's ( UBER ) results beat Wall Street estimates on

Tuesday on the back of steady demand for its ride-sharing and

food-delivery services, lifting its shares 5%.

In interest rate markets, the broader stock market

stabilisation has tempered the Fed view somewhat.

But a hefty 41 basis points of cuts next month is still

priced by futures market and more than 100bps is still in the

mix by the yearend.

Tuesday's $58 billion three-year Treasury auction went off

without a hitch and some $42 billion of benchmark 10-year

goes under the hammer later today.

With a yield of 3.93%, Treasury is getting 10-year funding

more than 20bp cheaper than if the auction was held this time

last week.

As to recession worries more generally, there's little on

Wednesday's diary to shift the dial on that - with tomorrow's

jobless claims data likely to be a focus given the sudden bout

of angst about labor market weakness.

For most investors, a 'soft landing' remains the best guess

and stepped-up Fed rate cuts will only underscore that.

Franklin Templeton Institute's Stephen Dover points out that

the average one year stock market return after the first Fed

rate cut is almost 5% even when a recession occurs - but it's

16.6% when the cuts come without a recession materialising.

In Europe, pharma giant Novo Nordisk trimmed its

full-year profit outlook after a sub-forecast sales update for

its popular weight-loss drug Wegovy - stirring worries among

investors about stiffening competition from Eli Lilly.

Elsewhere, politics dominated.

Democratic presidential nominee Kamala Harris and her newly

selected vice presidential running mate, Minnesota Governor Tim

Walz, campaigned for the first time together on Tuesday in

Philadelphia.

The tailwind behind Harris' campaign has national opinion

polls showing her slightly ahead of challenger Donald Trump, but

betting markets have cut the odds of her taking the White House.

The PredictIt site now puts her chances of victory at some

57% - almost 10 points clear of Trump.

Key developments that should provide more direction to U.S.

markets later on Wednesday:

* US June consumer credit

* Bank of Finland governor and European Central Bank policymaker

Olli Rehn speaks

* US corporate earnings: Walt Disney, Warner Bros Discovery,

Marathon, Occidental Petroleum, Mckesson, Atmos Energy, Emerson

Electric, CVS Health, Monster Beverage, Ralph Lauren, Hilton

Worldwide, Zimmer Biomet, Corpay, Global Payments, Equinix, CF

Industries, Bio-Techne, Charles River Laboratories, NiSource etc

* US Treasury sells $42 billion of 10-year notes

(By Mike Dolan, editing by Ros Russell;

[email protected])