ORLANDO, Florida, Aug 28 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

Wall Street rose on Thursday as investors looked favorably

on tech despite a mixed reaction to Nvidia's ( NVDA ) results, while the

prospect of U.S. rate cut next month from a more dovish Fed

pushed the dollar lower against nearly every major and emerging

currency in the world.

More on that below. In my column today, I look at the

rotation out of tech stocks and into small caps that accelerated

in August, and ask whether it can continue into September.

If you have more time to read, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. Fed Governor Cook sues Trump over his attempt to

fire

her

2. Dollar drop on politicized Fed may be part of

Trump

deal: Mike Dolan

3. Nvidia ( NVDA ) CEO says AI boom far from over after tepid

sales

forecast

4. For bruised bond markets, turbulence persists as

debt

sales ramp up again

5. EU to scrap tariffs on U.S. goods to pave way for

lower

car duties

Today's Key Market Moves

* STOCKS: S&P 500 hits new high, Nasdaq outperforms.

Europe, Asia, emerging markets more mixed.

* SHARES/SECTORS: Nvidia ( NVDA ) slips 0.8%, but recovers

from

after-market lows overnight. Tech and communications lead U.S

markets higher though, small caps lag.

* FX: Dollar falls against nearly every currency in

the

world, dollar index -0.4%. China's offshore yuan hits 2025 high.

* BONDS: Long-dated yields in Japan, France, and UK

ease

back from this week's multi-year peaks. U.S. curve bull

flattens, $44 billion auction of 7-year notes goes pretty well.

* COMMODITIES: Copper has biggest rise in two weeks,

up

1.5% to a 2-week high. Nvidia ( NVDA ), U.S. GDP help lift prices.

Today's Talking Points:

* U.S. GDP resilience

Second-quarter U.S. GDP growth was unexpectedly revised

up to an annualized 3.3% from 3.1% and PCE inflation in the

quarter was revised slightly lower to 2.5% from 2.6%. On the

margins, this may point to more of a 'Goldilocks' scenario and

temper some of the 'stagflation' fears that continue to swirl.

Does this alter Fed expectations? Probably not - there are

some key data before the September 17 decision, starting with

July PCE inflation on Thursday, that will have much bigger sway.

But it does show that the impact from tariffs on activity and

prices hasn't been properly felt yet.

* Big government

Contrary to what we were told on the campaign trail and led

to believe with Elon Musk's 'DOGE' moment in the Washington sun,

the Trump administration is taking a very active role in many

aspects of U.S. economic, policymaking and industrial life.

From taking stakes in big companies like Intel and others to

letting Nvidia ( NVDA ) sell its H20 chips to China in exchange for 15%

of those sales, and from trying to stuff the Fed board with

loyalists to targeting law firms and academic institutions, the

administration's footprint seems to be expanding, not shrinking.

* Yuan steps beyond

The Chinese yuan - onshore spot and offshore - leapt to its

highest level against the U.S. dollar this year, precisely since

November 6, the day after the U.S. election. The PBOC's USD/CNY

fixing is on course for its biggest weekly move since September.

Beijing is clearly steering the yuan higher, not lower, as

many observers predicted would be its response to the economy's

deflationary pressures and looming trade war with the U.S. Maybe

Beijing is focusing more on bolstering domestic demand than

exports?

U.S. small caps quietly notch historic outperformance vs

tech

Amid the Federal Reserve drama and deluge of corporate

earnings in August, one clear but overlooked trend emerged in

U.S. equities: the rotation out of expensive tech stocks and

into cheaper small caps. As the month draws to a close, the big

question is whether this can continue.

The Nasdaq 100 is currently on track for a monthly gain of

1.5% while the Russell 2000 small cap index is headed for a 7.3%

rise, signaling an underperformance of 580 basis points for the

tech-heavy index.

According to Stuart Kaiser, head of equity trading strategy

at Citi, that relative monthly performance for the Nasdaq 100 is

in the bottom 5% since 1985.

And if we look at ETFs, tech's underperformance looks even

more striking. This month, the Invesco QQQ exchange-traded fund

tracking the Nasdaq 100 is flat, while the iShares Russell 2000

ETF is up 7%.

FED BOOST

So what's responsible for this dramatic divergence?

It may partly just reflect investors seeking to rebalance

their concentrated and lopsided portfolios. But the split was

clearly turbo-charged by Federal Reserve Chair Jerome Powell's

Jackson Hole speech on August 22, when he opened the door to an

interest rate cut next month.

Manish Kabra, head of U.S. equity strategy at Societe

Generale, says the Russell 2000 index's outperformance against

the broader S&P 500 that day was the biggest since the U.S.

election on November 6 last year that returned Donald Trump to

the White House.

Powell's dovish pivot is helping small caps outperform

because these companies tend to benefit more from lower interest

rates given that they rely on borrowing to grow and expand.

Larger firms, especially 'Big Tech' megacaps, often have huge

cash reserves and easier access to other sources of financing.

To be sure, lower rates wouldn't just be good news for small

caps. The rising tide of liquidity and investor sentiment would

typically be expected to lift all boats, including the

'Magnificent Seven' megaships.

As analysts at UBS point out, past equity bubbles have often

been burst by rising interest rates, so a resumption of the

central bank's easing cycle would appear to minimize that

particular risk for high-priced tech stocks.

But, regardless, small caps may still continue to get more

of a Fed boost in the near term.

AI DOUBTS

Another catalyst for the rotation has been creeping doubts

about AI's ability to deliver returns commensurate with the

bubble-like frenzy surrounding the new technology.

Tech stocks remain on the pricey side. That's justified,

argue UBS analysts, by the potential revenue from AI-generated

efficiencies, which they estimate could reach around $1.5

trillion a year globally.

Others are less optimistic. If value creation on this

massive scale fails to materialize, then tech companies will

struggle to generate a return on the trillions of dollars of

global capex expected in the coming years.

That's why all eyes were on $4.4 trillion Nvidia's ( NVDA ) earnings

on Wednesday. How investors interpret the global AI leader's

results will help determine whether tech's underperformance

continues into September. The company's revenue, profit and

forecasts looked solid, but uncertainty surrounding the

suspension of its business with China and skepticism around the

revenue outlook are giving investors pause.

UNDER THE RADAR

For now, market momentum remains with smaller firms. Francis

Gannon, co-CIO and managing director at Royce Investment

Partners, calls it a "stealth summer" for small caps, the recent

outperformance of which has gone "mostly unnoticed" amid the

daily headlines centered on economic uncertainty, geopolitical

worries, and new highs in the larger cap-led indices.

Indeed, the Russell 2000 has yet to revisit last November's

peak, while the Nasdaq and S&P 500 have been printing new highs

for weeks.

Whether or not small caps start hitting new records will

likely be determined by what happens at the Fed.

So the big macroeconomic events to watch next month will be

the August employment report due on September 5, August CPI

inflation data on September 11, and then, of course, the Fed's

policy decision on September 17.

Small caps have enjoyed a pleasant end to the summer. Let's

see what happens when investors all get back to their desks next

month.

What could move markets tomorrow?

* China corporate earnings, including Alibaba, BYD, CITIC,

China

Construction Bank, ICBC, Bank of China

* Japan retail sales, unemployment, industrial production

(July)

* Japan Tokyo inflation (August)

* India GDP (Q2)

* Germany retail sales (July)

* Germany inflation (August, prelim)

* ECB board member Luis de Guindos speaks

* Canada GDP (Q2)

* U.S. PCE inflation (July)

* U.S. Chicago PMI (August)

Want to receive Trading Day in your inbox every weekday

morning? Sign up for my newsletter here.

Opinions expressed are those of the author. They do not

reflect the views of Reuters News, which, under the Trust

Principles, is committed to integrity, independence, and freedom

from bias.