ORLANDO, Florida, Aug 26 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

U.S. stocks rose on Tuesday as investors looked at President

Donald Trump's controversial efforts to fire Fed Governor Lisa

Cook through the prism of possible interest rate cuts soon and

parked to one side the longer-term erosion of confidence in the

central bank and U.S. policymaking more broadly.

More on that below. In my column today, I ask whether

Nvidia's earnings on Wednesday will be strong enough to dispel

concerns among some investors around when AI will deliver its

promised returns, and keep the tech rally going.

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. Trump takes his Fed fight to unprecedented level

with

effort to fire Cook

2. What's known about the legal premise for Trump's

effort

to fire Fed's Cook

3. Mantra of central bank independence shaken by

Trump

moves on Fed

4. Trump's latest Fed jab breeds more dismay than

drama

5. Dollar turn emboldens dogged wariness of Wall

Street:

Mike Dolan

Today's Key Market Moves

* STOCKS: European shares fall sharply, China's

indices

ease back from 10-year highs, Wall Street edges higher.

* SHARES/SECTORS: Rotation into small caps

continues,

Russell 2000 outperforms. Nvidia shares +1% ahead of results,

Keurig Dr Pepper slumps another 7% after buying JDE Peets.

* FX: Dollar slips across the board but closes off

its

lows of the day. 'Safe-haven' yen and Swiss franc outperform.

* BONDS: U.S. yield curve steepens as much as 7 bps,

2-year auction draws highest bid-to-cover ratio this year.

* COMMODITIES: Oil slides more than 2%, its biggest

fall

in three weeks.

Today's Talking Points:

* Fed independence

Trump's attempt to fire Fed Governor Lisa Cook for alleged

mortgage irregularities has cranked up his feud with the central

bank to unprecedented levels. Cook insists she will not resign,

her lawyer says she will sue Trump for trying to fire her, and

the Fed says she will seek a court ruling to continue in her

role.

Traders are betting on a rate cut next month, and Treasury

yield curves are steepening. This may offer some near-term

support for equities. But beyond that, doubts over the

credibility of Fed policy are bound to intensify, and that will

surely come back to bite markets.

* Long yields

It's not just ultra-long U.S. Treasuries that are under

heavy selling pressure. Longer-dated yields in Japan, Britain,

and the euro zone are also rising as long-term debt

sustainability across the industrialized world comes under the

microscope.

Britain's 30-year gilt yield surged on Tuesday to close near

its highest level in 27 years, Japan's 10-year yield rose to a

17-year high, and the 30-year yield hugged Monday's record high

of 3.2150%.

* French politics

France's minority government is teetering, with the three

main opposition parties saying they will not back a confidence

vote which Prime Minister Francois Bayrou announced for

September 8 over his plans for sweeping budget cuts.

The ripples are being felt across the euro zone, where

equity and bond prices fell on Tuesday. Italy has long been

viewed as the weak fiscal link among the big euro zone

countries, but right now the spotlight is firmly on France.

Can Nvidia results dispel creeping AI doubts?

Questions are arising about when artificial intelligence

will deliver its promised returns, meaning tech-concentrated

U.S. equity indices sitting near record highs are vulnerable to

a correction.

Nvidia's quarterly results this week could therefore

potentially be explosive - not just for the company's shares or

the tech sector, but for all of Wall Street.

The U.S. chipmaker and global AI leader is the world's most

valuable company, with a market cap of $4.4 trillion. That's

double the entire value of Germany's benchmark DAX and

represents 8% of the S&P 500, the largest share for any single

stock in the index's history.

Nvidia is expected to report a 53% increase in revenue to

$46.02 billion on Wednesday, according to the mean estimate from

40 analysts, based on LSEG data. That would be higher than the

company's own guidance three months ago.

Given Nvidia's unprecedented weight in the U.S. market, its

earnings releases have become an event - almost akin to U.S. GDP

or inflation statistics. But Wednesday's numbers will be

scrutinized particularly closely given the questions being

raised about whether we're seeing an AI bubble.

'OVEREXCITED'

Doubt appears to be creeping in among investors about when

and by how much - or even if - the eye-watering investment in AI

projects and infrastructure will begin to pay off. And it's not

just the bearish, contrarian, 'Magnificent Seven' short sellers

peddling this narrative either.

"Are we in a phase where investors as a whole are

overexcited about AI? My opinion is yes," said none other than

ChatGPT founder Sam Altman earlier this month, according to The

Verge.

A recent Massachusetts Institute of Technology study found

that 95% of companies are getting zero return on the billions of

dollars they have plowed into Generative AI investments. More

than 80% of companies have looked into or started using tools

like ChatGPT and Copilot, but they only boost individual

productivity, not firms' bottom line, the study found.

Investors appear to be growing antsy, with some beginning to

rotate out of expensive tech and growth stocks and into small

caps and value names. In the last two weeks, the Invesco QQQ

exchange-traded fund tracking the tech-heavy Nasdaq 100 is down

nearly 1%, while the iShares Russell 2000 ETF is up over 5%.

That could just be a bit of mean reversion in thin August

trading, but it's a nervy backdrop for Nvidia's earnings

release.

TRILLION DOLLAR BET

One of the key worries being bandied about is the amount of

money companies are investing in AI. The 'Magnificent Seven'

U.S. tech giants have pledged hundreds of billions of dollars in

the coming years on AI-related investment.

Morgan Stanley analysts predict nearly $3 trillion of global

spending on data centers through 2028, with over $900 billion

anticipated in 2028 alone. To put that into perspective, capex

spending among all S&P 500-listed companies last year was around

$950 billion.

Analysts at McKinsey go even further. They estimate that

investment in data centers worldwide will need to reach $6.7

trillion by 2030 - covering hardware, processors, memory,

storage, and energy - to keep up with demand.

With sums like that, the hurdles to making an attractive

return on investment are huge. But so are the potential rewards

if they do. Morgan Stanley strategists estimate that the

long-term 'economic value creation' for S&P 500 companies from

AI could reach $920 billion a year.

In theory, this could increase the S&P 500 market's value by

$13 trillion, using a 10-year average multiple of 18.5 times

future earnings, or up to $16 trillion, based on the current

market multiple of around 22.

HIGH EXPECTATIONS

But that's way down the line. It takes years for new

technologies to be fully adopted, and although markets are

forward-looking, investors can grow impatient if promised

returns fail to materialize. Especially when share prices have

run up in the meantime.

We may already be starting to see that in the recent tech

pullback. In the four months up to the mid-August high, U.S.

tech shares gained 53%, the strongest performance over a

comparable period since March 2000, Truist Investment Advisory's

co-CIO Keith Lerner recently noted.

"The rubber band for tech stretched too far - at least in

the short term. Tech became overcrowded and vulnerable to

negative headlines," Lerner says.

Given Nvidia's prominence, a release of bumper figures could

calm AI jitters, but its failure to meet analysts' lofty

expectations could cause the tech snap-back to become a whole

lot sharper.

What could move markets tomorrow?

* Australia inflation (July)

* Germany GfK consumer sentiment (September)

* U.S. Treasury auctions $70 billion of 5-year notes

* Nvidia Q2 results (after market close)

* Richmond Fed President Thomas Barkin speaks

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