Markets hover between stability and doubt – all eyes on NVDA and the Fed

Just When It Seemed Safe to Dive Back Into Long-Term Japanese Debt…

Just when we thought it was safe to pull the trigger again and return to long-term Japanese debt, last night’s 40-year bond auction flopped, and yields rose once more…

“Weak demand for 40-year bonds is likely due to ongoing high volatility and the fact that the actual issuance volume will not be reduced for at least another month, prompting most investors to refrain from taking risks,” said Ataru Okumura, senior rates strategist at SMBC Nikko Securities.

The average bid-to-cover ratio, which measures demand, at Wednesday’s auction for ¥500 billion ($3.5 billion) in bonds maturing in March 2065, came in at 2.21 — down from 2.92 at the previous auction in March.

This pushed yields higher globally — but for now, they remain “contained”…

As Goldman’s top trader Rich Privorotsky notes, there’s still hope that Japan’s Ministry of Finance will reduce bond supply (Nikkei futures dropped 1.5% overnight after a 4% gain the day before).

“The fact that today’s auction didn’t go well supports the view that the government will adjust issuance of ultra-long bonds,” said Kazuhiro Sasaki, head of research at Phillip Securities Japan.

“In a way, this is positive for the bond market as it increases the likelihood the Finance Ministry will take action,” Sasaki added, referring to the growing pressure on long-term yields in Japan.

Privorotsky was surprised by the market’s strength yesterday.

Europe Rebounds, Nvidia in the Spotlight

Europe is climbing back above pre-tariff-threat levels — perhaps the market is betting that Trump will want to resolve trade disputes before the midterm elections.

Markets are preparing for NVIDIA’s earnings results later today…

There are many differing views, but it appears investors are not overly long in their positions.

Some are expecting downward revisions to forecasts (due to concerns related to China and Blackwell).

Following recent gains, the short-term risk/reward ratio is no longer as attractive, but the long-term AI narrative likely remains the main market driver this week.

Overall, the market’s resilience is impressive.

There’s clearly a sense of urgency in increasing net exposure and beta.

Stable yields are removing obstacles to further equity gains.

In Europe, after yesterday’s close, there was over €4 billion in bond supply — well absorbed. More issuance is expected before the summer lull.

What’s next?
Sentiment remains unclear — Twitter vs. UMich…

Bull Case for the U.S.: Markets Remain Tepidly Stable

U.S. consumer confidence beat expectations (though only half of the respondents were surveyed after the tariff delay for China), highlighting the unreliability of “soft” data.

Goldman Sachs’ current activity index for May is 1.6% (up from -0.2% in April), showing broad-based growth.

These are real-time data points — with limited front-loading — and the economy appears to be stabilizing around 2% growth, with consumer spending remaining solid.

Long-term, interest rate direction remains unresolved, but in the short term, the liquidity exhaustion date, fiscal policy, and auction reductions (e.g., Treasury cutting 4- and 8-week bill auctions) are supportive:

“The U.S. Treasury is cutting auction sizes for 4- and 8-week bills — the beginning of what’s likely a broader series of reductions.” (via Bloomberg)

Bear Case for the U.S.: Growth Normalization Still Unclear

• Tariffs of 10%+ act as a tax on consumers (is the recession already here?)
• Higher yields (only partially offset by easier financial conditions due to a weaker dollar)
• Weakness in the housing sector and small business
• In the worst-case scenario, long-term interest rates become a battleground for fiscal discipline in the U.S., leading to some form of austerity

Short-Term Outlook for Europe Remains Uninspiring

Not enthusiastic about Europe in the near term, due to:

a.) Ongoing trade tensions — at these levels, the risk premium vanishes
b.) Q2 earnings downgrades due to the euro’s sharp appreciation
c.) Potential flare-up in the Russia/Ukraine conflict (perhaps more relevant as a relative trade idea)

I still wonder whether we’re at a short-term inflection point for the U.S. dollar, given stronger economic data and the reminder from Japan that debt dynamics outside the U.S. are (in places) far worse.

After Nvidia’s results, let’s not forget that the end of the month often brings equity selling, driven by pension fund rebalancing.

For today, Privorotsky is watching NVIDIA, the Fed minutes, and any headlines from the OPEC+ ministerial meeting.