European shares drifted higher on Wednesday, buoyed by a sharp drop in crude prices that fueled hopes of easing inflationary pressures, while traders positioned cautiously ahead of a pivotal earnings report from AI bellwether Nvidia.
The pan-European STOXX 600 rose 0.1% to 657.34 as of 0703 GMT, with basic resources leading sectoral gains, up 0.9%. The energy index fell 1.1% and was the worst performing sector on the benchmark.
Oil prices tumbled for a third consecutive session after Iran said it had restarted talks with Oman on managing the Strait of Hormuz. Brent crude futures slid more than 2% to around $86 a barrel on prospects of increased oil flows through the critical waterway, which handled roughly a fifth of the world’s traded oil before the conflict began nearly six months ago.
The drop in crude helped push bond yields lower, with the yield on U.S. 10-year notes at 4.634% after falling 6.5 basis points on Tuesday. The easing in yields offered some reprieve to equity markets that have been grappling with the inflationary consequences of the prolonged Middle East conflict.
JP Morgan analysts cautioned against over-optimism. “While there was no real progress or details of the Iran-Oman deal, as Iran reiterated that Hormuz will remain shut until conditions are met, price action suggested that markets are quickly pricing in optimism around an interim announcement,” they said in a note.
Commodity vessel transits through the Strait of Hormuz hit their lowest level in three months, underscoring the supply constraints facing the global economy. The rising optimism in the face of little evidence of immediate relief suggests investors may be setting themselves up, yet again, for disappointment.
Attention now turns to Nvidia’s second-quarter earnings, due later in the day, with investors focused on whether the massive AI spending boom is sustainable and can generate profits that satisfy increasingly demanding market expectations.
Tech shares in Europe fell 0.2% ahead of the results. Nasdaq futures dropped 0.5% in Asian hours, while MSCI’s broadest index of Asia-Pacific shares outside Japan edged up 0.12%.
“Nvidia is approaching the point where beating expectations is expected, so the headline numbers alone may not determine the market reaction,” said Charu Chanana, chief investment strategist at Saxo in Singapore. “The question is less whether Nvidia beats and more how big the beat is and whether guidance is strong enough to keep earnings expectations moving higher.”
She pointed out that options data hints at a smaller move after earnings compared to previous profit announcements, suggesting Nvidia’s results are becoming somewhat more predictable. Over the previous 12 quarters, the company’s market value has swung by an average 7.4% following its earnings report. This time, options traders are pricing in only a $280 billion, or 5.4%, move in Nvidia’s market value after it reports.
Analysts expect Nvidia to forecast an 82.8% rise in third-quarter sales to $104.20 billion. Adjusted gross margin for the second and third quarters is expected to remain around 75%.
JP Morgan analysts said it was likely that Nvidia’s earnings release will be “supportive of the AI trade though perhaps without giving a material near-term boost” to the semiconductor sector.
Investors are also eyeing a key U.S. inflation report on Wednesday — the personal consumption expenditures price index — for fresh clues on the Federal Reserve’s interest rate path. The U.S. dollar was steady ahead of the data release, while markets have been grappling with the U.S. Treasury department’s move to buy back bonds to help cap a surge in long-end yields.
That move to calm the bond market has piled pressure on the dollar, catapulting spot gold and bitcoin near three-month highs as the “debasement trade” persists.
Elsewhere in Asia, Japan’s Nikkei eased 0.4% while the tech-heavy Kospi dipped 0.2%. Technology shares in the region remained under pressure following Alibaba’s launch of a $10.2 billion share sale at a steep discount to fund its AI ambitions, as well as disappointment over Samsung Electronics’ shareholder-return plan in the previous session.