Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Wall Street rose on Thursday as investors looked favorably on tech despite a mixed reaction to Nvidia's 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. 

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* 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 Sept. 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 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 - leaps to its highest level against the U.S. dollar this year, precisely since Nov. 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 US. Maybe Beijing is focusing more on bolstering domestic demand than exports? 

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%.