Wall Street rallied strongly on Thursday on renewed optimism around AI, sparked and led by an eye-popping surge in Microsoft shares, as equity investors shrugged off the spike in bond yields following Fed Chairman Kevin Warsh's Wednesday comments on inflation.
In the foreign exchange market, meanwhile, the yen notched one of its best days in years on suspected intervention from Japanese authorities.
Today's Key Market Moves
STOCKS: South Korea -1.7%, Europe +1%, UK flat. Nasdaq +2.8%, S&P 500 +1.7%.
SECTORS/SHARES: Six sectors on the S&P 500 rise, five fall. Tech +5%, comms services -2.5%. "SOX" chip index +8%. Microsoft +15.5%, Sandisk +26%, Micron Technology +18%. Meta -8%. Amazon +8% after the bell on Q2 results, Apple -3%.
FX: Dollar/yen plunges 2.5%, biggest fall since April 30 intervention. Dollar index -1%.
BONDS: U.S. yield curve bear steepens. 2-year yield dips, 30-year yield +7 bps to hit 5.24%, highest since mid-2000s.
After weeks of speculation about whether they would act to lift the yen from a 40-year low against the dollar, Japanese authorities finally appeared to intervene on Thursday. There's been no confirmation yet from Tokyo, but FX analysts are pretty certain the yen's near-3% surge against the dollar had an official helping hand.
If it was intervention, the question is how effective will it be? Tokyo last intervened on April 30, spending $73 billion to slam dollar/yen lower by around 5 'big figures'. That bought about six weeks before the yen was back at pre-intervention levels. A lot hinges on the Bank of Japan on Friday, and a hawkish signal could give the Ministry of Finance much more bang for its intervention buck. A dovish signal, on the other hand, could put the yen back under heavy pressure.
Liquidation
When market downturns snowball, speculation inevitably rises about who is exposed to margin calls, position liquidation and big losses. Highly leveraged hedge funds are the usual suspects. The recent rout in chip stocks is no different, and on Thursday it emerged that the AI-focused hedge fund Situational Awareness has sold the bulk of its stock portfolio to Ken Griffin’s Citadel.
The fund, led by rising star Leopold Aschenbrenner, was under pressure to either raise fresh capital from investors or offload its entire book. It chose the latter. Could there be others? Global hedge funds are grappling with their biggest monthly drawdown on record as the crowded AI trade has soured, with Asia-focused fundamental long-short funds down 18.6% on average this month.
Warsh communication and bond-market skepticism
In my column today, I look at why the bond market was distinctly unimpressed with Warsh's seemingly lukewarm commitment to bringing inflation down and even the Fed's 2% inflation target itself. Allowing the bond market to do the Fed's tightening for it is a risky game to play.
Communication
Warsh wants to overhaul the Fed's communications strategy, although judging by the flak he received for his press conference on Wednesday, perhaps he should focus on his own communication first. He spoke a lot without explaining how he intends to get inflation down. Worse, his commitment to even bringing inflation down, and the Fed's 2% price stability goal itself, was questionable.
The selloff at the long end of the bond market is a warning that a lack of clarity from a central bank about its goals, reaction function, or strategy to achieve its aims will be met with doubt and skepticism. There may be more market turbulence in the coming weeks and months as Warsh shakes up the Fed.
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