Is the AI trade back?

{"text":[[{"start":7.32,"text":"This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newsletters"}],[{"start":22.56,"text":"Good morning. Citadel has emerged as one of the few winners from last month’s AI rout. The hedge fund giant’s flagship fund gained nearly 6 per cent in July, after spending most of the month flat, after its fire-sale purchase of Situational Awareness’s public stocks. In fact, Citadel’s big bet may have helped end the rout; more on that below. Email us: unhedged@ft.com"}],[{"start":45.72,"text":"The S&P 500 rally"}],[{"start":47.84,"text":"There has been a lot of talk about a booming stock market in recent months, but until recently, the facts have told a different story: the S&P 500 had been in a sideways trend since mid-May, when tech leadership fell away. Trends and momentum are important in markets, and US stocks have looked a bit lost."}],[{"start":65.92,"text":"The picture changed last week, when the S&P started moving up smartly. Between last Thursday morning and this Tuesday afternoon, the index rose 5 per cent, enough to pull it out of the dreary trading range it had been stuck in for almost three months, and to touch an all-time high (the market eased off a shade yesterday)."}],[{"start":84.84,"text":"A blip or an inflection point? Note, first, that this was a hyper-concentrated move. Just 13 stocks accounted for more than 90 per cent of the index’s gains, all of them in Big Tech:"}],[{"start":null,"text":"

"}],[{"start":97.56,"text":"All 13 of these stocks had been in the red, some of them the dark red, since the market flatlined in May. And, collectively, they are still slightly down in value since then. This was a rebound in the biggest tech stocks, all of which have hitched their wagons to the AI trade. It was mirrored by a bad week for defensive stocks — Apple (the anti-AI tech stock), pharmaceuticals, Walmart and big tobacco."}],[{"start":121.06,"text":"There has been a fair amount of chatter that the rally was driven by “technical” or “mechanical” factors, such as short covering, hedging in the options market or whatever. Yin Luo of Wolfe Research notes that stocks with high short interest have in fact done quite well. But we spoke to several people in options markets, and their view is that the rally seems fundamentally driven. Earnings have been strong and there is a sense of relief that one massively leveraged player (Situational Awareness) has been taken out of the game. Does that mean the summer of stagnation is over, and the rally will continue? It’s too early to say. We’ll believe it when one or more of the 13 stocks listed above breaks past their old all-time highs."}],[{"start":121.56,"text":"(Armstrong)"}],[{"start":163.48,"text":"Jobs report: it would take a lot to do a little"}],[{"start":167.44,"text":"The US payrolls report is one of the handful of economic data points that matter to almost all investors, almost every time. It is a closely watched gauge of the most important economy in the world. But this Friday’s edition is a bit anomalous in this respect: the report is unlikely to change the market outlook much. It will take a really big overshoot or undershoot versus expectations to move markets, especially when it comes to interest rates."}],[{"start":192.92,"text":"New Fed chair Kevin Warsh hasn’t explained his view of the job market (or much else) in any detail, but his comments at the outset of last week’s press conference were characteristically anodyne: “Job gains have kept pace with the workforce and the unemployment rate has changed little.” He also said he didn’t believe in the Phillips curve (the idea that unemployment and inflation have an inverse relationship):"}],[{"start":215.44,"text":"I do not believe that price stability and full employment is an either/or proposition. There have been policymakers over the last several generations who have thought that there is a strict trade-off there."}],[{"start":226.36,"text":"The rest of the Federal Open Market Committee appears similarly unconcerned about the labour side of the Fed mandate. Don Rissmiller of Strategas points out that even the three dissenters from the last decision all indicated they were satisfied with the state of the labour market. All the attention is squarely on too-high inflation."}],[{"start":245.72,"text":"Economists are forecasting non-farm payrolls growth of 90,000 on Friday, following a soft 57,000 in June. This comes just days after the weakest ADP private payrolls print in six months. But a soft, or even negative, print on Friday likely won’t do much to relieve the pressure on the Fed to raise rates at its September meeting. The break-even rate of employment is estimated to be around zero, due to ageing demographics and the drop in immigration. Matthew Martin of Oxford Economics argues that we need to see more signs of weakness, such as a rise in the unemployment rate or a declining prime-age employment-to-population ratio, before we can expect the Fed to start worrying about helping the labour market."}],[{"start":286.64,"text":"And what about a surprisingly hot report? Some people (including Rob) think the job market might be tighter than standard measures such as wage growth suggest. But a rate increase in September is already more likely than not, according to the market, and even a wild acceleration in job creation for one month might not push those odds much higher. The downside risk looks bigger: job growth is modest, lay-offs are low and demand is cooling."}],[{"start":287.14,"text":"(Kim)"}],[{"start":287.64,"text":"One good read"}],[{"start":288.14,"text":"War by other means."}],[{"start":null,"text":""}],[{"start":null,"text":""}],[{"start":314.92,"text":"Can’t get enough of Unhedged? Keep following Rob Armstrong and Katie Martin’s incisive and unfiltered analysis on the Unhedged podcast, a twice-weekly, 15-minute lively dive into the latest markets news and financial headlines. New episodes every Tuesday and Thursday."}],[{"start":null,"text":""}],[{"start":332.471,"text":"Due Diligence — Top stories from the world of corporate finance. Sign up here"}],[{"start":336.44,"text":"The AI Shift — John Burn-Murdoch and Sarah O’Connor dive into how AI is transforming the world of work. Sign up here"}],[{"start":346.4,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1786007112_7770.mp3"}