The AI trade and the Fed are sitting the same exam this week

Markets get two verdicts this week, and they’re really the same verdict twice. AI chipmaker Nvidia is scheduled to release its financial results tomorrow in what’s already being read as a referendum on the AI trade itself. Then Kevin Warsh is set to deliver his first keynote as Fed Chair on Friday, which is officially about payments innovation, though nobody on a trading desk believes that’s where the real news sits, Bloomberg reports.

The rotation away from AI has persisted, even as some tech shares recovered. Bloomberg’s data show the 40-day correlation between a Goldman Sachs broad AI basket and the S&P 500 excluding AI swung to roughly -0.6, deeply negative for the first time. That points to money rotating out of AI: semiconductor and data-center names were deeply in the red over the past five trading days, while AI-victim, inflation-sensitive, and stagflation-sensitive baskets — including miners and energy — outperformed.

The AI thesis still has legs: AI-linked infrastructure companies are still responsible for about half of the index’s earnings growth, and Anthropic’s latest revenue topped USD 11.6 bn in 2Q against OpenAI’s roughly USD 6.7 bn. Meanwhile, Anthropic’s annualized revenue run rate topped USD 65 bn, compared with about USD 40 bn for OpenAI, according to Bloomberg. However, the market has stopped pricing AI as the only trade in town. There are now clear winners and laggards inside it, and that’s arguably driving as much of the rotation as any Fed signal.

Behind all of it sits the slower fuse: yields. US public debt hit a record USD 40 tn this week, and long bond yields are at 19-year highs, the FT reports, even after Treasury Secretary Scott Bessent committed to at least double long-end Treasury buybacks in the roughly USD 30 tn US government debt market, according to The Guardian. The 30-year yield had touched 5.30% before the Treasury’s buyback announcement pulled it back slightly, Bloomberg notes.

Warsh’s communication style is now part of the story. Warsh has signaled a distaste for forward guidance and said he wants to frame broader questions rather than focus narrowly on near-term policy. A survey of academic economists run for the FT by the University of Chicago’s Booth School suggests the experiment isn’t landing well: three-quarters call the pullback in Fed communication the single biggest shift since Warsh took over, and six in ten blame credibility worries for a meaningful share of this year’s climb in long yields. “The communication strategy is driving a loss of Fed credibility,” former Boston Fed president Eric Rosengren told the salmon-colored paper.

A reversal of the old playbook: What former Fed Chair and Nobel Economics Prize winner Ben Bernanke once named a “global savings glut” (cheap money chasing safe assets) has evolved into a global savings squeeze, Reuters reports, as rising government debt, fractured trade and supply chains, population aging, and AI investment compete for available capital. “Both the bond market and the FOMC have clearly decided to wake up,” Adam Posen of the Peterson Institute told Reuters, calling it the start of a multi-year uptrend in rates instead of a blip.

Positioning suggests traders don’t expect Warsh to keep this narrow either way. In the week marking mid-August, hedge funds bought US equities every day — Goldman’s prime desk called it the strongest three-week run since March 2020 — while global stocks were net sold at the fastest pace in two months last week, according to Goldman Sachs Prime Desk. Some 96% of the S&P 500 is in its corporate stock buyback window, with more than USD 1 tn in authorizations providing a steady bid; trend-following funds hold roughly USD 140 bn of global equities that could flip into USD 150 bn of selling in a sharp drawdown, with the first stop-loss triggers about 4% below current levels.

OUR TAKE- If Warsh wanted to prove the Fed doesn’t need to talk markets down anymore, this is a bad week to test that theory. Nvidia’s results are likely to remain a key test for the AI trade, while Warsh’s remarks could shape the market’s reading of rates and Fed policy. What Nvidia cannot resolve is the separate concern around long-term yields, where investors are weighing inflation, Treasury policy, government borrowing, and uncertainty about the Fed’s policy outlook.

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MARKETS THIS MORNING-

Asian markets opened in the red earlier today, with South Korea’s Kospi down 2.3% and Japan’s Nikkei down 0.6%. Meanwhile, Wall Street equities are broadly trading at a loss as futures remain flat.

THE CLOSING BELL: TADAWUL-

The TASI rose 0.9% yesterday on turnover of SAR 6.0 bn. The index is up 6.5% YTD.

In the green: Saudi Vitrified Clay Pipes (+10.0%), Saudi Reins. (+10.0%), and Gulf General Cooperative Ins. (+9.4%).

In the red: National Medical Care (-3.8%), Arabian Pipes (-3.0%), and National Gas and Industrialization Company Holding (-2.7%).

THE CLOSING BELL: NOMU-

The NomuC remained flat yesterday on turnover of SAR 16.6 mn. The index is down 7.1% YTD.

In the green: Riyadh Steel (+15.5%), Naas Petrol Factory (+9.7%), and Advance International Company for Communication and Information Technology (+8.9%).

In the red: Naf Company for Feed for Industry (-12.1%), Arabian Plastic Industrial (-8.3%), and Hedab Alkhaleej Trading (-6.7%).