AI Trade Faces Growing Doubt as Market Liquidity Tightens
A growing sense of unease is gripping the market, with Thursday’s trading session signaling a potential shift in sentiment surrounding the artificial intelligence (AI) trade. The market finished down approximately 1.7%, but analysts suggest the decline is driven by a reassessment of high-flying AI-related stocks.
Market Sentiment Shifts
According to sources, Thursday “had a different feel” than previous sessions, largely due to the performance of key AI-focused companies. Oracle (NYSE:) and CoreWeave (NASDAQ:) have experienced significant declines in recent days and weeks, prompting concerns about the sustainability of the AI rally.
“It paints a picture of a market that is now beginning to doubt the AI trade,” one analyst noted. This doubt isn’t isolated to the United States, with similar dynamics observed in SoftBank, a stock that had previously benefited from rising implied volatility. While still showing substantial gains overall, SoftBank has recently relinquished some of those profits.
Unwinding of AI Positions
Despite the S&P 500 falling between 1.6% and 1.7%, the experienced a smaller drop of around 1.1%. This disparity suggests an unwind of positions in AI-related names, potentially returning the market to pre-earnings levels. At that time, the focus was on the need to resolve equity-dispersion and volatility-dispersion trades.
Liquidity Concerns Intensify
Adding to the market’s challenges, liquidity conditions remain constrained. The average repo rate traded on Thursday, as reported by DTCC, held steady around 4%. While a temporary easing might occur today due to it being a non-settlement date, next week presents a more challenging outlook.
Approximately $60 billion in Treasury settlements are scheduled for the week of July 15th, with $26.7 billion settling on the 17th, $14 billion on the 18th, and $18 billion on the 20th. This influx of settlements will likely maintain tight liquidity conditions, regardless of any potential drawdown of the Treasury General Account (TGA).
Reserve Balances Remain Low
Even with recent market activity, reserve balances remain near historic lows, currently around $2.88 trillion. A reduction of the TGA to $850 billion would only add approximately $110 billion in liquidity, a figure deemed insufficient to significantly alleviate the pressure.
“It’s not going to make much of a difference at the end of the day,” a senior official stated.
The current situation echoes historical patterns, with one observer noting that “1966 continues to play out,” suggesting a cyclical recurrence of these market conditions. The confluence of factors – waning AI enthusiasm, tightening liquidity, and low reserve balances – paints a cautious picture for the near-term market outlook.
