Early Morning Reid Macro Strategy

Early Morning Reid - Macro Strategy

Key Market Data (Index @ Close // Change) (S&P 500 @ 7719 // -1.11%) (STOXX Europe 600 @ 638 // +0.43%) (iTraxx Crossover @ 314 // unch) (Brent Oil^ @ 104.41 // -2.02%) (10yr Treasury^ @ 5.10 // -12 bp) (10yr Bund @ 3.47 // 0 bp) (Dollar Index^ @ 102.04 // -0.13%) (Further Fed hikes/cuts priced for 2026 @ 30 // 3 bp) (Further ECB hikes/cuts priced for 2026 @ 24 // 0 bp) ^ - Change from previous day's 4:30 GMT to 04:30 GMT

Markets have just had an incredibly tumultuous 24 hours, as a strong US CPI print was then followed up with mounting fears around the AI trade. Indeed, you can see the story of the day from the huge turnaround in bond yields, with the 10yr Treasury yield initially surging to 5.33% after the CPI print, before paring that all back to close at 5.19%, and this morning it’s now down another -8.4bps to 5.10%. Meanwhile for equities, the developments pushed the S&P 500 (-1.11%) to its worst performance since July, and futures on the index are down another -0.50% this morning. Moreover, there’s been a huge selloff in Asia overnight, with the KOSPI (-7.04%) and the Nikkei (-5.08%) both slumping, and the KOSPI even saw a circuit breaker triggered earlier given the scale of the declines.

In terms of the catalysts, several names most exposed to AI have already been under mounting pressure in recent days. For instance, we mentioned in yesterday’s edition how CoreWeave’s 5yr CDS contract went over 1000bps intraday on Tuesday, highlighting how nervous some credit investors were about the company’s leverage profile. But yesterday, their CDS was then up another +136bps, closing at 1118bps, and the company’s share price fell -15.46% on the day. Moreover, this pressure started to be noted more widely, particularly among those firms that have been heavily scrutinised by credit investors given their large capex needs. So this led to big losses elsewhere, with Oracle (-8.83%) posting its largest decline since June, whilst the Philly semiconductor index (-4.30%) posted a 6th consecutive decline for the first time in over a year. In fact, that now leaves the index down -11.6% over those 6 sessions.

Those trends have shown no sign of letting up overnight, with significant moves in Asia this morning. That’s been most obvious for the KOSPI (-7.04%) and the Nikkei (-5.08%), but we’ve also seen sharp losses for the CSI 300 (-2.00%), the Shanghai Comp (-1.98%) and the Hang Seng (-1.47%) as well. Some of the individual names have seen even bigger losses, including SK Hynix (-11.28%) and Samsung (-9.91%). And looking forward, there’s no sign of the moves stabilising in the US and Europe, with futures on the NASDAQ 100 down another -1.08% this morning.

All that was exacerbated by a strong US CPI print yesterday, which led to mounting expectations about Fed rate hikes, adding to the pressure on some of these names. To be fair, the print was already expected to be a strong one given the recent rise in energy prices. But when it came out, headline CPI was at +0.649% on the month (vs. +0.6% expected), meaning it was just a whisker away from rounding up to +0.7%, and it pushed the year-on-year number to +3.7% as well. Moreover, the details didn’t look promising either, as core CPI was at +0.335% on the month (vs. +0.2% expected), taking the year-on-year number to +2.6% (vs. +2.5% expected). So this wasn’t just an energy surge driving prices higher, as there were broad-based moves across the consumer basket.

For markets, the clearest impact was on Fed pricing, as it immediately drove fresh speculation about an October rate hike. Beforehand, that had been priced at only a 22% chance, partly because multiple Fed speakers had steered away from it in the last couple of weeks. But after the CPI print came out, that then surged to an intraday peak of 58%, and it spent around half an hour above the 50% mark. Nevertheless, the AI fears and the broader risk-off tone have seen that move almost entirely unwind since, with futures now pricing in just a 27% chance of an October hike this morning, not much higher than before the CPI print even came out. So it just shows how much AI is dominating market attention right now, as…