Good morning. To the surprise of nobody, the AI trade has had a rough few days. S&P 500 data centre darlings such as Dell, Ciena and Lumentum have lost about a fifth of their value this week, and AI infrastructure bonds have been dumped. Possible triggers include the Broadcom CEO's "casino" quip, a slightly iffy revenue update from Anthropic, and comments from CoreWeave about tapping insurers for financing because "that's all the money in the world."
Whatever the cause, the sell-off put a solid bid under Treasuries. The yield on the 10-year is down 24 basis points since Wednesday morning. That may seem surprising given this week's notably warm consumer and producer inflation reports, but if the AI trade implodes, inflation is unlikely to be anyone's main worry. US markets rallied yesterday afternoon, so this may not have been the big one, but it will have focused minds.
The newsletter asked readers how to AI-proof a portfolio. Sushil Wadhwani of the London School of Economics argued that Treasuries are the textbook hedge, since growth and inflation should slow when AI-related investment falls, and that the Fed would likely cut rates by at least 200bp in a full-blown crash. He sees gold as a likely eventual beneficiary of rate cuts, though it may be sold first for cash in a crisis. He also points to Indian equities, which have little direct AI exposure, and to macro hedge funds, which did well during 2000-2002.
One long-only manager, holding about 30 per cent cash, described minimising AI exposure through portfolio construction. Javier Corominas of Alpine Macro/Oxford Economics noted that the stock-bond correlation may have shifted from negative to positive, which weakens bonds as a traditional hedge.
Source: Financial Times Markets · Summarized by HeadlinesBriefing