Good morning. Market headlines pinned yesterday's downturn on Meta's blockbuster spending plans, triggering a rotation away from AI stocks. However, bigger forces are at play.
Yesterday's Treasury rally, with the 10-year yield falling 19 basis points to 4.96%, and the Nasdaq losing 2.6%, marked a turning point after a cooling process since early October. Real yields, not inflation expectations or Fed policy shifts, drove the move. Bob Michele of JPMorgan Asset Management summarized the bond market shift: extreme pessimism on growth and inflation, compelling valuations with 10-year real yields last seen in 2002, and the market waiting for a spark.
Tech earnings moderation served as that spark, alongside concerns over French debt and Eurozone contagion. Since May, industrial stocks tied to the data centre boom faded, narrowing the market to the AI trade. Recently, peripheral tech companies were picked off.
Since bond yields peaked, defensive sectors like healthcare and consumer staples outperformed. Consumer staples, previously hated, saw a striking turnaround. The pieces for this fear trade have been falling into place for some time, driven by risk-off sentiment rather than central bank positioning.
Source: Financial Times Markets · Summarized by HeadlinesBriefing