If you made through last week alive, you did better than the “prodigy” Leopold Aschenbrenner, whose hedge fund, Situational Awareness, reportedly lost roughly more than 65% of its value after a collection of highly leveraged AI trades moved violently against it. The firm was forced to unwind much of its approximately multibillion dollar public stock portfolio,.
The crazy part? Citadel was able to take advantage of the forced selling just as several of the same AI stocks began rebounding. It was another reminder that leverage does not care how intelligent you are, how convincing your thesis sounds, or how much money investors have trusted you with. As smart as Leopold may have been…when positions become too large and too leveraged, the market can force you out at the worst possible moment (this is why those who beat the game long term are those who manage risk, not consistently take unnecessary risk).
The Broader Market & Other Major Events
That liquidation likely added fuel to the extreme volatility we saw across semiconductors, AI infrastructure and other crowded momentum trades. However, the broader market ultimately survived the week. The bigger focus was the FOMC meeting and Fed Chairman Kevin Warsh’s Press Conference. As expected, The Federal Reserve held interest rates steady, with 9 voting to hold rates steady, and three voting to raise rates. The thing that matters for markets is that nobody said anything about an interest rate cut, which is ultimately what investors wanted to hear.
The lack of timeline on a rate cut stems from the uncertainty around energy prices and lingering inflation. As much as President Trump urged Kevin Warsh to cut rates when he takes office, Warsh cannot budge because cutting rates right now would be a massive question mark. If The Fed’s inflation target is 2%, there’s a very low chance they’ll cut rates while inflation is still closer to 3%.
The Bond Market
The bond market seems to be doing Kevin Warsh’s job for him If even if the Fed doesn’t raise rates, long term Treasury yields react in real time to economic updates. The 30-year Treasury yield climbed above 5%, its highest level since 2007. Higher bond yields matter because they compete directly with stocks for investor capital. They also increase borrowing costs for businesses and consumers while putting pressure on high growth companies. If yields continue climbing, they could become one of the biggest headwinds for the market during the second half of the year. The fact that we haven’t sold off severely in reaction to the rising yields remains to be a phenomena, but the economy is in a different place right now than it was two decades ago.
Japanese Yen & Intervention
Another major story largely flying under the radar was Japan's intervention in the currency market. After the yen fell to its weakest level in decades, Japanese authorities stepped in to buy yen and sell dollars in an effort to stabilize the currency. The move briefly strengthened the yen and helped calm global markets. A stronger yen can also reduce the odds of another violent unwind in the popular "yen carry trade," which has been a source of volatility for global equities over the past year. This is something that usually goes ignored by investors, but is one of the most influential topics.
First Week of the New Month
Heading into August, the biggest focus to kick off the new month is the labor market. Multiple reports will be released this week, updating us on the health of the U.S. job market, which has been under question in recent months. Unemployment is expected to slightly gain from 4.2% to 4.3% as layoffs and slowing hiring continue to impact the economy. Ironically enough, a slowing labor market is welcomed by investors because it encourages rate cuts, but if it slows far more than expected, then it can become a recession problem…and with last quarter’s GDP reading only showing 1.5%, recession fears could become a problem.