Stocks hit as AI CEOs call for slowdown in AI development - Newsquawk US Market Wrap

• SNAPSHOT: Equities down, Treasuries up, Crude up, Dollar up, Gold down.
• REAR VIEW: AI bosses call for a slowdown in the pace of its development; Cooler-than-expected Canadian inflation; Crucial Saudi oil pipeline hit in strikes will be mostly out of service for several weeks; Trump said Ukraine and Russia agreed not to hit energy targets; US seeks "Step-by-Step" agreement with Iran; Iran-Gulf nations meeting postponed.
• COMING UP: Data: Chinese Activity Data (Aug), UK Jobs/Wages (Jul), French/Spanish Inflation Final (Aug), German/EU ZEW Economic Sentiment Index (Sep), US ADP Employment Change Weekly Speakers: ECB's Cipollone Supply: Japan, UK, Germany, US

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MARKET WRAP

Stocks were sold on Monday, albeit finishing well off earlier lows, with weakness primarily driven by chip and memory names after a group of prominent AI CEOs, including those from OpenAI, xAI and Anthropic, called for a slowdown in the pace of AI development amid safety concerns.

The majority of sectors finished lower, although Communication Services, Health Care and Consumer Staples outperformed. The AI developments weighed heavily on semiconductor and memory names given their significant exposure to the AI buildout, while cybersecurity names such as CrowdStrike (CRWD) and Palo Alto Networks (PANW) rallied. Software names also outperformed as concerns over increasingly advanced AI replacing existing software services eased.

Elsewhere, Financials came under pressure after Bank of America (BAC), speaking at the Barclays conference, warned that sales and trading revenue is expected to be roughly flat Y/Y. Citi (C), however, pared earlier losses after guiding to low-single-digit Y/Y growth in investment banking revenue and mid-single-digit growth in markets revenue.

Crude prices settled higher but notably off earlier peaks. Oil initially rallied after the Iran-Gulf nations meeting was postponed and Saudi Arabia's East-West pipeline was shut down, with the pipeline expected to remain mostly out of service for several weeks. However, benchmarks pared gains on more constructive geopolitical headlines after President Trump said Ukraine and Russia had agreed not to strike each other's energy infrastructure and that Iran wants to make a deal, while ILNA, citing Pakistani sources, reported that the US is seeking a step-by-step agreement with Iran.

As oil retreated from its highs, Treasuries moved off their lows, with the long end ultimately rallying and the curve flattening. The AI developments may also have provided some support further out the curve, with a slowdown in AI development potentially reducing CapEx requirements and, consequently, corporate debt issuance to fund the AI buildout.

In FX, the Dollar rallied amid the risk-off environment, while the Antipodeans, Yen and Euro lagged. Gold tumbled but finished off its lows, remaining below USD 4,300/oz. Attention now turns firmly to Wednesday's FOMC decision, where expectations for a rate hike have continued to build. A Reuters poll conducted after Friday's CPI report found 85% of forecasters expect a 25bp hike, while money markets assign around a 90% probability to such a move.

FIXED INCOME

T-NOTE FUTURES (Z6) SETTLED 2 TICKS HIGHER AT 106-05+

Yield curve flattens as oil pares early gains while AI CEOs call for slowdown in AI development. At settlement, 2-year +0.7bps at 4.637%, 3-year +1.0bps at 4.731%, 5-year unchanged at 4.788%, 7-year -0.5bps at 4.869%, 10-year -1.0bps at 4.959%, 20-year -2.2bps at 5.367%, 30-year -2.9bps at 5.327%.

THE DAY: The Treasury yield curve flattened on Monday, with earlier losses reversing as oil pared from its highs, while participants also weighed the potential implications of a slowdown in AI development for the bond market. Some technical trading may have also been a factor after the 10-year yield briefly rose above 5.00%, for the first time since 2023.

Oil was initially supported after the Iran-Gulf nations meeting was postponed and Saudi Arabia's East-West pipeline was shut down, with the crucial pipeline expected to remain mostly out of service for several weeks while repairs are carried out. However, a series of more constructive geopolitical developments subsequently saw crude retreat from its peaks, coinciding with Treasuries moving higher. US President Trump announced that Ukraine and Russia had agreed not to strike each other's energy infrastructure, before later saying that Iran also wants to make a deal and that the US is open to the concept. Meanwhile, ILNA, citing Pakistani sources, reported that the US is seeking a step-by-step agreement with Iran.

As oil reversed from its highs, Treasuries moved off their lows and the long end ultimately rallied on the session. Another potential factor was the focus on calls for a slowdown in AI deployment from several prominent AI CEOs, including OpenAI's Altman, xAI's Musk and Anthropic's Amodei. The developments weighed heavily on semiconductor and memory names, but also have potential implications for the bond market. A material slowdown in AI development could reduce the enormous CapEx requirements associated with the AI buildout and, in turn, reduce the need for companies to tap debt markets to fund that investment. Given elevated corporate issuance to fund AI-related CapEx has been one source of upward pressure on yields this year, expectations for reduced future issuance may have provided some support to Treasuries, particularly further out the curve.

At the front end, however, yields remained under upward pressure as expectations for a Fed hike on Wednesday continued to build. An updated Reuters poll found that 85% of forecasters now expect the Fed to hike by 25bps, versus the previous poll which showed a consensus for rates to remain unchanged. Money markets are assigning around a 90% probability of a hike this week, with another hike fully priced by year-end and almost two further hikes priced through 2027.

SUPPLY

Notes

• US to sell USD 13bln of 20yr bonds on September 15th; to settle on Sept. 18th; to sell USD 19bln of 10yr TIPS on Sept. 17th; to settle on Sept. 30th

Bills

• US to sell USD 92bln of 13-wk bills and USD 79bln of 26-wk bills on Sept. 14th, to sell USD 75bln of 6-wk bills on Sept. 15th.

STIRS / OPERATIONS

• Fed Hike Pricing via CME FedWatch: Sept 23.2bps (prev. 21.6bps), Dec 50.7bps (prev. 48.5bps)
• EFFR at 3.63% (prev. 3.63%), volumes at USD 105bln (prev. USD 108bln) on September 11th
• SOFR at 3.62% (prev. 3.62%), volumes at USD 2.867tln (prev. USD 2.921tln) on September 11th
• NY Fed RRP op demand at 1.42bln (prev. 5.25bln) across 4 counterparties (prev. 3) on September 14th
• NY Fed plans to conduct approximately USD 15.6bln in reinvestment purchases (prev. USD 17.0bln) and no reserve management purchases over the noted monthly period (Sept 15th - Oct 14th).

CRUDE

WTI (V6) SETTLED USD 1.34 HIGHER AT 101.39/BBL; BRENT (X6) SETTLED USD 1.07 HIGHER AT 105.68/BBL

The crude complex started the week on the front foot, albeit settling around session lows. At the reopening of trade, benchmarks gapped higher, supported by the postponement of the Iran-Gulf nations meeting and the shutdown of Saudi Arabia's East-West pipeline. Further upside was seen following reports that the IRGC shot down a US drone and after comments from the Iranian Foreign Ministry, before crude caught another bid after AP reported that the crucial Saudi pipeline will remain mostly out of service for several weeks while repairs are carried out. Against this backdrop, WTI and Brent rose to peaks of USD 104.95/bbl and USD 109.80/bbl, respectively. However, several more constructive geopolitical developments emerged through the US afternoon, helping the energy complex pare some of its earlier gains. Firstly, Trump said Ukraine and Russia had agreed not to strike each other's energy infrastructure. Secondly, Trump remarked that Iran wants to make a deal "quickly and badly", adding that he would determine whether the US is open to the concept, although Iranian sources quickly pushed back on the remarks. Finally, ILNA, citing Pakistani sources, reported that the US is seeking a "step-by-step" agreement with Iran. Collectively, the more constructive geopolitical headlines helped push WTI and Brent back towards session lows of USD 100.79/bbl and USD 105.17/bbl, respectively, with benchmarks settling around these levels.

EQUITIES

CLOSES: SPX -0.47% at 7,621, NDX -0.82% at 29,127, DJI -0.31% at 52,412, RUT -0.41% at 2,892.

SECTORS: Communication Services +2.78%, Health +1.36%, Consumer Staples +1.26%, Financials -0.36%, Consumer Discretionary -0.51%, Real Estate -0.80%, Energy -0.91%, Materials -1.05%, Utilities -1.36%, Industrials -1.47%, Technology -1.68%.

EUROPEAN CLOSES: Euro Stoxx 50 -0.79% at 6,275, DAX -0.60% at 25,415, CAC 40 -0.76% at 8,118, FTSE 100 +0.44% at 10,698, SMI +0.75% at 13,879, FTSE MIB -1.68% at 51,629, IBEX 35 -1.38% at 19,566, PSI -1.52% at 9,380, AEX -0.04% at 1,098.

STOCK SPECIFICS:

• AI-linked stocks: Pressured after bosses of AI companies called for a slowdown in the pace of AI development.
• Oracle (ORCL) Executive Chair Larry Ellison cancelled his plan to sell USD 7.5bln of Oracle shares.
• The Baldwin Insurance Group (BWIN) is going private in a USD 7.7bln deal with Sequence Holdings and Michael Dell's family office.
• The Elmet Group (ELMT) gets USD 450mln DoW investment and up to USD 2bln Defense Logistics Agency contract.
• Affirm Holdings (AFRM) was upgraded at Wolfe Research.
• Bank of America (BAC) CEO said Co. will see USD 1.6-1.8bln in Q3 Investment Banking fees; sales and trading revenue expeced roughly flat Y/Y.
• Citigroup (C) expects FY ROTCE to finish a bit above the 11% top end of its guidance range. IB revenue expected to rise low single digits while market revenue is tracking up mid-single digits Y/Y.

FX

The Dollar Index was firmer to start the week amid the broad-based risk-off trade given the wider AI development concerns, although risk sentiment did improve throughout the duration of the US session. Dollar-related news flow was fairly sparse on Monday, given the aforementioned AI worries, but also ahead of the pivotal FOMC confab on Wednesday; the central bank is expected to hike rates by 25bps, with money markets assigning around a 90% probability to a 25bps rate hike. In the latest Reuters poll, 15% expect the Fed to hold rates steady, so it is no certainty about what they shall ultimately decide what to do.

G10 FX was lower across the board against the Greenback. Antipodeans, JPY, and EUR were the laggards, while the Swissy and Pound were the relative outperformers, albeit still seeing slight losses vs. the Dollar. The Loonie saw pressure following the region’s inflation metrics, as headline Y/Y printed in-line with expectations, though Core M/M and Headline M/M were a touch cooler.

Elsewhere, currency-specifics were light to start the week as risk events await, although overnight there were reports that the PBoC plans to expand the yuan offshore market and will consider expanding the central bank's macroprudential and financial stability roles; it added that it will innovate macroprudential policy tools and support steady economic recovery and growth.