AMD Up 2.19 Per Cent a Day After the Slow-Down Selling: What Did Monday Actually Reprice?

The indices closed lower for a second day on Tuesday, $S&P 500(.SPX)$ down 0.45 per cent at 7,585.73, the $NASDAQ(.IXIC)$ Composite down 0.78 per cent at 25,981.57 and the $Dow Jones(.DJI)$ down 0.63 per cent at 52,093.11. The reason for the fall, though, was not the same one as Monday's. On Monday the market was pricing what four executives had said, which is something that has not happened yet; on Tuesday two things had already produced a result — a Senate motion failed, and the 10-year Treasury yield reached a level it had not touched in nineteen years.

The heaviest fall of the day was not in chips but in $Circle Internet Corp.(CRCL)$, which closed 11.41 per cent lower at US$86.30. The Senate voted that day on the procedural motion on the CLARITY Act, and the count was 50 in favour to 49 against, well short of the 60 needed to move it forward. Voting against were all the Democrats plus four Republican senators: Collins, Hawley, Moran and Tillis. Several of the Democrats who had negotiated the bill — Gillibrand, Warner, Booker and Warnock — voted against it this time as well. Tillis's vote was a procedural arrangement, on which the Senate majority leader, John Thune, filed a motion to reconsider, so the bill itself is not formally dead; the window for moving it any further this year has largely closed.

Circle fell harder than its peers because of the way its revenue is built. Of US$701 million of revenue in its most recent quarter, US$667 million came from interest on reserve assets, more than nine-tenths of the total. One clause in the bill restricts stablecoin issuers from paying yield to holders: pass it and Circle's interest income has legal protection; leave it unpassed and the company keeps competing for that money against banks and exchanges with no written rule in place. The sell side marked it down the same day, Morgan Stanley cutting the stock to Underweight and its price target to US$38 from US$106, and Goldman Sachs rating it Neutral with a target of US$92. Other crypto-linked shares fell less, with Coinbase, Strategy and Robinhood closing between 3 per cent and 9 per cent lower.

The 10-year Treasury yield reached 5.041 per cent during Tuesday's session, its highest since 2007, before easing back to around 5.01 per cent late in the day. On Monday it had got as far as 5.014 per cent, just short of that 2007 mark; on Tuesday it got there. That was a fifth consecutive session of rising yields.

Three things were doing the pushing, oil the most direct of them: the Saudi east-west pipeline is still shut and Brent settled at around US$109 a barrel, while Ukraine denied that a deal had been reached with Russia to stop attacks on energy infrastructure, so there is no near-term easing in sight on supply. Wednesday's rate decision is the second, with the Federal Open Market Committee starting its meeting on Tuesday and the market putting the odds of a 25 basis point rise at around 92 per cent; if it happens it will be the first increase since July 2023. The third sits at the long end itself: a US$13 billion sale of 20-year bonds on Tuesday went badly and long-dated prices fell further, while AI companies have issued so much debt this year that they have taken up the room primary dealers have to absorb long-dated bonds, leaving new issues harder to place.

On Monday the market was arguing about whether AI should slow down, which has not happened yet; on Tuesday the market was paying interest on the money AI has already borrowed, which has. Several of the day's larger fallers were exactly the companies building out compute on borrowed money — $Alphabet(GOOG)$ closed 1.24 per cent lower, $Microsoft(MSFT)$ about 1.6 per cent lower and $Amazon.com(AMZN)$ about 2 per cent lower. Part of the money that builds data centres comes from the bond market, and the price the bond market sets feeds back into these companies' discount rates. So rates and AI are not two unrelated things; there is just one step in between.

The chips sold on Monday's "it will slow down" case were partly bought back on Tuesday. $Advanced Micro Devices(AMD)$ closed 2.19 per cent higher at US$504.20, $Qualcomm(QCOM)$ more than 4 per cent higher and $Coherent(COHR)$rent nearly 2 per cent higher. None of the three released anything new between Monday and Tuesday, so the difference between the two days can only be put down to sentiment — which is to say that part of Monday's fall was not a repricing.

Memory did not follow: $Western Digital(WDC)$ and $Seagate Technology PLC(STX)$ closed between 4 per cent and 5 per cent lower, $SanDisk Corp.(SNDK)$ 1.36 per cent lower at US$1,530.89 and $SK hynix(SKHY)$ 0.46 per cent lower at US$174.83; $Micron Technology(MU)$ closed 0.39 per cent higher at US$927.60, the only one in the group to finish up. Everything that took part of Monday back was outside memory, which says the market had no answer by Tuesday to Monday's question of whether the price rises can continue.

$Oracle(ORCL)$ closed 3.07 per cent lower at US$140.35, down for a fourth session since its results, with the same cash arithmetic still weighing on it: turning about US$664 billion of remaining performance obligations into revenue means building the capacity first, the gap is borrowed, and on Tuesday borrowing got dearer again. Wednesday afternoon's rate decision will produce a definite number, with the dot plot and the chair's press conference after it. Monday the market priced an essay, Tuesday it priced a vote and a yield curve, and what it has to price on Wednesday is harder than either.

The above is personal analysis, not investment advice.

💬 【Talking Point】

Chips sold on Monday's slow-down case came back on Tuesday, with $Advanced Micro Devices(AMD)$ closing 2.19 per cent higher and Qualcomm more than 4 per cent higher, while memory stayed split — Western Digital and Seagate between 4 per cent and 5 per cent lower, Micron 0.39 per cent higher. What do you think Monday's fall actually repriced?

💰 【Bounty】

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