Wall Street's biggest trading desks spent weeks arguing that the stock-market rally would resume once the election was over. On Thursday, that call backfired spectacularly.Max Kettner, HSBC's Chief Multi-Asset Strategist, argues that the sharp selloff in AI and US equities does not yet point to a fundamental break in the trade. He explains why positioning and forced selling may be driving the volatility, and how he is thinking about AI valuations including why he'd be comfortable with an Anthropic IPO valuation below $1 trillion.
Well, let's dig into the market moves that we're seeing today on a significantly negative day for equities. We've got Max Kettner with us, HSBC's chief multi-asset strategist for more. Max, good morning. I wonder in all of the shakedowns that we've seen of AI related trades over the past couple of months, where you place what we're seeing over the past 24 hours? Is this a moment of reckoning or something much less dramatic?
No, I think it's a a sort of moment like we had uh if you guys remember the end of January 2018, the the blow up in all the inverse volt products. That feels pretty similar, right? We had obviously the news that you guys broke on on uh one of the hedge funds uh shutting part of their equity business, uh then the rumors coming, is there going to be more more than that? Um that feels very similar to what we had eight years ago, or nine years ago, almost now. Um remember back then, it was the smart beta product blowing up. It was all the inverse VIX ETNs and inverse VIX ETFs blowing up. And then people were also for a couple of days saying, right, which which, you know, how much AUM can can blow up? How systemic is this going to be? La la. So I think this is pretty similar to that. Um the only real difference this time around is is that obviously in the next two weeks we'll talk about the Anthropic IPO and and my my guess is as good as anyone else's, is it going to come? Is it not going to come going to come? What valuation? If it's a lower valuation, is that going to be read positively? Is it going to be read negatively? It's it's just anyone's guess. That's the the key difference I think to to 2018 now.
So Max, Bloomberg's Skyler Montgomery Coney has been writing this morning on the MLive blog that for at least for today, before we get to the Anthropic IPO, the selling is now the risk. And I mean, she says there's no fundamental point to this move. Do you agree with that?
Yeah, I mean, fundamentally it's not like anything's changed yesterday, right? What's changed yesterday was uh, oh my lord, we have forced selling now because funds are, it's not pods liquidating, it's now funds liquidating. And is that going to be the only one or is that just the first one? Fundamentals, I mean, we've we've stopped caring about fundamentals weeks ago, right? So, if you think about it like fundamentally, um even one of the oldest Nvidia chips, the B300, the the rental yield has been going parabolically higher in the last two months. If you had told me two months ago that rental yields for GPUs, even for the oldest ones are going parabolically higher. I mean, 1 million percent, I would not have told you, yeah, the trade is short semis. Really? It's it's it's so weird. So, you know, in terms of the timing, I don't quite understand why we why semis were ripping in August and in September. And likewise, I don't really understand what's happening right now. I get it that, you know, with the Democrats, maybe the the dynamic is slightly different, sure, but
Okay, well if this market's so hard to understand, what are you doing? How are you trading this? What's your advice to clients?
Um you look less at what is fundamentally correct, because that doesn't really matter, and you look more at what is the current narrative. You try to figure out what is the current narrative, and then you try to figure out what is the potential catalyst for that narrative to end and the potential timing. Right? So, think a month ago, this pretty much today a month ago was the high-end yield. Right? We had almost 535. Well, what? We're we're a good 50 basis points lower from here now. A month ago, when you look you guys look at the terminal and you plot those term frequency charts, so how many stories there are on things like government debt, it was genuinely off the charts. Like you have to change the scale. because people in September were just freaking out about fiscal sustainability, fiscal deficits, too much government debt and so and so on and so on. Whereas in reality, did did that really change within four weeks? Really? Like fiscal dynamics, like they change within four weeks? No, come on. Even the price action didn't didn't really fit, right? Because things like the 10-year auction, for example, right? a month ago was the best one in 23 years. Like surely, if you're worried about fiscal, you wouldn't have the best 10-year auction in more than two decades. But that was the narrative, right? So you're trying to figure out, okay, when is that narrative over? What's the next narrative? Now the narrative obviously is, AI is dead. AI cycle is dead. So we got to figure out has, number one, has it fundamentally really changed, which I don't think it has, right? Uh and that means what's the what's the next narrative? Is the next narrative really that I'm continuing to play broadening? Do I really want to buy consumer staples that have just ripped 20%? Do I want to buy a Costco that is exposed to like the lower end of the K just singling it out, but you can do Walmart, you can do Target, all of those have rallied 20% plus in the last five weeks. You know, staples are trading almost at 25 times earnings. Tech is trading at 17. Does that make sense? Of course it doesn't. Fundamentally makes no sense, but we got to figure out what is the catalyst for that. For me, the catalyst really is the Anthropic IPO. If you get that over the line, if you get it at a reasonable valuation, um then actually
What is what is a reasonable valuation for that?
I you know, obviously not two trillion. I would even be happy if it's a trillion or even below it, right? I don't think we need the headline, oh my god, it is a trillion dollar IPO because I think what's actually more important is the secondary. Right? Is because if we get a dynamic like we had with SpaceX that you get it on secondary and then uh stock rips for a couple of hours but then it dumps. in the current environment, you don't want to have that. So it might actually even be better if you have it a bit a bit lower than one and a half like somewhere between, I don't know, I don't know what it is. Like is it a bit below 1 trillion, a bit above a 1 trillion? I think that would probably be good good enough.
But if they delay again, does that become a bigger story?
I'm not sure. Look, I'll tell you what, 24 hours ago, I would have said, there's no way now. Come on, we've ripped and everything. Like, of course it's going ahead. Now I'm a bit, I don't know. I really don't know. Like the the point also is, like, we've just chatted about it offline, right? Like who knows if the Nasdaq isn't going to rip three, 4% by the end of today because yesterday really was the flushing out where there was indiscriminate selling. Look at Europe this morning, it's not like tech is driving the sell off, right? It's just everything including the defensives. So this feels much more like general broad-based flush out. You know, if in the next next couple hours and next week, Nasdaq rips 5% higher, cool, IPO's back on again.
Briefly, is there a haven trade here? You look at the UK, look at some of the European stories, or are we all locked into this AI story whether we like it or not?
You're either locked in with a correlation of one or a correlation of minus one. That's basically it. Unless you want to do like, you know, there is of course some stories like FTSE 250. I quite I am quite bullish about the UK because we've had so many positive economic surprises. So yeah, I like those ones are probably the unrelated ones, but they're obviously in terms of the size of the trade, way smaller. Um but if you look at the 10-year yield versus the Nasdaq, now in the last three months, it genuinely looks like it's the same line. So either people up until a month and a half ago have been saying, oh, AI and higher AI CAPEX means higher nominal growth, higher nominal growth means higher R star, that means the 10 year needs to go maybe even to 6% and now we say the entire opposite.
