Rotational Pressure Prevents Breakout Momentum From Developing
Fallout from Meta’s Muse is hitting the financial sector.
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The indexes are flat to start Wednesday with oil and bonds steady. It is a quiet open ahead of two events that could set the tone for the rest of the week: the Trump-Xi meeting Thursday and several Fed speakers today.
The question I am pondering is whether this market can generate sustained momentum given how much rotational pressure is in play. Monday the mega-caps broke out and led. Tuesday the money rotated into small-caps and biotech while the Mag 7 rested and the financials broke down.
Every session the leadership changes, and leadership that changes every day is not leadership. It is churn.
A Correction on the Financials
Tuesday night, I attributed the weakness in the financials to the flat yield curve and the 10-year at 5%. That was part of it, but the far more important issue was Meta’s (META) Muse application. Charles Schwab (SCHW) and LPL Financial (LPLA) each fell more than 6%, roughly double the drop in the big banks, and a flat yield curve was not the driver there.
The fear for these financial services firms is disruption caused by Muse. A large part of what a firm like Schwab earns comes from customers not bothering to move their money. I’ve written quite a bit about how the main goal of Wall Street is to gather assets rather than produce returns. Assets under management is what gives Wall Street its power and profits.
Cash often sits in low-yield accounts and clients stay in default financial products because nobody shops around, since switching is a hassle. An AI agent that can scan the market, see that your cash is earning nothing while a money fund pays more, and move it for you with no effort ends that inertia. Muse launched September 8 and was downloaded more than 900,000 times in six days, which is what triggered some general anxiety into a real selloff.
I will have more on this at midday, because it is a bigger theme than one day of financials weakness. It is the AI trade moving into a new phase, and there are strong parallels to the internet in 2000.
For Wednesday morning, the point is that Tuesday’s financials drop was not a rate story. It was AI impacting another industry, and that fits the theme about the sorting of winners and losers I have been writing about all year.
The Fed Is Still In the Picture
The rate issue the market recovered from last week has not gone anywhere, and a Fed speaker made that clear on Tuesday. Richmond Fed President Tom Barkin said the supply shocks from tariffs and the Middle East war are not wearing off as fast as hoped, which leaves the door open for more hikes. His line was that there is a risk that elevated inflation could affect future inflation, and that he hears it in his district.
The most important financial theme in the last few years that is not discussed much is that supply-driven inflation gets embedded rather than fades. Even if inflation goes to zero that does not mean that prices will decline. It just means that they stop going up.
Four more Fed presidents speak Wednesday, from New York, Richmond, Cleveland, and Philadelphia, so there will be more of this. Last week’s hike was not a one-and-done situation, and the market is going to be reminded of that repeatedly.
The Week’s Real Events
The calendar is light on data but heavy on events that matter. The flash PMI comes this morning, with manufacturing expected to tick up and services to slip. Durable goods and Michigan sentiment hit on Friday, and the sentiment number is expected to stay at a depressed 47.8 with inflation expectations at 4.6%, neither of which fits the idea that the worst is over.
The main event is Thursday, when President Trump hosts Chinese President Xi. Tariffs and China’s rare-earth minerals are the focus, and the rare earths matter directly to the AI buildout. A good outcome helps the AI names and a poor one hurts them, so that meeting has a binary outcome that will impact AI infrastructure.
Game Plan
I am staying cautious, though I did add a few things Tuesday. Traders have been caught off guard by all the shifts lately and are struggling to position, which is part of why the rotation has been this violent. When nobody knows where the leadership is, money sloshes from group to group and nothing holds.
My concern remains that negative seasonality has not had its say yet. We are in the historically weak stretch, the Fed is still hawkish, and the events this week could break either way.
I would rather let the rotation sort itself out and keep my capital ready than force a position into a market that changes its mind every session. I’ll be looking for opportunities but I’m not going to force anything.
At the time of publication, Rev Shark had no positions in any securities mentioned.
