The AI capex hangover turns into a full-scale deleveraging stampede

This tape is not a polite risk off. It is a forced exit.

You can feel it in the way the selling does not negotiate. It does not pause to ask what something is worth. It just asks who still has a bid, and then it leans on that bid until it disappears. When markets start trading like a margin clerk instead of a valuation committee, narratives stop mattering intraday and balance sheets start talking.

That is what Thursday looked like. Tech did not simply slide. It snowballed. Software was the first domino earlier in the week because that was where the premium lived, the cleanest narrative, the easiest multiple to defend, and the most crowded long when the market still believed AI would add revenue without subtracting relevance. The shockwave then behaved exactly as shockwaves do. It propagated. Chips were dragged in. Mega caps followed. Crypto was swept up. Metals were pulled under. What began as a sector rotation evolved into a cross-asset liquidation event.

The market is finally pricing the question it avoided all year. Not whether AI works, but who gets paid when it works. That is the uncomfortable part. AI is not only a tool for productivity. It is a tool that can erase toll booths. A lot of software has been charging rent on workflow. If the workflow becomes a commodity, the rent becomes a target. When investors stop arguing about next quarter and start arguing about the business model, multiples do not compress gently. They reprice like a trap door.

Investor psychology now appears to be the photographic negative of 2021. Back then, institutions were buying software with urgency at twenty-year valuation highs, convinced cloud economics were flawless, and zero rates were a permanent feature of the landscape. Today, those same institutions are selling software at twenty-five- to thirty-year valuation lows relative to semis, not because revenues vanished, but because they are tail hedging the risk that the business model itself could fade into obsolescence, as Lotus 1-2-3 once did.

Add a weak labour pulse and the selloff finds its accelerant. Challenger cuts surge, jobless claims creep higher, JOLTS rolls over. That mix does more than nick confidence. It quietly rewrites the fragile US recovery narrative that had been propped up by a steady run of positive economic surprise indices. Treasuries caught a bid, but not the celebratory kind. This was a stabilizer bid. A defensive bid. Two-year yields sank to the lows of the year, and the belly outperformed just enough to signal this was no isolated tech tantrum. It was a broader migration toward safety. When yields fall this fast, the market is not adjusting forecasts. It is pulling the fire alarm and heading for the cross asset exits, even if the smoke has not yet filled the room.

And then there is the part that institutional traders always respect more than headlines: positioning.

When Goldman Sachs prime book analysts are telling you nets are stretched, you do not need a new macro shock to create pain. You only need the price to move against the crowd. That is the cruel math of crowded winners. The unwind becomes the catalyst. Selling begets selling because the market is not clearing on fundamentals; it is clearing on risk limits. When systematic, fundamental long-short, and multi-strat books are all red in size on the same day, you are no longer watching discretionary investors rotate. You are watching the plumbing seize.

That is why the day felt so one way. Breadth collapsed. Only a thin slice of names stayed green. This is what a tape looks like when the index is a mask and the internals are coughing blood. The Nasdaq's loss of key moving averages matters less as a technical story and more as a behavioural trigger. Once those levels snap, the playbook shifts from buy dips to reduce exposure. The market stops being a staircase higher and becomes a high-speed elevator lower.

Momentum is a wonderful servant and a brutal master. On the way up, it feels like intelligence. On the way down, it feels like betrayal. However, it is the same force, just directed in the opposite direction.

Options told the same story with a different accent. The first meaningful signal was not the drop itself. It was the tail. The index options market began to price actual crash risk, not as a dramatic event, but as a distribution. Vol of vol perked up. Tails got bid. That is the market admitting that the range of outcomes is widening, which is another way of saying no one trusts their map anymore.

Now zoom out to the strangest part of this episode. The liquidation was not limited to equities. Precious metals and bitcoin both declined sharply, which is the classic signal that this is deleveraging, not ideology. If this were simply a growth scare, gold would normally catch a cleaner bid. Instead, it was thrown overboard in the same deleveraging storm.

Silver dropping about 19 percent overnight is not a normal move. That is a margin call move. Silver does not trade like that when investors are calmly rebalancing. It trades like that when somebody has to raise cash now. Gold flirted with $5000 and then got swatted as Asia opened, which matters because it tells you where the incremental price setter was yesterday

Across base and precious metals, Shanghai led a broad liquidation with no single clean catalyst. The timing points to positioning rather than panic. Ahead of Lunar New Year, derivatives desks rarely carry risk through a week-long shutdown, but exposure is usually trimmed methodically, not flattened this aggressively. Many had assumed speculative length had already been washed out on the first break below $4,500, making the follow-through more revealing. Yesterday's pressure may have been amplified by the previous day's post-close announcement of tighter SHFE margin limits, a subtle signal that regulatory tolerance contracts most rapidly when volatility rises. Together, it produced a familiar Asia-led flush where price discovery comes from forced reduction rather than fresh information.

Gold crushed at the Shanghai open

Yet the regional physical market had been outperforming, with India and China paying up for real units, while paper markets did their own bearishdance. The basis mattered. It still matters. The physical bid can be firm, which is thes steady underlying demand bid, and you can still get a paper flush if leverage is forced to unwind.

That is why I monitor holdings and flow. If ETF holdings barely budge while notional volume explodes, that is not a collapse in belief. That is a liquidation in speculative positioning. It is bullish in the medium term, even if it is volatile in the short term, because it indicates that the long-term hands are not the ones panicking. The weak hands are being removed with a crowbar.

Crypto was the purest expression of the same dynamic. Bitcoin taking a five-sigma-style hit relative to the last three years is not a change of mind. It is a change of margin. Liquidations are spiking, hundreds of thousands of traders are wiped out in a day, and total liquidations are in the billions. That is not a thoughtful reappraisal of digital scarcity. That is the leverage stack collapsing. The price action has the hallmarks of forced selling because it breaks every neat support line people wanted to believe in. Once the market starts trading like a liquidation ladder, ratios and trend lines become decorations.

So what is the through line? It is not that AI is dead. It is that the market is finally charging the AI bill to the right account.

For months, capital expenditure was treated as a heroic investment. Spend now, win later. But when growth cools at the margin and labour data softens, the market starts asking whether that capex is an engine or an anchor. If companies are spending substantial sums to build intelligence, investors will demand evidence that the spending yields durable pricing power, not merely a larger arms race. Otherwise, AI becomes a treadmill. Everyone runs faster, nobody gets ahead, and the only thing that grows is the electricity bill.

That is why the phrase from UBS, “unresolvable existential threat,” hits so hard. Not because it predicts extinction tomorrow, but because it reframes the debate. It shifts the conversation from earnings to relevance. From cyclical to structural. From a bad quarter to a broken moat. Markets can live with disappointment. They cannot live with doubt about the direction of travel.

And that is also why liquidity matters more than opinion right now. When liquidity evaporates at the futures level, price gapping becomes normal. Intraday swings get bigger. Risk managers tighten. Vol funds reduce. Macro books hesitate. Directional players back away because the cost of being wrong is now a cliff, not a bruise. If one-month gold breakevens are still north of $100 an ounce, it is telling you the option market is pricing a battlefield, not a garden. You do not load up on exposure on a battlefield unless you are filling an order.

(The 1-month gold breakeven is the implied one-month move in spot gold derived from 1-month at-the-money options.)

My read is simple. This is a cleanse, not a conclusion.

In the near term, the market needs volatility to ease back before real money and macro size can return with conviction. You cannot build positions on a trampoline. You need the surface to stop bouncing. Until then, rallies are likely to be short-covering and gamma-driven, not a new uptrend. The pain trade remains the unwind of crowded winners because the crowd is still large and exits remain narrow.

In the medium term, I am not bearish on the prospects of AI. I am bearish on the illusion that every AI-linked asset deserves a permanent valuation halo. The market is ripping off the costume. The survivors will be those who can convert capital expenditures into cash flow without commoditizing their product. The rest will discover that disruption does not occur only in old industries. It happens to whoever is priced as untouchable.

Thursday was the market, reminding everyone of the oldest rule on the desk. When the story gets crowded, the risk is not that you are wrong. The risk is that everyone tries to be right simultaneously, and there is insufficient liquidity for the whole crowd to exit through a single door.

Liquidity is evaporating from the U.S. equity market, and metals volatility is simply too high to ignore and hold any significant intraday length. The price action this week has not only been violent but also disorderly. Intraday swings in single stocks are no longer noise around a trend; they are the trend. That kind of tape breeds unease because it signals to investors that the market is clearing on urgency, not conviction.

When conditions look like this, large moves do not fade quickly. They propagate. As liquidity thins at the futures level, every order carries more impact and every stop becomes a catalyst. The market stops absorbing risk and starts transmitting it. That is how air pockets form. Not because everyone agrees on the direction, but because there is no longer enough depth to disagree safely.