The AI locomotive doesn’t brake for politics

Markets are once again proving that narrative is everything — and right now, that narrative is silicon-fueled and seemingly unstoppable. It’s as if the whole financial world has fallen under the spell of the AI locomotive — an iron beast thundering through political potholes and fiscal fog, flattening everything from Washington gridlock to French cabinet drama to Japan’s political earthquake beneath its treads.

The S&P 500, now clocking seven straight daily gains, is running like a machine with no governor. AMD’s explosive 25% leap on its OpenAI deal didn’t just light another flare on the tech highway; it lit the entire sky. One can almost hear the roar from Santa Clara to Seattle — a digital arms race in full flight, each chip deal turning into a new verse in the gospel of artificial intelligence. Nvidia might have taken a breather, but the broader semiconductor complex surged nearly 4%, a reminder that the AI trade isn’t a theme anymore — it’s the bloodstream of this market.

It’s not just tech. Tesla added its own voltage, teasing a fresh product as if Elon were tossing a spark plug into a room full of gasoline traders. And gold — that ancient counterweight to modern euphoria — is eyeing $4,000 like it’s the next natural number in a Fibonacci sequence of disbelief. Bitcoin, the digital heir to both greed and fear, is tagging along too, rewriting the speculative playbook that used to separate hedgers from hopers. Even oil managed a modest gain as OPEC+’s “measured” increase reminded traders that scarcity still has a vote in this new world order.

The message is almost comic in its clarity: politics don’t matter when the machine is printing gains. Government shutdown? “So what.” French turmoil? “Next headline.” Japan’s election shock? “We’ll take the stimulus, thank you very much.” The market’s moral compass, for now, points only toward momentum.

And momentum, dear reader, is the oxygen of bull markets. The traders on the Street aren’t debating bubbles anymore — they’re joking about how many times the word “bubble” trends on Google. If irony were a tradable asset, we’d be rich. “A bubble in bubble fears” is how one strategist framed it, and it fits perfectly. When the masses start shouting “top,” the professionals quietly double their exposure.

Of course, we’ve seen this movie before — 1999, Act II, but with better cash flow and cloud infrastructure. Back then, the exuberance was irrational; today, it’s rationalized. AI spending isn’t fueled by debt this time, but by monstrous free cash flow machines that can fund their own revolutions. Nvidia’s $100 billion OpenAI investment isn’t madness; it’s empire-building. Capital expenditure has become the new conquest.

That’s why this bull feels more self-sustaining than its 1990s ancestor. The Magnificent Seven aren’t vaporware firms chasing clicks — they’re cash geysers. Goldman, Citi, and Morgan Stanley all say the same thing in their own language: the earnings season ahead will justify the euphoria. With Q3 numbers expected to beat across the board, traders smell a self-reinforcing rally: strong earnings beget stronger flows, which beget higher multiples, which beget the same headlines that pull in the next round of believers.

We are now well into the feedback loop stage of the bull — the kind that feeds off its own reflection. Barclays’ equity timing indicator shows an 82% probability of further gains in the next two months. When even the quants start blessing the narrative, you know liquidity has found its religion.

But amid this unrelenting AI parade, the FX market provided a brutal subplot. Japan, fresh off the surprise coronation of hard-line conservative Sanae Takaichi as its next prime minister, became ground zero for a bloodbath in the consensus long-yen trade. Wall Street’s most crowded macro idea — short dollar, long yen — just met the kind of political surprise that turns P&L sheets into crime scenes.

The irony? Takaichi’s pro-stimulus leanings and her vague stance on inflation were well known, but no one thought she’d actually win. Now she has — and in the blink of an eye, USDJPY has ripped higher, vol skew has flipped bearish, and traders who once swore Japan’s tightening cycle was imminent are racing for the exits. Every major house — Goldman, Deutsche, UBS — scrambled to close their yen longs. The same desks that were sermonizing about yen strength weeks ago are now writing mea culpas faster than they can update their models.

It’s the oldest rhythm in trading: conviction, crowding, and capitulation. The yen has now become a casualty of narrative whiplash — policy uncertainty meets political novelty. And the irony is almost poetic. Japan’s exporters might be the only ones smiling, their equity valuations swelling as their currency bleeds. Old Faithful — crush the yen, boost the Nikkei — rides again.

Meanwhile, the S&P continues to hum near 6,750, bonds wobble under the weight of fiscal fatigue, and the AI caravan pushes deeper into the desert — headlights bright, mirrors useless. Traders can talk all they want about stretched valuations, but markets don’t die of altitude; they die of exhaustion. For now, there’s no sign of either.

Until then, we trade what’s in front of us — an AI supercycle that feeds on its own hype, a yen that’s lost its halo, and a marketplace that’s decided reality can wait until Q4 earnings. The show goes on, and as always in these late-cycle carnivals, everyone swears they’ll know when to leave the tent.

Short term Yen view

Short-term yen view — predictably( as I stated yesterday during the height of buying fever), the USDJPY move has lost a bit of steam through the U.S. afternoon, a rhythm any seasoned FX hand will recognize. It’s the classic pattern: after a high-momentum run, the pair softens as positioning flattens, some short-term profit-taking kicks in, and liquidity thins in the NY afternoon. Still, there’s more nuance in today’s fade than just technical digestion.

Traders on Tokyo desks have been swapping notes that Sanae Takaichi, Japan’s newly crowned LDP leader and soon-to-be prime minister, is preparing to staff her cabinet with old-guard fiscal veterans — a signal she may not be charging headlong into a “Liz Truss moment.” That hint of restraint — fiscal caution dressed in conservative pragmatism — has tempered the earlier knee-jerk enthusiasm for a pure pro-stimulus Japan trade.

For now, the FX market seems content to pause and reassess until we see both the final cabinet lineup and any initial policy pronouncements. And looming in the background, the U.S. Treasury’s currency team will undoubtedly have something to say if USDJPY starts looking like a one-way street again.

So while this is not the time to strap on a big reversion trade, there may be tactical opportunities to fade the edges — on range compression plays as Tokyo’s new political order clarifies itself. Think of it less as the start of a full reversal and more as a cooling jet stream before the next macro crosswind.