The liquidity rocket ignites — Yet the engine room’s still narrow

The engine room’s still narrow

Markets are flying again, but it’s not the kind of ascent that makes traders comfortable. The S&P 500 has closed at a record high for the second straight day, but the climb feels more like a rocket than a rally — a straight, narrow burst of power driven by a handful of names and an extraordinary belief in what AI and liquidity can still deliver. The screens are glowing green, but if you’ve been around long enough, you know this sort of tape doesn’t breathe — it hums, it whirs, it overheats.

Nvidia led the charge once more, rising 5% after a string of announcements that turned its annual conference into a full-blown AI festival. Its billion-dollar stake in Nokia and partnerships stretching from Palantir to Google Cloud sent traders scrambling to reprice the entire semiconductor complex. Jensen Huang was the ringmaster, declaring that AI had entered its “inflection point” — a line that might as well have been written by the market itself. Microsoft and Apple joined the parade, each brushing against the $4 trillion mark, while the rest of the Mag 7 sat like heavyweights waiting for their bell rings later this week. Together, they now account for roughly one-quarter of the entire S&P 500 — proof that in this market, gravity is a rumor and concentration a lifestyle.

Still, scratch beneath the surface, and you’ll find something less stable. Over 350 names in the S&P finished the day in the red. Breadth has gone missing. This is a rally being pulled uphill by a handful of draft horses while the rest of the herd grazes in place. Nvidia alone contributed two-thirds of the index’s gain today — a stat that should make even the most bullish portfolio manager pause. When leadership narrows this sharply, what you’re really watching is an engine room running hot with very few hands on the throttle.

And yet, the fuel lines are wide open. The Fed is back in easing mode — tomorrow’s rate cut is already in the bag — and traders are sniffing for any hint that Chair Powell might accelerate the timeline or end QT ahead of schedule. Add to that the return of corporate buybacks, seasonal inflows, and a Fed put that’s as alive as ever, and it’s no wonder liquidity is pushing through every crack. Investors aren’t trading on growth data anymore; they’re trading on flow. The money’s moving, and in this market, that’s all that matters.

But today’s rally had another, more specific accelerant — one that came not from AI or policy, but from trade diplomacy. . Beyond the AI fireworks and central-bank fuel, one trade headline pulled a wider canvas into view: the WSJ reported that Washington is prepared to roll back a slice of tariffs on Chinese goods—specifically the 20 % fentanyl-related duty—if Beijing tightens controls on precursor chemicals used to make the drug. That may sound like a narrow eddy in the grand trade war ocean, but for traders, it’s a wind change. If U.S. tariffs fall towards 10 %, it would bring China’s average import duty down from ~55 % to ~45 %—making Chinese-made goods more competitive and reflecting a looser trade regime than assumed.

In market language, the trade risk treadmill just slowed. The prospect of a one-year truce, not a final resolution, nonetheless removes a structural overhang. And when one of the largest macro drags eases—tariffs, in this case—the pathway for risk assets broadens. Hence, the stabilizing mood: risk-on is being reinforced not just by liquidity and tech momentum, but by actual geopolitics moving into calmer territory.

Indeed, the geopolitical backdrop has shifted from storm clouds to cautious blue skies. Tariffs will ease, fentanyl-linked export rules will tighten, and Beijing will unlock some market access. It’s diplomacy by relief valve: not enough to fix anything, but enough to let the pressure out. Trump gets his headlines; Xi gets his stability. For traders, it’s one less thing to hedge.

But if this rally is a ship, it’s one that’s gliding fast on a very thin keel. The market’s depth is shallow, volatility is creeping higher even as prices rise, and options desks are showing that traders are dumping puts and chasing calls — the most aggressive upside positioning since Trump’s election rally in 2024. It’s momentum stacked on faith, belief priced like certainty. The AI trade, for now, isn’t a bubble; it’s still in its build-out phase — the digital infrastructure equivalent of 1950s highway spending. But like every great build-out before it, it’s powered less by certainty than by faith — faith that the rivers of cheap money keep flowing and the math eventually catches up to the dream.

Tomorrow brings the next test. The Fed will deliver its cut, the big five will report earnings, and traders will decide whether this melt-up has another leg or whether the altitude starts to bite. For now, the rocket is lit, the sky looks clear, and the thrust is pure liquidity. But beneath that roar, the engine room still feels perilously narrow — and every veteran on the desk knows what happens when a rally runs on belief longer than breadth.

The trade catalyst: U.S. to roll back some China tariffs

But the real accelerant behind last night’s melt-up wasn’t just AI exuberance or monetary easing — it was the quiet hum of diplomacy. According to The Wall Street Journal, the U.S. is preparing to roll back part of its tariff regime on Chinese goods in exchange for Beijing tightening controls on precursor chemicals used to make fentanyl. The proposal would cut the 20% fentanyl-related tariff on Chinese exports to about 10%, effectively lowering the average tariff on Chinese goods from 55% to 45% — the sharpest repricing of U.S.–China trade costs in years.

That shift carries serious macro weight. A 10% cut may sound modest, but in relative trade terms it levels the playing field: it brings Chinese tariffs closer to those faced by other partners like India and Brazil and reduces the incentive for Chinese manufacturers to route goods through Southeast Asia to dodge levies. The framework also includes a freeze on new export restrictions, reciprocal reductions in port fees, and renewed commitments from Beijing to purchase U.S. soybeans — a political and economic sweetener for America’s farm belt.

Perhaps most significantly, China is expected to delay its new rare-earth export controls, which had threatened to choke off global supply chains for EVs, semiconductors, and defense materials. That deferral, confirmed by Treasury Secretary Bessent, effectively takes Trump’s threatened 100% blanket tariff on Chinese goods off the table — a massive de-escalation signal to global markets. Both sides have also agreed to pause additional trade actions deemed hostile, including potential tech-export bans and new security restrictions.

Chinese Vice Commerce Minister Li Chenggang called the talks a “preliminary consensus,” suggesting both capitals are eager to lock in a one-year truce. It’s a practical détente — not a friendship pact, but a chance to stop the bleeding. FBI Director Kash Patel is even set to travel to Beijing to discuss fentanyl enforcement, underscoring how deeply this deal intertwines economic and security agendas.

For traders, the takeaway is clear: the tariff war is cooling, not ending — and that alone is enough to reignite global risk appetite. By lowering the average tariff barrier, the deal softens inflation pressures, improves trade flow visibility, and removes the tail risk of another tariff spiral heading into year-end. In a market already primed with liquidity, that’s the kind of policy spark that turns a steady rally into a vertical melt-up.

Trader’s take

Every rally begins with belief, but this one runs on choreography — the Fed easing, Trump talking détente, and the AI giants keeping the lights on. It’s a beautiful illusion while it lasts: liquidity as rocket fuel, diplomacy as tailwind, and hope as oxygen. And right now, that hope is unopposed — the data’s gone dark, the shutdown’s silenced the usual noise, and traders are flying blind through clear skies. With no gravity in the form of hard numbers, the market floats on narrative alone, a melt-up powered by faith and the absence of friction. But every pilot knows the higher you climb on thin air, the more delicate the controls become.