Nomura: Bond short squeeze and AI selloff trigger cross-asset 'reverse dispersion' rotation, with capital flowing into value stocks and small-cap stocks

According to reports from Zhihu Finance APP, Nomura strategist Charlie McElligott stated that the fading of cross-asset traditional momentum is igniting a round of "reverse dispersion" gains across global markets—a squeeze on short bond positions together with negative catalysts in the AI sector have triggered a broad rotation of capital into underweighted value and small-cap stocks.

In a report on Tuesday, McElligott wrote that momentum factor unwinding was triggered by factors perceived as negative AI catalysts. Traditional AI positions were "humbled" due to concerns over Anthropic's annualized recurring revenue (ARR) trajectory, questions about the sustainability of CoreWeave (CRWV.US) and new cloud service providers (neocloud), as well as rising financing costs.

The weak IPO performance of new cloud companies in South Korea intensified this sell-off, and a wider reduction of gross exposure further fueled the trend—defensive sectors and economically sensitive cyclical value stocks with existing shorts and underweight positions outperformed popular long positions.

McElligott pointed out that this reversal began with crowded bond shorts being squeezed: a decline in US Treasury yields started to "awaken the potential for 'reversal' across various assets, from 'anti-dollar' forex to small-cap/value stocks (anything non-AI related)." Reports of possible progress on an Iran deal added further impetus, pushing energy prices lower and bonds higher—fitting the "Trump wants a deal before midterms" scenario that McElligott described.

The report noted that amid the impact of de-grossing, equity net exposure among leveraged funds has fallen to one-year, three-year, and five-year lows. Meanwhile, buy-side investors appear reluctant to miss out on the year-end rally: Data as of Friday showed one-week call option demand surging to the 100th percentile for individual stocks and the 98th percentile for exchange-traded funds (ETF)—a kind of "stock replacement" strategy, where investors buy cheap out-of-the-money calls while cutting exposure to underlying assets to maintain market participation.