ORLANDO, Florida, July 30 (Reuters) - Wall Street rallied

strongly on Thursday on renewed optimism around AI, sparked and

led by an eye-popping surge in Microsoft shares, as equity

investors shrugged off the spike in bond yields following Fed

Chairman Kevin Warsh's Wednesday comments on inflation.

In the foreign exchange market, meanwhile, the yen notched

one of its best days in years on suspected intervention from

Japanese authorities.

In my column today, I look at why the bond market was

distinctly unimpressed with Warsh's seemingly lukewarm

commitment to bringing inflation down and even the Fed's 2%

inflation target itself. Allowing the bond market to do the

Fed's tightening for it is a risky game to play.

If you have more time to read, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. US economic growth slows in second quarter, but domestic

demand robust

2. US inflation slows in June, but reversal likely amid

Middle East conflict

3. Euro zone economy grows faster than expected on AI

spending, confident consumers

4. Yen surges, analysts suspect official Japanese

intervention

5. Bank of England keeps rates on hold, awaits clearer sign

of Iran war inflation hit

Today's Key Market Moves

* STOCKS: South Korea -1.7%, Europe +1%, UK flat. Nasdaq

+2.8%, S&P 500 +1.7%.

* SECTORS/SHARES: Six sectors on the S&P 500 rise, five

fall. Tech +5%, comms services -2.5%. "SOX" chip index +8%.

Microsoft +15.5%, Sandisk +26%, Micron Technology +18%. Meta

-8%. Amazon +8% after the bell on Q2 results, Apple -3%.

* FX: Dollar/yen plunges 2.5%, biggest fall since April 30

intervention. Dollar index -1%.

* BONDS: U.S. yield curve bear steepens. 2-year yield dips,

30-year yield +7 bps to hit 5.24%, highest since mid-2000s.

* COMMODITIES/METALS: Oil falls in choppy trade, Brent -2%,

WTI -1%. Gold +1%, palladium +5%.

Today's Talking Points

Communication

Warsh wants to overhaul the Fed's communications strategy,

although judging by the flak he received for his press

conference on Wednesday, perhaps he should focus on his own

communication first. He spoke a lot without explaining how he

intends to get inflation down. Worse, his commitment to even

bringing inflation down, and the Fed's 2% price stability goal

itself, was questionable.

The selloff at the long end of the bond market is a warning

that a lack of clarity from a central bank about its goals,

reaction function, or strategy to achieve its aims will be met

with doubt and skepticism. There may be more market turbulence

in the coming weeks and months as Warsh shakes up the Fed.

Intervention

After weeks of speculation about whether they would act to

lift the yen from a 40-year low against the dollar, Japanese

authorities finally appeared to intervene on Thursday. There's

been no confirmation yet from Tokyo, but FX analysts are pretty

certain the yen's near-3% surge against the dollar had an

official helping hand.

If it was intervention, the question is how effective will

it be? Tokyo last intervened on April 30, spending $73 billion

to slam dollar/yen lower by around 5 'big figures'. That bought

about six weeks before the yen was back at pre-intervention

levels. A lot hinges on the Bank of Japan on Friday, and a

hawkish signal could give the Ministry of Finance much more bang

for its intervention buck. A dovish signal, on the other hand,

could put the yen back under heavy pressure.

Liquidation

When market downturns snowball, speculation inevitably rises

about who is exposed to margin calls, position liquidation and

big losses. Highly leveraged hedge funds are the usual suspects.

The recent rout in chip stocks is no different, and on Thursday

it emerged that the AI-focused hedge fund Situational Awareness

has sold the bulk of its stock portfolio to Ken Griffin's

Citadel.

The fund, led by rising star Leopold Aschenbrenner, was

under pressure to either raise fresh capital from investors or

offload its entire book. It chose the ​latter. Could there be

others? Global hedge ‌funds ⁠are grappling with their biggest

monthly drawdown on record as the crowded AI trade has soured,

with Asia-focused fundamental long-short funds down 18.6% on

average this month.

What could move markets tomorrow?

* Bank of Japan interest rate decision

* China 'official' PMIs (July)

* Euro zone inflation (July, flash)

* U.S. Federal Reserve officials Beth Hammack, Neel

Kashkari, and Lorie Logan may release statements explaining

their dissents this week

* U.S. earnings, including Exxon, Chevron, Colgate-Palmolive

Want to receive Trading Day in your inbox every weekday

morning? Sign up for my newsletter here.

Opinions expressed are those of the author. They do not reflect

the views of Reuters News, which, under the Trust Principles, is

committed to integrity, independence, and freedom from bias.