Is the AI bull market "sucking dry" bank balance sheets? The cost of financing in the US stock market is "off the charts", and the end-of-quarter repurchase market may face "pulsating" shocks.

The funding demand for US stocks continues to accumulate, squeezing the available space on the balance sheets of bank dealers, even though overall end-of-quarter pressures are limited, short-term interest rates may still rise. As the first half of the year comes to a close, the cost of US stock financing has sharply increased, approaching levels of pressure usually seen at year-end. A series of blockbuster stock offerings (including SpaceX's record-breaking IPO), continued high stock market valuations, and significant expansion of leverage ETFs have all driven up the cost of financing. The futures contract for tracking the S&P 500 total return index hit 200 basis points on June 26, reflecting a sharp increase in the gap between the demand for leveraged long stock exposures and the trading capacity of dealers. In comparison, the average value of this figure in May was only 62 basis points. Changes in US stock financing conditions can reshape the allocation pattern of balance sheet capacity in the market. Tightening financing will restrain leverage utilization and balance sheet space, while loose financing will release liquidity into the market. These conditions may then influence the Federal Reserve's balance sheet operations, guide the Treasury Department's issuance of short-term debt, and shape the liquidity deployment of banks. Eleanor Xiao and Mark Cabana, strategists at a US bank, wrote in a report to clients on Monday: "Stock financing is crucial to the US fixed income market because it may lead to a crowding out of intermediation. If the cost of stock financing continues to rise, traders may shift assets from the fixed income sector to the stock sector." Repo market rates typically rise at quarter-end as traders reduce operations to shrink their balance sheets, while new bond issuances settle and inject collateral into the financial system. In recent weeks, a large amount of funds have entered money market funds (partly due to uncertainty surrounding the Fed's policy path), partially easing the above pressure. However, the continuously rising demand for stock financing may disrupt the relatively calm nature of the money market. Strategists expect that, influenced by factors such as the gradual release of cash locked by recent large-scale public offerings, stock financing pressures will ease after June. But the financing level is unlikely to fall back to the lows of May. Quarterly futures contracts have already reflected higher balance sheet costs, suggesting that any easing may be short-lived. Morgan Stanley strategists pointed out that last week's surge in stock financing costs increased the risk of disruptions in end-of-quarter activities. This may prompt main brokers to become more cautious, leading to reduced financing for hedge funds, stricter pricing, as articulated by strategy teams including Martin Tobias. They stated that if the high cost of stock financing persists across contracts beyond the end of June, it may mean that "the cost of stock financing will remain high until a fairly large deleveraging event occurs." Xiao and Cabana from Bank of America also hold a similar view, believing that the pressure of stock financing will continue until demand cools down, dealers expand their balance sheet space, or there is a correction in US stocks. Boosted by the artificial intelligence investment boom, the S&P 500 index is expected to achieve its best quarterly performance since 2020. Strategists warn that if the stock market does not decline, the new normal for stock financing costs will be higher than historical averages.