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

Nomura strategist Charlie McElligott said the fading of traditional cross-asset momentum is triggering a "reverse dispersion" rally in global marketsa short squeeze in bond shorts combined with negative AI catalysts has triggered a broad rotation into underweight value stocks and small caps. In a Tuesday report, McElligott wrote that the unwind in the momentum factor was triggered by factors seen as AI "negative catalysts," with traditional AI positions "getting hammered" due to concerns over Anthropic's annualized recurring revenue (ARR) trajectory, doubts about the sustainability of CoreWeave (CRWV.US) and neoclouds, and rising financing costs. The weak performance of a Korean neocloud IPO exacerbated the selloff, with broader gross exposure reduction flows adding fuelexisting shorts and underweight positions in defensive sectors and economically sensitive cyclical value stocks outperformed crowded long positions. McElligott noted that the reversal began with a squeeze in crowded bond shorts: falling Treasury yields began to "awaken latent 'reversals' across assets ranging from 'anti-dollar' FX to small-cap/value stocks (anything non-AI)." Reports of possible progress on an Iran deal added further fuel, pushing energy prices lower and bonds higherfitting what McElligott calls the "Trump wants a deal before the midterms" upside scenario. The report said that under the gross exposure reduction shock, leveraged funds' net equity exposure has fallen back to one-, three-, and five-year lows. Meanwhile, buy-side investors appear reluctant to miss the year-end rally: data as of Friday showed one-week call option demand surged to the 100th percentile for single stocks and the 98th percentile for exchange-traded funds (ETFs)a "stock replacement" maneuver in which investors buy cheap upside options to retain participation while cutting exposure to the underlying assets.