AFH Monday Espresso Podcast

Monday Espresso Podcast - 3rd August 2026

[00:00:00] Rory Dowie: Good morning. Today's Monday the 3rd of August. I'm Roy Dowie, Portfolio Manager here at Marlborough. Joining me again today is Andrew Shaw, one of the Senior Investment Analysts on the team. Andrew, good morning.

[00:00:12] Andrew Shaw: Morning Roy.

[00:00:13] Rory Dowie: A remarkable week last week in markets, we will touch the surface on what happened, but we've decided on three topics this morning.

[00:00:20] Rory Dowie: Firstly, it was in effect Central Bank Week. We had the Federal Reserve in the US, the Bank of England here at home, and the European Central Banks all setting interest rates. We also had earnings from three of the giants in the tech world and three of those big AI spenders in Meta, Microsoft and Amazon.

[00:00:37] Rory Dowie: And thirdly, quite a remarkable story from the hedge fund world. There was a near collapse of an AI focused fund called Situational Awareness and it's rush sale to one of the biggest names on Wall Street, which certainly raised some eyebrows. Andrew, first things first it was a wild week in markets. How do things go?

[00:00:55] Andrew Shaw: Wild is the word, Rory. It is volatile from start to finish, last week. The dominant theme was a sharp sell off in anything linked to AI or artificial intelligence. The chip makers, especially Asia, took the brunt of it at one point last week, South Korea's main market fell more than 10% in a single day. So sharp that it actually triggered the automatic circuit breakers.

[00:01:17] Andrew Shaw: And they are rules in a stock market that pause trading to let everyone calm down for for a minute or two. And they did kick in. Japan had a rough couple of sessions too. Of course it to home the UK and Europe held up much better.

[00:01:33] Andrew Shaw: The FSE 100 is full of banks, oil majors and consumer staples rather than technology so it, it tends to be more sheltered when the AI trade wobbles. And then later in the week we got a big bounce back following news that the hedge fund, you mentioned Situational Awareness, have been sold to Citadel as well as those, some of the strong earnings. And we finished the week on a stronger tone, Thursday, particularly strong.

[00:01:57] Rory Dowie: Yeah. As you mentioned there a pretty rollercoaster week. And again, reminder to clients why we hold a spread of different types of companies and investments rather than just betting on one theme like ai, for example. Right. Let's get into it. Andrew Central Banks, what was going on there?

[00:02:13] Andrew Shaw: Yeah, so on Wednesday, the Federal Reserve, which is America's central bank, sets the interest rates for the world's largest economy.

[00:02:20] Andrew Shaw: They chose to keep rates on hold, and that's in the range of between three point half and 3.75%. That's the fifth meeting in a row now that they were rates unchanged. But here's what caught the eye. Three of the 12 members actually voted to raise rates, and for the first time in a long while, financial markets are betting the next move is up, not down.

[00:02:42] Rory Dowie: Yeah. And that is a bit of a change in tone. For most of the last year. The conversation was about when rates would be cut. Now it's about whether they go up. And the reason Andrew is inflation driven largely by the conflict in the Middle East pushing up the price of oil. Is that right?

[00:02:56] Andrew Shaw: Exactly higher oil feeds through to the petrol pump and to energy bills and central banks worried that it gets baked into prices more widely.

[00:03:04] Andrew Shaw: It was the same story at the Bank of England on Thursday. They held our rates at 3.75%, but again three of the nine members wanted a raise up to 4% and the bank now expects UK inflation to climb to around 3.2% by the end of the year, which is well above the 2% target. The European Central Bank or the ECB held to, and they've already nudged rates back up earlier in June.

[00:03:30] Rory Dowie: Okay, so in summary, central banks pausing things at the moment. Little bit nervy around what's going with the oil price markets expecting rate hikes at the next meeting kind of across the board. We'll obviously be keeping a a close eye on that and obviously any developments in the Middle East.

[00:03:44] Rory Dowie: Technology giants, Andrew, we heard from some of the hyperscalers last week, well, Alphabet specifically, we had three of them going on this week. They're those companies investing in the data centre, build out the powers ai. Let's start with those that went well.

[00:03:58] Andrew Shaw: Yeah. The clear win last week was Microsoft revenue of $90 billion for the quarter, which is up 18% comfortably ahead of expectations.

[00:04:07] Andrew Shaw: The star was their cloud computing arm, that's Azure, which essentially rents out computing power over the internet. It grew by a remarkable 43%, which is its fastest rate in four years and that's passing a hundred billion dollars of annual sales for the first time. The shares jumped. Amazon was arguably even better received.

[00:04:28] Andrew Shaw: It's posted its first ever $200 billion sales quarter in its own cloud business, that's AWS, grew 37% the quickest in more than four years, it shares we're up around 9%.

[00:04:41] Rory Dowie: Yeah, so strong performance from from those two hyperscalers and Meta, the owner of Facebook, Instagram, WhatsApp, they were the odd one out.

[00:04:47] Andrew Shaw: It was sales actually grew a healthy 28%, but profits missed and the shares fell around 7%. Two things spooked investors. One, some big one-off costs, legal charges and redundancy payments. And two, the sheer amount they're spending Meta's investment in data centre more than doubled to $31 billion in the quarter and it nudged up its plans for the year.

[00:05:11] Andrew Shaw: So that's the running tension across the whole sector really. It's investors will over the growth, but they're increasingly nervous about the eye-watering in sums money being spent to chase it and when it will actually pay off.

[00:05:23] Rory Dowie: Yeah. So investors clearly backing Microsoft and Amazon there, they've obviously had a positive share price reaction.

[00:05:28] Rory Dowie: You are seeing quite strong AI revenue come through in the overall revenue print, which is, you know, making investors believe that they're actually seeing return on some of that AI investment. Meta, they flunked their results. Investors are a little bit more concerned on that side of things. A bit of a random story last week, well, not a random, but a, but a pretty important one, seemed a bit bizarre.

[00:05:47] Rory Dowie: Situational Awareness, we mentioned it at the start of the pod. Andrew, what's, what happened last week there?

[00:05:53] Andrew Shaw: So Situational Awareness is a hedge fund, and that's a fund that makes big, often aggressive bets on behalf of wealthy clients. It was set up in 2024 by an ex open AI employee called Leopold Ashen Brenner, he's only 25 years old and doesn't have any trading experience. He'd written a really popular piece, an essay that was arguing that the AI revolution was gonna need a colossal build out of chips, data centres and power. And he put money behind that idea. And for a while it worked spectacularly well.

[00:06:24] Andrew Shaw: Year to date the fund was up 439%.

[00:06:29] Rory Dowie: Yeah, so a remarkable return there. But clearly with those numbers there's always a bit of a catch, isn't there, Andrew?

[00:06:34] Andrew Shaw: There was a catch, and as is often the case, it was leverage, which simply means borrowing money to make your bets bigger. The fund was running at roughly four times its own money, and that's brilliant on the way up.

[00:06:46] Andrew Shaw: And it's brutal on the way down. And when AI shares tumbled earlier this month, the losses were magnified. The banks that had lent money demanded more cash to cover those loans, what's called a margin call. And the fund couldn't meet them. It was forced to sell its entire portfolio shares to Citadel.

[00:07:05] Andrew Shaw: And that's a giant hedge fund run by billionaire Ken Griffin.

[00:07:08] Rory Dowie: And this is where the timing gets quite interesting and perhaps a little controversial. Andrew, what happened? And you know, why? Why the concern.

[00:07:16] Andrew Shaw: A few days before all this, the trading arm of Griffin's Empire, which is a separate business called Citadel Securities, puts out a note predicting the Federal Reserve would surprise everyone with a rate rise.

[00:07:29] Andrew Shaw: Now a surprise rate rise is exactly the kind of thing that hits these high flying AI shares hardest 'cause their value rests on profits expected far in the future and higher rates make those future profits worth less today. That note added to the nerves the selloff deepened. And days later, another Griffin firm bought up the wreckage cheaply.

[00:07:51] Andrew Shaw: Some commentators did cry foul on this.

[00:07:54] Rory Dowie: Yeah, I mean, look, there are a couple of important caveats. There are two different firms, Citadel Securities and Citadel and you know, several other forecasts we're calling for a rate rise, but even then it does look a little bit fishy given all of that and you know, that did create some volatility in the markets.

[00:08:09] Rory Dowie: As you mentioned there, you know, if people are leveraged up and they have to close down those positions, they're then forced sellers and then you know, when they're forced to dump those positions, it pushes prices down further. Everyone starts worrying about who else could be caught out. So clearly that added to a lot of the market volatility we saw in the week.

[00:08:26] Rory Dowie: Then you saw Citadel come in and scoop up those shares at a very low price. Very clear. Andrew, keeping an eye on time. What have we got to look out for next week?

[00:08:36] Andrew Shaw: Yeah, there's more earnings next week. The last of the big tech names are reporting and on the economic front, keep an eye on the US jobs figures at the end of the week, which were always closely watched and on the oil price, which remains tied to events in the Middle East.

[00:08:50] Rory Dowie: Great. Thanks Andrew, and for helping me unpack a busy week. Listeners, thanks for joining. Hope you found that useful. As always, please reach out if you have any questions and wishing you all a wonderful week ahead.