China's Chips, Crypto Clarity, Creeping Spreads

Every morning before the opening bell, the Schwab Market Update sets the stage for the day ahead, covering key market movers, economic developments, and emerging themes. Each edition includes "Three things to watch," and Thursdays feature a weekly section, "Crypto currents." This recap revisits select items for those who may have missed them, helping traders head into the weekend better informed.

China's claims of success building competitive AI models recently became another concern swirling around the volatile chip sector, reminding some of the 2025 "Deep Seek" sell-off. China appears to be taking a different tack from the U.S., offering AI models for wide use ("open source") rather than as proprietary technology. This has some investors concerned that U.S. companies could turn to cheaper Chinese models for less-advanced AI needs as costs continue growing. The costs are taking a toll, evidenced by S&P Global downgrading Oracle's (ORCL) debt earlier this month to one step above junk status. This turns the focus to free cash flow as competing hyperscalers report in coming weeks. Chinese competition isn't a done deal, as Chinese models aren't widely proven. Even so, cheaper open source technology, even from China, might be tempting amid growing debt levels for U.S. companies heatedly pursuing AI.

Volatility has largely remained in check in recent weeks with the Cboe Volatility Index^® (VIX) mostly staying below 19 despite the war's impact. It rose almost 17% on Thursday after the latest Middle East skirmishes.  Although the VIX remains below 20, a threshold marking heightened uncertainty, the market's not so calm under the surface. "A rotational market is ongoing, with historically high dispersion and historically low correlations," said Liz Ann Sonders, chief investment strategist at the Schwab Center for Financial Research, or SCFR. As of mid-week, only the energy sector had more than 50% of its stocks trading at four-week highs. Other sectors range between 1% and 13%. No sector had more than 20% of its stocks trading at 52-week highs. This provides evidence of churn as investors seem uncertain where to focus. Earnings season, the Fed meeting, and next month's July jobs report all loom, perhaps contributing to the sense of dysregulation. That's why it's hard to pinpoint sector direction, with today's winner often becoming tomorrow's goat. 

It's a critical moment for the long-awaited Clarity Act, one that may offer traders and investors potential upside with limited downside risk, said Jim Ferraioli, director of digital currencies research and strategy at SCFR. U.S. lawmakers appear poised to finally drag the market structure bill across the goal line. But failure to pass the bill before the Senate's August 10 summer recess could delay it until after the midterms. If lawmakers do pass the bill, the "institutional adoption" narrative will likely come alive again, perhaps driving bitcoin higher in the short term, Ferraioli said. That's what happened in April, when bitcoin rose about 25% in a month after two well-known financial institutions launched spot crypto trading and another spot exchange-traded product (ETP). But another delay for the Clarity Act likely wouldn't have much impact on bitcoin's price, given that it sits near the bottom of a longish bear market.

Though mid-summer heat is baking parts of the U.S., it's not too early to ponder autumn, when Capitol Hill and the government budget process are often on the front burner. "There may be a House vote to pre-emptively avoid a government shutdown this fall," said Michael Townsend, managing director of legislative and regulatory affairs at Schwab. "With the government funding deadline looming on September 30 and Congress having made little headway on the annual funding bills, the House may try to pass a bill to temporarily fund government operations until after the November election." Other notable bills include $70 billion in defense spending to help pay for the war in Iran and legislation that would limit members of Congress and their families from trading individual stocks. The House passed both of these on Wednesday but they will next need to get through the Senate. 

Credit spreads are drifting upward lately, though investment grade spreads remain low by historic standards as corporate health generally looks solid. The recent climb could reflect all the borrowing taking place in tech, which has raised the supply of debt offerings. "The credit markets are still performing well, but supply concerns could weigh on short-term performance," said Collin Martin, head of fixed income research and strategy at SCFR. "Hyperscaler issuance has been high and tech spreads have adjusted higher. This could pose a risk to spreads over the near-term." At this point, the yield on investment grade bonds tracked by Bloomberg is about 76 basis points above Treasury yield, up from below 73 a month ago but down from 78 on December 31. The historic average is 130. Credit spreads sometimes rise before the stock market begins to show signs of weakness, so they can be an important indicator.