Two technology heavyweights, Alphabet (Google) and Microsoft, reported their quarterly earnings last night, triggering sharply contrasting market reactions.

While Microsoft surprised investors positively, Alphabet disappointed, reporting results below market expectations.

The reaction was significant. Microsoft shares surged more than 4% in the beginning, now only +1%, while Alphabet plunged more than 10% in after-hours and pre-market trading.
The weakness in Alphabet alone weighed heavily on technology sentiment, contributing to a decline of approximately 1% in Nasdaq futures.

These developments once again highlight just how sensitive investors have become to earnings announcements, particularly among companies at the center of the artificial intelligence investment boom.

Markets:

• Equities: European markets trading higher, while US equities are under pressure, led by technology stocks

• Bonds: Government bond yields trading almost unchanged - US 2y yield 4.71%, US 10y yield 5.03%, Japan 10y yield 2.84% - France 10y yield 4.92%

• Commodities: Oil prices move sideways, WTI around USD 102/barrel and Brent around USD 114/barrel;
  Precious metals fall, gold at USD 4’025/oz, silver below USD 53/oz

• Currencies: US dollar trading sideways - Japanese Yen remains around USDJPY 158 - Swiss franc almost unchanged

• Cryptos: falling - Bitcoin towards USD 80k

• Volatility: The VIX index moving back above 17 - The window for relatively inexpensive portfolio hedging is still there

My View: My fundamental concerns surrounding the AI investment boom remain unchanged: extraordinary capital expenditure, increasingly stretched valuations and, most importantly, the uncertainty surrounding the monetization of these enormous investments.

The critical question is no longer simply how rapidly AI-related revenues can grow. It is whether the hundreds of billions of dollars being invested in infrastructure, data centers and computing capacity will ultimately generate sufficient returns to justify today's valuations.

But another development makes me increasingly skeptical: the continued growth financial interdependence among companies operating within the AI ecosystem.

Consider the financing arrangements emerging across the industry. Companies such as Nvidia invest in or provide financing to AI businesses and infrastructure providers, which in turn use part of that capital to purchase Nvidia's chips and computing technology.

In simple terms: a company helps finance its own customers, who then use that money to purchase its products.
These transactions can be commercially legitimate, and the resulting sales can represent genuine revenue. However, they raise an important question about the quality and sustainability of the reported growth.

How much of today's extraordinary AI revenue growth is driven by genuine, independently funded end-user demand — and how much is being supported by capital circulating within the same AI ecosystem?
Such arrangements can accelerate reported revenue growth, reinforce valuations and create the impression of rapidly expanding demand, even when the ultimate profitability of the underlying AI services remains uncertain.

The increasing reliance on external financing, debt issuance and interconnected investment commitments creates another vulnerability. If access to capital tightens, the consequences could spread rapidly across the entire AI ecosystem, from infrastructure providers and chip manufacturers to cloud operators and their financial backers.

This is precisely why I believe investors should focus much more closely on cash generation, financing structures and returns on invested capital rather than celebrating headline revenue growth alone.

An Extraordinary Concentration Risk
There is another major risk that deserves much greater attention: the extraordinary concentration of the US equity market.
The numbers are striking:

• The 10 largest companies account for approximately 40% of the S&P 500's total market capitalization.

• The 20 largest companies represent around 50% of the entire index. Just 20 companies out of approximately 500 index constituents determine half of its performance.

• AI-related stocks account for more than 41% of the S&P 500, illustrating just how dependent the broader market has become on a single investment theme.

Such extreme levels of concentration are historically unusual. Similar patterns have emerged during previous speculative investment booms, when investor enthusiasm became increasingly focused on a relatively small number of companies or sectors.

History does not repeat itself exactly, but excessive concentration, extraordinary valuations and unrealistic growth expectations have frequently accompanied major market bubbles.

The danger is that investors believe they are broadly diversified through an S&P 500 ETF, while in reality a substantial portion of their capital is exposed to the same underlying investment theme.

Should sentiment toward AI deteriorate further, the consequences could extend far beyond individual technology companies.

A broad-based sell-off could trigger additional selling through index ETFs, leveraged investment products and systematic strategies, amplifying market declines well beyond the AI sector itself.

My Positioning — Early, but Prepared
If you have been following my market commentary for some time, my skeptical outlook on the AI investment boom and the broader US technology sector should come as no surprise.
I have consistently questioned the sustainability of extraordinary valuations, aggressive capital spending, increasingly debt-financed expansion and now the growing circularity of financial flows within the AI ecosystem.
I left the AI party far too early. There is no question about that. The speculative rally continued considerably longer than I anticipated.
However, I would rather leave a speculative party too early than remain fully exposed when the music suddenly stops.
My positioning reflects this conviction, with short exposure to selected technology companies, long volatility positions and substantial cash reserves.

I cannot predict exactly what will be the trigger and when the AI bubble will burst, but I believe the risks are increasingly asymmetric.
And when investors finally begin questioning not only the extraordinary expectations embedded in today's valuations, but also the quality of reported revenues and the financial dependencies supporting them, the adjustment could be both rapid and painful.

The Federal Reserve kept interest rates unchanged at 3.75%–4.00% at its October meeting, despite persistently elevated inflation and continued resilience in the US economy.

The decision was not unanimous, with two of the 12 FOMC members voting in favor of another 25-basis-point rate hike. The Fed acknowledged that inflation remains elevated but emphasized the need to gather additional economic data before taking further action.

Fed Chair Kevin Warsh reiterated his opposition to forward guidance, signaling a shift toward a less predictable, more data-dependent monetary policy approach.

Warsh also announced changes to the Fed's meeting structure starting in 2027. While the FOMC will continue to meet eight times annually, one meeting in 2027 and two meetings from 2028 onward will focus exclusively on broader monetary policy strategy rather than interest rate decisions, reducing the number of rate-setting meetings to seven and eventually six per year.

Markets: muted reaction

• Equities: Global equity markets traded slightly higher, with limited enthusiasm following the Fed's announcement.

• Bonds: Government bond yields trading almost unchanged - US 2y yield 4.72%, US 10y yield 5.03%, Japan 10y yield 2.83% - France 10y yield 4.94%

• Commodities: Oil prices move higher, WTI around USD 103/barrel and Brent around USD 114/barrel;
  Precious metals stabilized, gold at USD 4’060/oz, silver below USD 54/oz

• Currencies: US dollar almost unchanged - Japanese Yen almost unchanged USDJPY 158 - Swiss franc mixed

• Cryptos: slightly higher - Bitcoin back above USD 81k

• Volatility: The VIX index falls below 17 - The window for relatively inexpensive portfolio hedging is still there

My View: Even Fed Chair Kevin Warsh himself acknowledged that inflation remains too high. Yet, despite persistent inflationary pressures and a resilient US economy, the Fed decided to leave interest rates unchanged. To me, the decision raises serious questions about the Fed's willingness to take the necessary measures to bring inflation sustainably under control.

With the US midterm elections approaching, it appears that another interest rate hike may simply be considered too politically sensitive or economically risky at this stage. Whether political considerations played a role remains uncertain, but the timing is certainly remarkable.

My assessment remains unchanged: the Federal Reserve is still behind the curve. The next Fed decision will take place on 9 December.

The ongoing energy crisis, driven by escalating geopolitical tensions and persistent supply disruptions, continues to put upward pressure on energy prices. In my view, elevated energy prices and the resulting inflationary pressures are likely to remain higher for longer than financial markets currently anticipate.

Meanwhile, the extraordinary race for capital, particularly across the AI and technology sectors, continues. By keeping interest rates unchanged, the Fed is avoiding additional immediate pressure on financing conditions, potentially allowing the debt-financed investment boom to continue.

However, the bond market is already sending a warning signal. The US Treasury yield curve has steepened, with longer-term yields rising while shorter-term yields have remained relatively stable or declined slightly. This development suggests that investors are increasingly demanding higher compensation for longer-term inflation, fiscal and interest rate risks.

Keeping short-term interest rates unchanged does not necessarily translate into easier financial conditions. Rising longer-term borrowing costs could increasingly challenge highly leveraged companies, capital-intensive AI investments and government finances.

At the same time, equity markets appear remarkably relaxed, with the VIX trading below 17 despite the substantial risks building beneath the surface. I continue to see this as an opportunity to maintain or increase portfolio protection at relatively attractive costs.

For now, markets may welcome the Fed's patience. However, delaying further monetary tightening does not make inflation disappear. It may simply increase the price that needs to be paid later, and keeps rates higher for longer.

Anthropic officially filed for its initial public offering (IPO) yesterday, potentially paving the way for one of the largest stock market listings in history. The filing comes as CEO Dario Amodei continues to warn about the potential risks artificial intelligence poses to humanity.

The company is reportedly targeting a valuation of USD 1.5 trillion to as much as USD 2 trillion.

According to its IPO filing, Anthropic generated USD 16.3 billion in revenues during the first six months of 2026, compared with USD 1.2 billion during the same period a year earlier.

The latest financial figures also reveal:

• Valuation: USD 1.5–2 trillion, representing approximately 46–61 times annualized first-half revenues.

• Net loss: USD 80.7 billion in the first half of 2026, including USD 72.4 billion in largely non-cash accounting adjustments. The operating loss amounted to approximately USD 693 million.

• Debt: USD 6.2 billion in outstanding borrowings as of June 2026, with total reported liabilities of approximately USD 117 billion.

• Future commitments: At least USD 518 billion in long-term cloud computing and infrastructure spending obligations.

At the same time, Nvidia announced plans to invest USD 3 billion in Meta, while Meta is reportedly preparing financing arrangements of up to USD 95 billion to support its expanding AI infrastructure.

Markets: wait and see mode ahead of major earnings and Fed decision

• Equities: Mainly positve, driven by Tech stocks. Unusual large price swings followed several corporate earnings reports.

• Bonds: Government bond yields trading almost unchanged - US 2y yield 4.74%, US 10y yield 5.00%, Japan 10y yield 2.79% - France 10y yield 4.95%

• Commodities: Oil prices remain elevated, WTI around USD 101/barrel and Brent around USD 115/barrel;
  Precious metals stabilized, gold at USD 4’020/oz, silver below USD 54/oz

• Currencies: US dollar stronger - Japanese Yen weaker USDJPY 158 - Swiss franc mixed

• Cryptos: mixed - Bitcoin back above USD 80k

• Volatility: The VIX index stays above 17 - The window for relatively inexpensive portfolio hedging is still there

My View: The AI industry's race for capital continues, but access to financing is becoming increasingly selective. Recent headlines, including comments from Elon Musk, suggest that smaller neocloud companies are struggling to secure additional financing.

Meanwhile, Anthropic's anticipated valuation of up to USD 2 trillion is, in my view, increasingly disconnected from financial reality. Despite extraordinary revenue growth, the company continues to report operating losses, carries substantial liabilities and faces hundreds of billions of dollars in future infrastructure commitments.
Investors are already pricing in years of exceptional growth, improving margins and enormous future profits. In other words, perfection is priced in long before it has been achieved.

Nevertheless, I expect investors to chase Anthropic shares following its IPO, primarily hoping to realize quick speculative gains. An initial surge would not surprise me, but that would hardly justify the underlying valuation.

What concerns me even more is the growing financial interdependence within the AI ecosystem. Companies are borrowing heavily, investing in one another and committing unprecedented amounts of capital to infrastructure.
The fundamental question remains: Who will ultimately generate sufficient returns to justify these extraordinary investments?
The debt spiral continues to grow. The longer this increasingly fragile structure holds together, the more brutal and rapid the eventual correction could become.

Options Markets — A Warning Signal?
Another development deserves attention: S&P 500 put-option notional trading volume reportedly surged to a record USD 3.3 trillion, approximately 330% above the 2024 daily average.
While elevated volumes do not necessarily signal an imminent crash, they suggest increasing demand for downside protection and potentially greater market uncertainty.
Combined with stretched valuations, rising leverage and increasingly nervous investor reactions, this is another warning signal that much larger market swings could lie ahead.

The coming days could prove decisive. Major technology earnings and the Federal Reserve's decision will test investor confidence and could determine whether the recent sell-off develops into a broader market correction.
The risks have not disappeared. If anything, they continue to build beneath the surface.

Global equity markets are attempting a modest rebound following last week's sell-off, supported by slightly lower oil prices and hopes of easing tensions in the Middle East. However, investors face a crucial week of central bank decisions and corporate earnings, with particular attention on the sustainability of AI investments.

All eyes are on the Federal Reserve, which announces its interest rate decision on Wednesday, followed by the European Central Bank on Thursday and the Bank of Japan on Friday. Markets expect all three to leave rates unchanged, while the Bank of Canada is expected to raise rates by 25 basis points.

Important US inflation data will also be in focus on Thursday, with the release of the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve's preferred inflation gauge, right a day after the Fed announcement.

Meanwhile, the busiest week of the Q3 earnings season is approaching, with approximately 250 companies valued above USD 10 billion reporting results, including more than 36% of S&P 500 members.

Major companies reporting include Boeing, Airbus, Coca-Cola, Unilever, Air Liquide, Linde, Sanofi and Eli Lilly. However, particular attention will focus on technology giants Microsoft, Alphabet and Amazon, where AI investment spending and profitability will be closely scrutinized. All three are expected to report double-digit revenue growth. However, investors are increasingly shifting their attention from revenue growth toward AI-related capital expenditure, financing requirements and returns on investment.
Last week's market reaction to Meta's earnings illustrated this shift. Despite an initially positive response, shares subsequently reversed as investors assessed the company's decision to increase future spending commitments by USD 125 billion to USD 825 billion.
Meanwhile, Anthropic has reportedly filed to go public, with key financial information emerging ahead of a potential stock market debut. The disclosures provides investors with greater insight into the company's revenue growth, profitability, financing requirements and the financial sustainability of its AI business model.

Beyond monetary policy and earnings, geopolitical developments in the Middle East and potential Russia-Ukraine negotiations remain key drivers of market sentiment. Reports of a possible US delegation traveling to Tehran have renewed hopes for a diplomatic breakthrough and an easing of regional tensions. On the other hand, last week, the US State Department has ordered some diplomats and their families to leave Saudi Arabia as attacks could further escalate.

Markets:

• Equities: Global stock markets are attempting a modest recovery following last week's sharp sell-off.

• Bonds: Government bond yields trading almost unchanged to Friday’s close. - US 2y yield 4.71%, US 10y yield 4.99%, Japan 10y yield 2.79% - France 10y yield 4.91%

• Commodities: Oil prices retreat slightly, WTI touching USD 101/barrel and Brent around USD 115/barrel;
  Precious metals stabilized, gold at USD 4’020/oz, silver below USD 54/oz

• Currencies: US dollar stronger - Japanese Yen weaker USDJPY 158 - Swiss franc weaker

• Cryptos: trading lower - Bitcoin around USD 80k

• Volatility: The VIX index falls back from 20 towards 17 - The window for relatively inexpensive portfolio hedging is there

My View: The rebound looks surprisingly shy at this stage, especially considering the magnitude of last week's sell-off. So far, I see little evidence of renewed investor confidence. Instead, the recovery appears largely driven by opportunistic buying rather than a fundamental improvement in market sentiment.

As I have repeatedly highlighted in recent Market Insights and Weekly Market Snapshots, the risks surrounding the AI investment boom, excessive valuations, extraordinary capital expenditure and increasingly debt-financed growth have been building for quite some time.
Recent market reactions to technology earnings suggest that investors are finally beginning to question the sustainability of these developments.

This week's earnings announcements could provide further evidence. The crucial question is no longer simply how fast AI-related revenues are growing, but whether the enormous investments required to generate that growth can deliver adequate returns.

Even more concerning are reports of tightening credit conditions for smaller AI companies, with some reportedly struggling to secure additional financing. This could indicate growing caution among lenders about the sustainability of the AI investment cycle and the risk that a significant portion of the debt accumulated may ultimately not be repaid.
If access to financing continues to deteriorate, the consequences could extend well beyond individual AI companies, potentially affecting suppliers, infrastructure providers and the broader technology sector.

Meanwhile, inflation remains another major concern. I continue to maintain my conviction that the Federal Reserve could raise interest rates again, against the prevailing market consensus, or perhaps more accurately, market hopes. Recent inflation developments and persistent energy-related pressures reinforce my view.

A combination of disappointing earnings guidance, further increases in AI spending commitments, tightening financing conditions and a more hawkish monetary policy outlook could trigger another wave of selling pressure.
I therefore remain cautious and see no reason to increase equity exposure at current levels. Maintaining substantial cash reserves, selective short positions and downside protection continues to be my preferred strategy.

This week could prove to be a defining moment for financial markets. Will investors regain confidence, or will last week's sell-off turn out to have been just the beginning of a much broader correction?
The coming days may provide some crucial answers. I will be monitoring developments very closely.

Selling pressure across the global technology and AI sectors has returned, following yesterday's earnings reports from Meta and Tesla, which beat estimates, however, disappointed investors and reignited concerns about excessive valuations, extraordinary capital expenditure and the sustainability of AI-driven growth.

Just a day earlier, investors had celebrated SpaceX's better-than-expected earnings, briefly reviving optimism across the technology sector.

The contrasting market reactions highlight increasingly nervous and selective investors. Positive surprises continue to attract aggressive buying, while even modest disappointments in earnings or forward guidance can trigger disproportionate selling pressure.

Meanwhile, the enormous costs associated with AI investments are coming under greater scrutiny. Companies that previously enjoyed considerable flexibility in their AI spending are increasingly being challenged to demonstrate financial discipline, sustainable returns and a credible path to profitability.

Markets:

• Equities: Technology and AI-related stocks are leading global equity markets lower, with financial stocks also under pressure. Value and defensive sectors are showing greater resilience

• Bonds: Government bond yields trading slightly lower - US 2y yield 4.74%, US 10y yield 5.04%, Japan 10y yield 2.88% - France 10y yield 5.10%(!)

• Commodities: Oil prices remain elevated, WTI touching USD 100/barrel and Brent around USD 112/barrel;
  Precious metals sell-off, gold at USD 4’075/oz, silver below USD 56/oz

• Currencies: US dollar weaker - Japanese Yen stronger USDJPY 157 - Swiss franc stronger

• Cryptos: sell-off - Bitcoin below USD 82k

• Volatility: The VIX has climbed above 18, showing the first signs of renewed demand for downside protection (The window for relatively inexpensive portfolio hedging may be closing!)

My View: As highlighted in last week's Market Snapshot, closely observing market reactions over the coming days is crucial to assessing whether we are approaching a major turning point.

The first observations are revealing: Investors are becoming increasingly nervous, in both directions.
On one side, the fear of missing out (FOMO) remains powerful. Investors continue to chase almost every positive headline, earnings surprise or market rebound, unwilling to miss another potential rally.

On the other side, the market's tolerance for disappointment is rapidly diminishing. Even relatively modest earnings misses or cautious corporate outlooks are being punished heavily, sometimes triggering selling pressure across entire sectors.

This combination of aggressive dip-buying and increasingly violent reactions to negative developments is characteristic of a market struggling to maintain confidence.

More importantly, the first signs of a shift toward defensive positioning are becoming visible.
Even first defensive and undervalued stocks show some weakness.
Renewed demand for US Treasuries, a strengthening Swiss franc and rising volatility suggest that investors are beginning to seek protection against further downside risks.
The VIX, in particular, deserves close attention. After an extended period of remarkable complacency, the volatility index is finally showing signs of awakening.

I believe investors increasingly recognize that the AI bubble could burst at any moment. Yet few appear willing to leave the party early, fearing they might miss the final leg of the rally.

In my assessment, an elaborated several times, the warning signs are becoming increasingly difficult to ignore. Excessive valuations, extraordinary debt-financed AI investments, elevated borrowing costs and increasingly fragile market confidence suggest that we may be approaching the point at which the AI bubble begins to unravel.

What remains unknown is the trigger. It could be a corporate credit event, a missed debt obligation, financial distress at a highly leveraged company or the forced liquidation of a major hedge fund or other leveraged investment vehicle.
Any such event could initiate a chain reaction, particularly in markets where leverage, concentrated positioning and interconnected exposures have become significant vulnerabilities.

At this stage, monitoring the interaction between all asset classes, equities, government bonds, currencies, commodities, cryptocurrencies and volatility is more important than ever.
These cross-asset movements may provide early indications of whether the current correction is developing into something considerably more serious.

The “Buy the Dip” Trap?
One particularly noteworthy development is that the familiar “buy the dip” strategy has, so far, failed to deliver the expected recovery following last week's sharp sell-off.
This is unusual compared with the market behavior investors have become accustomed to over recent years, when corrections were repeatedly followed by rapid rebounds.

Investors conditioned to buy every decline may now be discovering that a strategy that worked exceptionally well throughout a prolonged bull market can become a dangerous trap when market conditions fundamentally change.
A failed rebound is not yet confirmation of a broader market collapse. However, it represents another warning sign that market dynamics may be shifting.

My conviction remains unchanged: The risks of a much broader market correction are increasing, while many investors remain dangerously exposed to an increasingly fragile market environment.
The question is no longer simply whether investors should buy the dip, but whether the next dip could be considerably deeper than they expect.

Selling pressure across the global AI sector is intensifying, with memory chip manufacturers among the hardest-hit companies. Rising debt burdens, increasing competition from China and concerns about future oversupply are weighing heavily on investor sentiment.

The sell-off accelerated on Wednesday following stronger-than-expected US inflation figures, which reinforced concerns about persistently elevated interest rates and financing costs.

Technology stocks have come under pressure globally, with SK Hynix, Samsung Electronics and Micron Technology among the notable casualties.

Two developments have added to the selling pressure:

• Chinese competition: Growing concerns about competition from China's memory chip manufacturer CXMT and its potential impact on global supply and pricing.

• Potential oversupply: A commentary published in a South Korean business newspaper raised concerns about a possible memory chip oversupply by 2029, putting additional pressure on valuations.

Meanwhile, financial stress within the debt-funded AI investment boom is becoming increasingly visible.

CoreWeave — Debt Concerns Intensify
CoreWeave shares and bonds came under heavy selling pressure as investors questioned the sustainability of the company's debt-financed AI infrastructure expansion.
Shares plunged 15.5% on Wednesday, followed by another 6% decline today. Meanwhile, bond prices tumbled, pushing yields on CoreWeave's debt maturing in 2031 and 2032 to nearly 15%, signaling distressed debt levels.
These elevated yields reflect growing investor concerns about CoreWeave's debt burden, refinancing risks and the sustainability of its highly leveraged business model.

Anthropic — Growth Slows Ahead of Planned IPO
According to the Financial Times, Anthropic reported 45% revenue growth to USD 16.8 billion in Q3, ahead of its planned IPO.
Although demand for its AI products continued to expand, growth slowed significantly from the 146% reported earlier in 2026 and fell short of some market expectations.
Annualised revenue is also expected to remain below the closely watched USD 100 billion threshold.

Markets:

• Equities: Globally, Tech stocks tank led by AI names, while value stocks hold up well

• Bonds: Government bond yields fell on unwinding short positions - US 2y yield fell to 4.76% (from 4.95%!), US 10y yield above 5.09% (from 5.33%!), Japan 10y yield 2.93% (from 3.0%)

• Commodities: Oil prices remain high, WTI at USD 95/barrel and Brent around USD 105/barrel;
  Precious metals rebounded, gold at USD 4’150/oz, silver below USD 57/oz

• Currencies: US dollar falls after yesterday’s jump - Japanese Yen slightly stronger USDJPY 158

• Cryptos: falling - Bitcoin around USD 80k

• Volatility: The VIX index showed first reactions moving above 17 (last opportunity for hedging!)

My View: No surprise to me. What we are witnessing now is precisely the risk I have been warning about for weeks.

The combination of slowing growth, extraordinary valuations, excessive borrowing, enormous capital expenditure and rising financing costs is increasingly challenging the assumptions underpinning the AI investment boom.

The situation already looks severe. Yet I believe this is only the first crack in a much larger problem that has been building beneath the surface.
The only uncertainty was what would ultimately trigger the sell-off. The underlying problems are anything but new.
Excessive debt, increasing competition, potential overcapacity and overly optimistic growth expectations are classic ingredients of an investment cycle that has overshot. And this time, investor expectations, valuations and positioning have gone to extremes as well.

The Unwinding Has Started
For now, value and defensive stocks are holding up relatively well. I suspect investors are unwinding crowded positions, selling AI-related stocks while covering short positions in previously underperforming sectors.

A similar pattern appears to be unfolding in US Treasuries. The sharp decline in Treasury yields may largely reflect short covering rather than any fundamental improvement in the economic outlook.

These technical movements can be powerful, but they do not necessarily indicate a sustainable change in market sentiment.

The Next Risk — Margin Calls and Contagion
My greatest concern is what happens if the AI sell-off accelerates. Substantial leveraged exposure to AI-related investments could trigger margin calls, forcing investors to liquidate positions to meet collateral requirements.
Forced selling does not distinguish between attractive and unattractive investments. Investors sell what they can, not necessarily what they want. This could rapidly spread selling pressure into other sectors and asset classes, including those currently demonstrating resilience.
Should forced deleveraging accelerate, the risk of a genuine market crash would increase dramatically.

The Critical Question — Where Does the Money Go?
Will US Treasuries regain their traditional safe-haven status, or will concerns about America's enormous debt burden, persistent inflation and elevated financing costs undermine investor confidence?
If both equities and Treasuries come under sustained selling pressure, the situation could become considerably more dangerous.
I also see potential for renewed US dollar weakness, while gold, precious metals and the Swiss franc could benefit from increasing safe-haven demand.

My Conclusion
Investors have been far too complacent about the risks building beneath the surface. Over the past few days, I have repeatedly warned that investors may be facing one of their last opportunities to reduce risk exposure before a potentially much broader market correction. The first cracks in the AI investment boom are now becoming visible, exposing the vulnerabilities created by excessive leverage, crowded positioning and extraordinary growth expectations.

What looks like a severe correction today could be only the beginning of a much broader market adjustment.
The coming hours and days will be crucial in determining whether the unwinding remains orderly or develops into a broader financial market crisis.

The first cracks are appearing. The real test may still lie ahead.

US inflation accelerated in September, with the Consumer Price Index (CPI) with annual inflation rising 3.7%, up from 3.4% in August and above economists' expectations of 3.6%.

On a monthly basis, consumer prices increased 0.6%, in line with forecasts.

Core inflation, which excludes volatile food and energy prices, rose 0.3% month-on-month, 2.6% on a year-on-year basis, exceeding expectations of 0.2% and 2.5%, respectively.

Energy prices were the main contributor to the increase. The energy index surged 5.2% in September, amid ongoing disruptions to global energy supplies linked to the Middle East conflict.

Following the release, market-implied expectations for an October Federal Reserve rate hike increased to approximately 50%, reversing part of the decline seen after the weaker US employment report earlier this month.

Markets:

• Equities: US stocks tank while European indices hold up fairly well

• Bonds: yields jump - US 2y yield above 4.93% (from 4.80%!), US 10y yield above 5.31% (from 5.21%!), Japan 10y yield 3.00%

• Commodities: Oil prices trading higher, WTI at USD 96/barrel and Brent around USD 106/barrel;
  Precious metals moved lower, gold at USD 4’090/oz, silver below USD 57/oz

• Currencies: US dollar sharply higher - Japanese Yen slightly weaker USDJPY 159

• Cryptos: falling - Bitcoin around USD 82k

• Volatility: The VIX index shows only little reaction, close to 16 (good opportunity for hedging!)

My View: Surprised? I am not.
For weeks, I have been among the few consistently arguing that the Federal Reserve would likely need to raise interest rates again in October.

Following the weaker US employment report earlier this month, investors quickly abandoned expectations of another rate hike. Once again, bad economic news was interpreted as good news for financial markets.

Today's inflation report has abruptly shifted expectations back towards another rate hike, with markets now pricing roughly a 50/50 probability of an October increase.

The bond market reacted immediately and decisively. Treasury yields surged, reflecting renewed concerns about persistent inflation and tighter monetary policy.

Equities have also moved lower, but I continue to believe that current valuations are far from reflecting the deteriorating underlying economic environment.

Elevated financing costs, rising consumer delinquencies, weakening sentiment, persistent inflation and increasing pressure on corporate financing costs are creating an increasingly dangerous combination.

Yet investors remain remarkably complacent. At some point, equity markets will have to digest the full extent of these developments. When that happens, the adjustment could be exceptionally painful.

A considerable share of today's market participants have little experience navigating prolonged inflation, structurally higher interest rates or a sustained bear market. Years of strong returns, abundant liquidity and rapid recoveries have encouraged excessive confidence and risk-taking.
The risk is that investors discover the true extent of their exposure only when liquidity disappears and markets begin adjusting violently.

Meanwhile, the fundamental situation is not improving. Oil prices continue to rise, and the conflict in the Middle East is spreading rather than easing. Intensifying Houthi attacks on energy infrastructure add another layer of risk to already strained global energy supplies.
Higher energy prices feed directly into transportation, production and consumer costs, creating additional inflationary pressure throughout the economy.
I see little reason to expect a meaningful easing of inflationary pressures in the near term.
This leaves the Federal Reserve in an increasingly difficult position: economic growth is weakening, but inflation remains too high.
Against this backdrop, another Federal Reserve rate hike may become increasingly difficult to avoid, despite the growing risks to economic activity.

One final observation: Investors should not change their entire market outlook with every new economic data release. Only days ago, markets were celebrating weak employment figures and dismissing the likelihood of further monetary tightening. Today, the narrative has reversed again.

Successful investing requires more than reacting to the latest headlines. Have a clear view. Have a clear strategy. Understand your risks. And above all, do not allow constantly changing market sentiment to dictate your investment decisions.

In my view, capital preservation and disciplined risk management remain far more important than chasing the final stages of an increasingly vulnerable equity market.

The US third-quarter earnings season has kicked off with four of the five major Wall Street banks reporting mixed results, highlighting diverging performance across the financial sector.

JPMorgan Chase disappointed investors, reporting earnings of USD 5.57 per share, below expectations of USD 5.85. This marked the bank's first earnings miss in nearly three years. While equity trading revenue surged 49%, weaker investment banking activity weighed on overall performance.

Goldman Sachs delivered significantly stronger results, with earnings of USD 17.01 per share, comfortably exceeding expectations of USD 12.86. Net profit reached USD 5.29 billion, demonstrating resilience despite the challenging financial environment.

Citigroup also exceeded expectations, reporting net profit of USD 5.2 billion, up from USD 3.8 billion a year earlier. Markets revenue increased 6% year-on-year, although trading activity slowed compared with the previous quarter.

Wells Fargo, meanwhile, reported earnings below market expectations, adding to the mixed picture emerging from the banking sector.

The results suggest that profitability remains relatively resilient, but performance is becoming increasingly uneven. Strong equity trading has helped offset weaker activity in other business segments, while elevated financing costs and economic uncertainty continue to create challenges.

Bank of America and Morgan Stanley are scheduled to report tomorrow, providing further insight into the strength of the US financial sector.

Markets:

• Equities: show some weakness

• Bonds: yields moving sideways - US 2y yield above 4.80%, US 10y yield above 5.22%, Japan 10y yield 3.00%

• Commodities: Oil prices trading higher, WTI at USD 94/barrel and Brent around USD 106/barrel;
  Precious metals moved lower, gold at USD 4’160/oz, silver below USD 60/oz

• Currencies: US dollar almost unchanged - Japanese Yen slightly weaker USDJPY 159

• Cryptos: rebound - Bitcoin around USD 83k

• Volatility: The VIX index moving sideways, remains above 15 (good opportunity for hedging!)

My View: The first major earnings reports highlight an important divergence: Wall Street continues to benefit from strong financial market activity, while the underlying economic environment becomes increasingly challenging.

Strong trading revenues should not be mistaken for broad-based economic strength. Elevated bond yields, rising financing costs, weakening consumer sentiment and mounting credit risks continue to put pressure on the financial system.

The critical question is how long banks' loan portfolios can withstand persistently high interest rates and deteriorating economic conditions.

Delinquency rates have been rising steadily, with some segments of consumer credit approaching or reaching levels last seen around the Global Financial Crisis in 2008. This is an increasingly concerning signal that financial pressure on households is building beneath the surface.

Credit deterioration often materializes in bank earnings with a considerable delay. While banks continue to report resilient profitability, prolonged high financing costs, mounting refinancing pressure and weakening household finances are increasingly testing borrowers' ability to service their debt.

Should economic conditions deteriorate further, rising defaults, higher credit-loss provisions and eventual write-downs could significantly erode bank profitability. Importantly, banks may need to increase provisions well before actual defaults occur.

Today's strong earnings may therefore conceal vulnerabilities that are already building within the financial system. The real test for banks may still lie ahead.

Meanwhile, US Treasury yields remain historically elevated, equity valuations reflect considerable optimism, and investors appear increasingly comfortable with the assumption that corporate profitability will remain resilient.

I continue to see a widening gap between financial market valuations and underlying economic risks. In my view, investors are underestimating the potential consequences of persistently high interest rates, weakening credit quality and slowing economic growth.

This earnings season will be a critical test of whether corporate fundamentals can justify elevated market valuations, or whether expectations have once again moved too far ahead of economic reality.

With the US midterm elections approaching, geopolitical tensions and energy markets remain in focus as US President Donald Trump's announcement of an “energy ceasefire” between Russia and Ukraine appears to be facing immediate challenges.

On Sunday, Trump announced via Truth Social that Russia and Ukraine had agreed to an immediate ceasefire targeting energy infrastructure.
However, Ukrainian President Volodymyr Zelenskyy contradicted the announcement on Monday, stating that Russian airstrikes against Ukrainian energy infrastructure had continued despite Trump's declaration.
Zelenskyy made clear that Ukraine would continue its long-range strikes against Russian targets unless Moscow formally agreed to halt attacks on energy infrastructure.

The developments raise doubts about whether a meaningful agreement has been reached, let alone implemented.

Meanwhile, the conflict in the Middle East continues to escalate, with more countries becoming involved. Turkey and Pakistan have reportedly expressed support for Saudi Arabia in its confrontation with the Houthi rebels in Yemen, raising concerns about a broader regional escalation.

Over the weekend, the Saudi-led military coalition reported intercepting missiles and drones launched by Houthi rebels. The attacks followed a particularly violent period, during which at least 14 people were killed and hundreds injured in Houthi strikes on Saudi Arabian airports.

Adding to concerns over global energy supplies, renewed drone attacks on tankers in the Strait of Hormuz have also been reported, highlighting the continued vulnerability of one of the world's most critical energy shipping routes.

Oil prices initially declined on hopes of easing geopolitical tensions before reversing course and moving higher.Brent crude climbed 1.4% to USD 106.20 per barrel, while WTI gained 1.4% to USD 93.10 per barrel.

The price reversal highlights the continuing uncertainty surrounding global energy supplies.

Markets:

• Oil prices initially declined on hopes of easing geopolitical tensions before reversing course and moving higher. Brent crude climbed 2% to USD 107 per barrel, while WTI gained 2.2% to USD 94 per barrel.

• Volatility: The VIX index remains low above 15 (good opportunity for hedging!)

My View: Announcing a potential diesel supply deal with Russia and an “energy ceasefire” between Russia and Ukraine, the US administration appears increasingly desperate to bring the energy crisis under control and reduce record-high fuel prices ahead of the midterm elections.

With the US midterm elections approaching, energy prices have become one of the most pressing political and economic concerns.
Record-high diesel prices, elevated gasoline costs and rising living expenses are putting increasing pressure on American households and businesses. Affordability has become a central issue ahead of the elections.
President Donald Trump is therefore making considerable efforts to bring energy prices down. Diplomatic initiatives, ceasefire announcements and efforts to restore global energy supplies are increasingly important in this context.
However, political announcements do not necessarily translate into lower energy prices or improved supply conditions.

Unsurprisingly, the conflict in the Middle East is expanding rather than easing, while the situation between Russia and Ukraine remains unresolved. Attacks on energy infrastructure, tankers and critical supply routes continue to threaten global energy markets.

As I have repeatedly highlighted, releasing strategic reserves or announcing ceasefires does not create additional sustainable supply. These measures may provide temporary relief, but they do not resolve the underlying structural disruptions.
Higher energy prices also continue to feed inflation, complicating the Federal Reserve's efforts to restore price stability while financing costs remain exceptionally elevated.

With the midterm elections only weeks away, I expect further efforts and interventions by the US administration trying to ease energy prices and calm financial markets.

However, I remain skeptical that these efforts will deliver a sustainable improvement without a meaningful de-escalation of the underlying conflicts.

For investors, the risks of renewed energy price increases, persistent inflation and further pressure on bond markets remain significant, followed by pressure on equities.

The AI sector faced renewed pressure yesterday as OpenAI's reported revenue fell significantly short of expectations, raising fresh questions about the sustainability of extraordinary AI valuations.

OpenAI disclosed USD 50 billion in annualized revenue at the end of September, almost 30% below the previously reported USD 68 billion. The discrepancy reflects the inclusion of partner revenues in the earlier figure.

Despite continued growth of 77% overall and 107% in its enterprise business during Q3, the lower revenue figure has started to raise concerns about AI valuations and whether extraordinary growth expectations can be sustained.

OpenAI, seeking a valuation of more than USD 850 billion, has postponed its IPO until at least 2027.

Meanwhile, Anthropic is reportedly targeting a staggering USD 2 trillion valuation for its upcoming IPO, attracting criticism over excessive valuations and investment risks.

Adding to concerns, Nvidia-backed Australian AI company Firmus withdrew its planned IPO, citing market volatility.

The developments triggered a sell-off in AI-related stocks, including Nvidia, Oracle and CoreWeave, as investors began reassessing the sector's growth expectations.

Markets:

• Equities: rebounding after yesterday’s decline

• Bonds: yields moving higher again - US 2y yield above 4.79%, US 10y yield above 5.26%, Japan 10y yield 3.02%

• Commodities: Oil prices trading sideways, WTI at USD 91/barrel and Brent around USD 103/barrel;
  Precious metals rising, gold up to USD 4’180/oz, silver up above USD 60/oz

• Currencies: US dollar slightly stronger - Japanese Yen slightly weaker USDJPY 158

• Cryptos: rebound - Bitcoin around USD 82k

• Volatility: The VIX index remains low above 15 (good opportunity for hedging!)

My View: For one day, the market appeared to change its narrative.

Yesterday, AI-related stocks slumped, and bond yields declined alongside them, despite sharply rising oil prices. This was particularly interesting given the market dynamics of recent weeks, when bond yields generally moved higher alongside oil prices.

One possible explanation is that investors began reassessing the extraordinary capital expenditure and debt-financing requirements of the AI industry. If the AI investment boom slows, corporate debt issuance could decline, reducing competition for capital and potentially easing upward pressure on Treasury yields.

At the same time, the US dollar remained relatively stable, suggesting that the move in yields was not primarily driven by a broad loss of confidence in US assets.

In other words, markets may briefly have started pricing in weaker growth, lower capital demand and potentially less pressure on interest rates, even as elevated oil prices continue to threaten the inflation outlook.

Today's rebound suggests that investors are not yet ready to abandon the AI trade. My view, however, remains unchanged: The AI investment cycle has moved far beyond sustainable levels.

Valuations have become extraordinarily stretched, supported by increasingly optimistic growth assumptions, massive capital expenditure commitments and, in my view, an extraordinary degree of FOMO, fear of missing out.

The warning signs are becoming increasingly difficult to ignore:

• Extraordinary valuations that require exceptional growth for years to come.

• Massive capital expenditure increasingly financed through debt.

• Historically high financing costs, with US 10-year Treasury yields above 5%.

• Revenue figures falling short of previously communicated expectations.

• Growing concerns about the economic returns on unprecedented AI infrastructure investments.

• Increasing energy constraints, with electricity supply and grid capacity becoming critical bottlenecks for data centre expansion.

• Growing public opposition to new data centre construction, driven by concerns over energy consumption, electricity costs and environmental impact.

• Increasingly crowded positioning, leaving investors vulnerable to a sudden reversal.

The combination of high valuations, rising debt, elevated interest rates and potentially disappointing revenue expectations is particularly dangerous.

The AI fantasy is starting to crack. The question is no longer simply how fast AI revenues can grow, but whether that growth can justify the enormous amounts of capital already committed and the valuations investors are willing to pay. I believe the gap between market expectations and economic reality has become dangerously wide.
If confidence in the AI investment cycle begins to unravel, the consequences will extend far beyond technology stocks. The sheer scale of AI-related investments, financing commitments and market concentration creates the potential for a much broader repricing of risk assets.

With equity markets near record highs, leverage elevated, bond yields above 5% and volatility remarkably low, investors appear to be pricing in an almost perfect outcome.
I believe the AI trade may be approaching a turning point. A disorderly unwinding could trigger one of the most severe equity market corrections since the Global Financial Crisis. The warning lights are flashing. Yet investors remain remarkably complacent.
I believe this may be one of the last opportunities for investors to reduce their exposure to risk assets before a potentially severe market correction unfolds

Yesterday’s publication of the FOMC meeting minutes showed most policymakers indicated that another rate increase would likely be appropriate before the end of the year.
All participants supported the 25-basis-point rate hike in September, bringing the upper bound of the federal funds target range to 4.00%.

Investors largely expect the Fed to remain on hold at its next meeting, while pricing suggests approximately a 70% probability of another hike in December.

Meanwhile, US inflation expectations are rising again. According to the New York Federal Reserve’s latest Survey of Consumer Expectations, inflation expectations for the next 12 months climbed to 3.9% in September, up 0.3 percentage points from August and reaching their highest level since May 2023.

Households also expect spending growth to accelerate to 5.5%, similarly increasing by 0.3 percentage points and reaching its highest level since May 2023.

Markets:

• Equities: Moving lower today, pressured by rising oil prices

• Bonds: yields retreating from recent highs - US 2y yield above 4.76%, US 10y yield above 5.24%, Japan 10y yield 3.09%

• Commodities: Oil prices rising, WTI at USD 91/barrel and Brent around USD 104/barrel;
  Precious metals prices mixed, gold up at USD 4’125/oz, silver down at USD 59/oz

• Currencies: US dollar almost unchanged - Japanese Yen stable USDJPY 158

• Cryptos: slump - Bitcoin around USD 81k

• Volatility: The VIX index remains low close to 16 (good opportunity for hedging!)

My View: I remain among the few expecting the Fed to raise interest rates again in October.

Market consensus continues to favor a pause ahead of the US elections, as there was never one in the past before the midterms.

I believe this expectation may prove overly optimistic. Despite political efforts to bring oil, gasoline and fuel prices lower, energy markets are moving in the opposite direction.
Oil prices are rising again as concerns about supply disruptions and fuel shortages intensify. Renewed attacks on tankers highlight the fragility of the recent recovery in Middle Eastern energy flows.

At the same time, the Middle East conflict risks expanding rather than de-escalating.
Reports of Pakistan and Turkey becoming more involved in supporting Saudi Arabia against the Houthis in Yemen raise concerns about a broader regional confrontation.

Meanwhile, the US is reportedly considering new military options against Iran, although President Trump has indicated that further action would not take place before the midterm elections.
The risk of another escalation is increasing, while the window for a diplomatic solution is narrowing.
I see little prospect of resolving the underlying problems in the short term.

Even if crude oil shipments continue to recover, shortages of refined products remain a serious concern. Strategic reserve releases can temporarily relieve supply pressure, but they do not create additional production capacity. And strategic reserves are already at historic lows.

I continue to expect persistent fuel shortages to keep energy prices elevated. Furthermore, transportation costs are skyrocketing. Prices for ships and salary for captains see new highs, adding further energy price and inflationary pressure across the economy.

This brings us back to the Federal Reserve. As Fed Chair Kevin Warsh recently emphasized: “The inflation is too high for too long.”
With inflation expectations rising and energy costs increasing again, I believe the Fed has considerably less room to remain on hold than markets currently anticipate.

An October rate hike remains my base case. Equity markets appear largely unprepared for such a scenario. The bond market, however, has already begun reflecting the growing inflation, monetary tightening and debt risks.

Even after the recent retreat in yields, I continue to see significant upside pressure on government bond yields.
For equities, the combination of persistently high energy prices, elevated financing costs, weakening economic momentum and further monetary tightening creates an increasingly challenging environment.

Yet equity valuations remain elevated, and volatility continues to suggest remarkable investor complacency.

When will the equity market finally correct? Timing remains impossible to predict. The recent resilience of equities has certainly lasted longer than I expected.

However, the fundamental risks have not disappeared. On the contrary, several have intensified.
I repeat my warning: I believe this may be one of the last opportunities to reduce equity exposure before a potentially significant market correction.

Markets can ignore deteriorating fundamentals for a surprisingly long time. But when expectations finally adjust to reality, the adjustment can be abrupt, and markets may overshoot in the opposite direction.

Markets continue to focusing on two key variables: oil prices and bond yields.

Yet something unusual is happening in the relationship between these variables and equities:
When oil prices and bond yields rise, equities rise as well. When oil prices and bond yields fall, equities also rise.
In fact, the correlation between equities and bonds has fallen to its lowest level this century. Traditional cross-asset relationships appear increasingly disconnected, with equities showing remarkably little sensitivity to movements in bond yields.

Today, oil prices are moving lower again. WTI has fallen below USD 90/barrel, while Brent crude has dropped back below USD 100/barrel, as stronger Middle Eastern exports and the release of G7 emergency stockpiles have eased some immediate supply concerns.

Bond yields initially moved lower this morning, but the relief proved short-lived, with yields subsequently turning higher again and remaining close to recent highs.

Meanwhile, equities continue to climb, led once again by technology stocks, with the Nasdaq reaching another record high.

Markets:

• Equities: Moving higher led by Tech with Nasdaq new record high

• Bonds: yields trading near recent highs - US 2y yield above 4.82%, US 10y yield above 5.30%, Japan 10y yield 3.11%

• Commodities: Oil prices falling, WTI at USD 88/barrel and Brent around USD 98/barrel;
  Precious metals prices almost unchanged, gold USD 4’155/oz, silver USD 61/oz

• Currencies: US dollar remains strong - Japanese Yen unchanged USDJPY 158

• Cryptos: mixed - Bitcoin around USD 86k

• Volatility: The VIX index higher, back below 16 (good opportunity for hedging!)

My View: Something does not add up.

The exceptionally low correlation between equities and bonds is striking. With bond yields at these levels, I would normally expect equities, particularly highly valued growth and technology stocks, to show significantly more vulnerability.

Instead, the Nasdaq is reaching new record highs while the US 10-year Treasury yield trades above 5.30%.

At the same time, the decline in oil prices should not be mistaken for a normalization of the global energy market.

Oil prices remain elevated, and underlying supply disruptions have not disappeared. Transportation costs, insurance costs and geopolitical risk premia remain high. Refiners continue to struggle to meet demand for fuels, not only today, but potentially in the months ahead.

The release of emergency reserves can temporarily increase available supply and reduce prices, but it does not solve the underlying problem. Releasing inventories is not the same as creating new production capacity, and those inventories already reaching low levels, will have to be rebuilt.

The combination therefore remains uncomfortable: bond yields above 5%, elevated energy costs, persistent inflation risks and equity valuations near record highs.

Yet equities currently appear almost immune to these risks. The historically low correlation with bonds is another indication of how detached equity markets have become from some of the traditional signals coming from other asset classes.

In my view, this disconnect is becoming increasingly difficult to justify fundamentally. Markets can ignore deteriorating risk signals for longer than expected, but they cannot eliminate them.

One of this week’s key data points was released today: the US employment report, with potentially important implications for the Fed’s next interest-rate decision.

The US economy created far fewer jobs than expected in September, pointing to a notable softening in the labor market. Nonfarm payrolls increased by just 29’000, significantly below expectations of around 84’000, while the unemployment rate rose to 4.2% from 4.1%.

The weakness was reinforced by substantial downward revisions to previous months. August payroll growth was revised from +162’000 to +133’000, while July was revised into negative territory at –10’000. Combined, the revisions removed around 60’000 previously reported jobs.

The market reaction was immediate. Expectations for another Fed rate hike in October fell sharply, with the weak employment report significantly reducing the probability of further near-term monetary tightening.

Markets: long-awaited relief for the bond market retreating from the multi-year highs reached earlier this week

• Equities: Moving higher with Tech in the top position

• Bonds: yields falling sharply - US 2y yield above 4.78%, US 10y yield above 5.20%, Japan 10y yield 3.11%

• Commodities: Oil prices falling on news Europe will release oil reserves, WTI at USD 89/barrel and Brent around USD 99/barrel;
  Precious metals prices higher, gold USD 4’185/oz, silver USD 61/oz

• Currencies: US dollar weaker - Japanese Yen unchanged USDJPY 158

• Cryptos: higher - Bitcoin around USD 86k

• Volatility: The VIX index higher, back below 16 (good opportunity for hedging!)

My View: The market reaction looks very short-sighted to me.

Investors are once again celebrating weaker economic data because it reduces the probability of another Fed rate hike. In the very short term, that is understandable: lower rate expectations provide relief for bonds and support equity valuations.

But the underlying message from today’s report is hardly positive.

The US labor market appears to be losing momentum considerably faster than expected, while previous employment numbers have again been revised lower. At the same time, inflation remains above the Fed’s target, energy costs remain elevated and financial conditions have tightened substantially as bond yields have surged.
This creates an increasingly uncomfortable combination: slower economic momentum without inflation having been fully defeated. As Fed Chair Kevin Warsh recently emphasized, “inflation is too high for too long.”

For the Fed, the situation therefore becomes more complicated rather than easier. A weaker labor market reduces the room for heavy additional tightening, while persistent inflation limits the room for meaningful easing.

For equities, I therefore see little reason to interpret today’s weak employment report as fundamentally bullish. Lower yields provide short-term relief, but weaker growth ultimately means weaker earnings potential.

The market may currently celebrate the reduced probability of another rate hike. The more important question, however, is increasingly becoming: Why should the Fed no longer be able to hike?
If the answer is a rapidly weakening economy, today’s “good news” for markets could ultimately turn out to be bad news after all.

Middle East crude oil flows are returning close to normal, with the 10-day average of exports reaching 17.5 million barrels per day, around 98% of pre-war levels. The recovery has been supported by Saudi Arabia restoring flows through its East-West pipeline.

However, the improvement in crude exports masks continued severe disruption in refined fuel supplies. Refined products shipped through the Strait of Hormuz are averaging only 677’000 barrels per day, compared with 3.6 million before the war. Combined crude and product shipments remain at around 80% of pre-war levels.

The resulting global fuel shortage, compounded by Ukrainian attacks on Russian refineries, has pushed diesel prices in the US to record highs. This represents an important economic risk, as higher diesel prices increase transportation and production costs and can add further inflationary pressure.

Meanwhile, security conditions in the Strait of Hormuz remain far from normal. Iran continues to attack tankers, forcing exporters to adopt alternative logistics. More than 70% of crude crossing Hormuz in August was transferred between tankers off the UAE or Oman, using a shuttle system protected by the US military.

Markets:

• Equities: Mixed - Asian markets positive this morning, Europe down while US markets are more or less unchanged thanks to tech sector

• Bonds: yields moving higher - US 2y yield above 4.85%, US 10y yield above 5.31%, Japan 10y yield 3.10%

• Commodities: Oil prices higher, WTI at USD 92/barrel and Brent around USD 102/barrel;
  Precious metals prices marginally lower, gold USD 4’150/oz, silver USD 60/oz

• Currencies: US dollar moving higher - Japanese Yen unchanged USDJPY 158

• Cryptos: unchanged - Bitcoin around USD 84k

• Volatility: The VIX index higher, above 17 (last chance for hedging!)

My View: Crude oil availability has improved, but the broader energy crisis has not normalized. Instead, pressure is increasingly shifting toward refined fuels, particularly diesel, while Middle East exports remain dependent on costly and potentially unsustainable security arrangements.

I also continue to see upside pressure on oil prices. Demand should remain elevated as depleted inventories need to be rebuilt, while the risk of renewed supply disruptions remains significant.

The US is relatively well positioned to manage its domestic oil requirements. However, regions that remain heavily dependent on imported energy, particularly Europe and Asia, are more exposed to continued supply constraints.

At the same time, the shortage of refined products is unlikely to disappear quickly. This keeps the risk to energy prices tilted to the upside and could maintain inflationary pressure even as crude oil flows improve.

Meanwhile, stress in the bond market continues to intensify. With the US 10-year yield above 5.3%, financial conditions are tightening further.
Bonds are already sending a clear warning signal. The question is what follows next.
The longer yields remain at these levels, or continue to rise, the greater the pressure on equity valuations, financing costs, leveraged positions and economic activity.

I increasingly believe that the entire market structure is vulnerable to a sharp adjustment. That does not mean markets have to fall immediately, but the risk is growing with every day that bond yields remain under pressure while equities continue to price in a highly favorable outcome.

Be prepared for a potentially sharp move lower.

US inflation data came in softer than expected today, but the details deserve a closer look.

The PCE price index rose 0.3% month-on-month, while core PCE increased by only 0.2%, below expectations of 0.3%. On an annual basis, core PCE inflation came in at 3.4%, compared with expectations of 3.7%.

At first glance, this looks like meaningful progress on inflation. However, there is an important caveat.

The Bureau of Economic Analysis implemented its annual update of the National Economic Accounts today, incorporating more complete source data as well as methodological improvements affecting, among other measures, the PCE price index. This means that part of the decline in previously reported inflation reflects revisions rather than a sudden improvement in underlying price pressures. The 3.0% annual core PCE figure should therefore be interpreted with some caution.

At the same time, the US economy appears to have been considerably stronger than previously estimated. Second-quarter GDP growth was revised sharply higher to an annualized 2.2%, from the previous estimate of 1.5%. Consumer spending and business investment were stronger than previously reported.

Bond Yields Remain Elevated
The 10-year Treasury yield remains above 5.2%, close to its highest level since 2007, while the 30-year yield remains around 5.5%, after recently reaching levels not seen since 2002.

Markets:

• Equities: Mixed, Europe down while US markets hold up well with Tech outperforming

• Bonds: yields little change after - US 2y yield above 4.85%, US 10y yield above 5.24%, Japan 10y yield 3.07%

• Commodities: Oil prices higher, WTI at USD 91/barrel and Brent around USD 99/barrel;
  Precious metals prices almost unchanged, gold USD 4’185/oz, silver USD 60/oz

• Currencies: US dollar falls slightly - Japanese Yen unchanged USDJPY 157

• Cryptos: moving higher - Bitcoin above USD 84k

• Volatility: The VIX index lower, back below 16 (good level for hedging!)

My View: Anyone expecting today's softer inflation data to trigger a significant bond rally has so far been disappointed.

I continue to see little fundamental justification for materially lower yields. Inflation remains well above the Fed's target, economic growth has just been revised significantly higher, and energy prices remain elevated.

While softer monthly inflation reduces some of the immediate pressure for further monetary tightening, the stronger GDP figures point in the opposite direction.

This leaves the Federal Reserve in an increasingly uncomfortable position: inflation remains too high, while economic activity is proving more resilient than previously thought.

I continue to expect the Fed to raise interest rates again at its October meeting. Market pricing still clearly favors unchanged rates. In my view, investors may therefore have to adjust to an interest-rate environment that remains higher for longer, and moves even higher than currently anticipated.

The implications extend far beyond the bond market. With the US 10-year Treasury yield above 5.2% and the 30-year yield around 5.5%, financing conditions are becoming increasingly challenging. Governments, companies, consumers and highly leveraged investors are all facing a substantially higher cost of capital.

The longer yields remain at these levels, or continue to rise, the greater the pressure on the financial system.
The question is increasingly becoming: Where does something break first?

For equities, I increasingly see the current environment as one of the last opportunities to reduce exposure before risks potentially accelerate.

The AI investment cycle, which in my view has already shown clear signs of overshooting, is now beginning to show cracks.
That does not necessarily mean a financial crisis is imminent. However, at current levels of leverage and financing costs, it may not take much for an initial shock to trigger a much broader and faster market adjustment.

Tonight, Micron Technology's earnings release after the US market close will provide another important test of the extraordinarily optimistic expectations embedded in the AI and semiconductor sector.

The warning lights continue to flash. Yet financial markets remain remarkably complacent.

In my view, the risk is no longer simply that markets have underestimated the challenges ahead. It is that when investors finally begin to price in those risks, the adjustment could be both rapid and severe.

The historic sell-off in US Treasuries continues, pushing benchmark yields to levels not seen in decades.

The US 10-year Treasury yield has risen for six consecutive weeks, climbing above 5.20% intraday, its highest level since 2007. At the long end of the curve, the 30-year yield reached 5.50%, a level last seen in 2004.

Pressure is also building at the short end, with the 2-year yield above 4.90%, as markets increasingly price in the risk of further monetary tightening.

At the same time, concerns over rising US debt levels and the growing supply of government bonds are adding further pressure, particularly at the long end of the yield curve.

Markets:

• Equities: Tech and AI bet ooutperforming the rest of the market.

• Bonds: yields little change after yesterday’s spike - US 2y yield above 4.90%, US 10y yield above 5.19%, Japan 10y yield 3.07%

• Commodities: Oil prices falling after yesterday's rally, WTI at USD 93/barrel and Brent around USD 105/barrel;
  Precious metals prices almost unchanged, gold USD 4’280/oz, silver USD 64/oz

• Currencies: US dollar weakens - Japanese Yen unchanged USDJPY 157

• Cryptos: Falling after strong rally - Bitcoin above USD 84k

• Volatility: The VIX index remains around 15 (good level for hedging!)

My View: The message from bond markets is becoming increasingly difficult to ignore: the global cost of capital is moving materially higher.

While the bond rout deepens, equity investors appear remarkably relaxed, focusing primarily on the recent decline in oil prices.

But how long can this divergence continue?

The relationship between bonds and equities is becoming increasingly uncomfortable. A 10-year Treasury yield above 5% and a 30-year yield around 5.50% materially raise the discount rate for equities and increase financing costs across the economy. This should matter particularly for long-duration, high-valuation growth stocks, yet these are precisely the areas currently outperforming.

For now, lower oil prices are providing some relief. But the bond market is sending a very different message: inflation risks remain elevated, monetary policy may have to stay tighter, and the cost of capital continues to rise.

In my view, the widening disconnect between bonds and equities cannot continue indefinitely.

Either bond yields need to fall materially, or equity markets will eventually have to adjust to the new reality of higher rates.

With the VIX still around 15, investors continue to price remarkably little risk.

Financial markets have been driven by one powerful force over recent days: hope.

Hope for improving oil flows. Hope for diplomacy in the Middle East. Hope for progress toward ending the Russia–Ukraine war. And increasingly, renewed hope surrounding the AI story.

The most tangible development came from the Middle East. US and Iranian representatives held three hours of talks in New York, with President Donald Trump describing the discussions as “very good.” Further talks appear possible, reviving expectations of a diplomatic off-ramp. Iran, however, continues to insist on conditions for ending the conflict and reopening the Strait of Hormuz.

At the same time, Saudi Arabia has restarted its East-West pipeline, which allows crude to reach the Red Sea while bypassing the Strait of Hormuz. Operations have resumed at a reduced rate, while a return to full capacity could still take several weeks.

These developments have been enough to trigger a sharp correction in oil prices and fuel optimism across financial markets.

Meanwhile, hopes — and perhaps some fantasies — surrounding AI have started to rebuild as well, adding another layer of momentum to technology stocks.

Markets:

• Equities: recent strong performance, mainly in Tech sector comes to a halt

• Bonds: yields little changed to the upside - US 2y yield above 4.79%, US 10y yield above 4.99%, Japan 10y yield 2.99%

• Commodities: Oil prices rising slightly after sharp correction, WTI at USD 90/barrel and Brent around USD 100/barrel;
  Precious metals prices continue to move lower, gold USD 4’305/oz, silver USD 65/oz

• Currencies: US dollar moving higher - Japanese Yen unchanged USDJPY 158

• Cryptos: Strong falling after strong rally - Bitcoin above USD 85k

• Volatility: The VIX index remains below 15 (good level for hedging!)

My View: The magnitude of the rally over recent days, pushing the Nasdaq back to an all-time high, surprised me.

In my view, the move can partly be explained by a short squeeze and technical buying as positive momentum accelerated, rather than by a comparable improvement in underlying fundamentals. I continue to see little fundamental justification for such a strong move higher in equities.

There remains an important distinction between hope and reality.

One of the main catalysts has been the sharp decline in oil prices, largely driven by hopes that oil flows will improve materially. Saudi Arabia restarting its East-West pipeline is a positive development, but the broader supply situation remains fragile. The Strait of Hormuz remains severely disrupted, major differences between the US and Iran remain unresolved, and alternative supply routes remain vulnerable to further attacks.

At the same time, bond yields have fallen only marginally. With the US 10-year yield still close to 5%, pressure from elevated financing costs has not gone away.

Positioning has likely played an important role as well. Since the Fed’s rate hike last week, investors positioned for weaker equity markets, including myself, have repeatedly been caught on the wrong foot in the recent days, forcing some to cover short positions and adding further momentum to the rally.

And then there is AI. Optimism has returned remarkably quickly, yet I continue to question how extraordinary capital spending, extremely optimistic growth assumptions, rising safety concerns and intense global competition can ultimately justify current valuations.

For now, markets appear to be trading on hope, momentum and positioning rather than a meaningful improvement in fundamentals.

The key question is whether fundamentals will catch up with that hope, or whether markets will have to catch up with reality.
It is only a matter of time before markets adjust to reality. When they do, they are likely to overshoot in the opposite direction.

Stock markets started the week on a strong note, with technology stocks clearly outperforming.

The main driver behind today’s risk-on move is the sharp decline in oil prices, combined with slightly less pressure from bond yields. Oil fell around 5%, with WTI dropping below USD 100 per barrel, providing some relief to inflation concerns and supporting equity markets.

The decline in oil comes as markets price in renewed hopes for diplomacy in the Middle East and improved oil flows through the Strait of Hormuz. However, geopolitical risks remain elevated and the underlying situation remains fragile.

Investors are also increasingly turning their attention to the Trump–Xi meeting on Thursday, September 24, where trade, technology, AI and geopolitical issues are expected to feature prominently.

Markets:

• Equities: strong performance,particularly in technology stocks, with characteristics of a short squeeze

• Bonds: yields little changed - US 2y yield above 4.76%, US 10y yield above 4.96%, Japan 10y yield 2.99%

• Commodities: Oil prices fell sharply by almost 5%, WTI at USD 96/barrel and Brent around USD 100/barrel;
  Precious metals prices fell as well, gold USD 4’345/oz, silver above USD 66/oz

• Currencies: US dollar moving higher - Japanese Yen fallsUSDJPY 158

• Cryptos: Strong rally - Bitcoin above USD 86k

• Volatility: The VIX index remains below 15 ( good level for hedging!)

My View: I am rather surprised by the strength of today’s move.

I have repeatedly highlighted that the direction of equity markets increasingly depends on the oil price, and today is a clear example. The sharp decline in oil provides temporary relief for inflation expectations, bond yields and therefore equity valuations.

However, I see little fundamental justification for such a strong move higher in equities.

Today’s rally has many characteristics of a short squeeze. Since the Fed’s rate hike last week, market participants positioned for a weaker equity market have repeatedly been caught on the wrong foot, forcing some investors to cover short positions and adding further momentum to the rally.

At the same time, the broader macro picture has not materially improved. Bond yields remain extremely elevated, monetary policy is becoming more restrictive, energy prices remain high despite today’s decline, and geopolitical risks have not disappeared.

Oil prices are falling primarily because the market is currently pricing in improving supply flows and renewed hopes for diplomacy rather than another deterioration in the Middle East.

In other words, no bad news is already good news for investors.

With volatility below 15 and risk appetite returning quickly, investors once again appear remarkably comfortable despite the number of unresolved risks.

I therefore remain cautious. Today’s relief could prove temporary, and I expect market dynamics to change quickly again.

Three major central banks this week, and three hawkish messages.

After the Federal Reserve raised interest rates by 25 basis points on Wednesday, the Bank of England struck a distinctly hawkish tone yesterday, followed today by another rate hike from the Bank of Japan.

The BoJ raised its policy rate by 25 basis points from 1.00% to 1.25%, bringing Japanese interest rates to their highest level since 1995. The decision was made by a 7–2 vote, with two members preferring to wait. At the same time, Governor Kazuo Ueda signaled that the central bank has entered a new phase focused on preventing inflation from overshooting its target, leaving the door open for further rate hikes.

Yesterday, the Bank of England kept its Bank Rate unchanged at 3.75%, but the underlying message was clearly more hawkish. The decision was made by a 6–3 vote, with three MPC members already voting for an immediate 25-basis-point hike to 4.00%. The BoE also warned that rates may have to rise if the Middle East conflict and higher energy prices generate more persistent inflation pressures.

The message from global central banks is becoming increasingly clear: the Fed, ECB, BoE and BoJ are all increasingly focused on renewed inflation risks, particularly those coming from higher energy prices.

Markets:

• Equities: relief rally seems already coming to an end with European indices down and US Futures falling back from intraday highs

• Bonds: yields moving up again - US 2y yield above 4.73%, US 10y yield above 4.97%, Japan 10y yield 2.99%

• Commodities: Oil prices unchanged after intraday rebound, WTI at USD 101/barrel and Brent around USD 104/barrel;
  Precious metals prices unchanged after starting the day higher, gold USD 4’360/oz, silver above USD 66/oz

• Currencies: US dollar moving higher - Japanese Yen falls despite the BoJ rate hike USDJPY 158

• Cryptos: continued to rally - Bitcoin above USD 78k

• Volatility: The VIX index unchanged below 16 (opportunity for hedging!)

My View: As mentioned yesterday, I expected the relief rally following the Fed announcement, but I also expected it to be short-lived.

The underlying problems have not disappeared. Tensions in the Middle East continue, while the global oil market remains under significant pressure. Saudi supply disruptions are affecting deliveries to European refineries, while diesel markets are becoming increasingly tight. None of this is the kind of news flow that would normally point toward sustainably lower energy prices.

For weeks, I have highlighted that markets were underestimating the situation in the oil market and that oil prices were trading too low relative to the underlying geopolitical and supply risks. That view remains unchanged.

In my opinion, oil remains the dominating factor for global financial markets in the short term.

The transmission mechanism is becoming increasingly important: Higher energy prices → higher transportation costs → renewed inflation pressure → upward pressure on bond yields → more pressure on central banks to raise interest rates → pressure on consumers and house owners

At the same time, consumer weakness continues to intensify as households face higher financing costs and increasingly higher energy and transportation expenses.

This combination, weakening consumers, persistent inflation, rising bond yields and increasingly hawkish central banks, is not fertile ground for risk assets. Quite the opposite.
Yet equity markets continue to show remarkably little concern, while volatility remains extremely low.

At some point, markets will have to confront this reality. The question is not whether these pressures matter. The question is when markets will finally start pricing them in.

Financial markets are staging a relief rally following yesterday’s Federal Reserve decision, with equities rebounding, bond yields retreating and volatility falling.

The Federal Reserve raised interest rates by 25 basis points to 3.75%–4.00%, with policymakers voting unanimously 12–0 in favor of the increase. Fed Chairman Kevin Warsh delivered a distinctly hawkish message, stressing that inflation “is too high and has been for too long.”

Importantly, the Fed also signaled that yesterday’s move may not be the last. The latest projections show that the large majority of policymakers expect at least one additional rate hike before the end of the year.

Today, the Bank of England left interest rates unchanged at 3.75%, despite UK inflation accelerating to 3.1% in August from 2.9% in July. The decision was made by a 6–3 majority, with three policymakers already voting for a 25-basis-point hike. The Bank also warned that inflation risks have shifted further to the upside.

Tomorrow, the Bank of Japan is widely expected to raise rates by another 25 basis points to 1.25%, which would bring its policy rate to the highest level in 31 years.

Markets:

• Equities: Rebounding after recent losses

• Bonds: yields falling - US 2y yield above 2.69%, US 10y yield above 4.95%, Japan 10y yield 3.0%

• Commodities: Oil prices moving lower, WTI at USD 101/barrel and Brent around USD 104/barrel
  Precious metals prices higher, gold USD 4’360/oz, silver above USD 66/oz

• Currencies: US dollar almost unchanged after yesterday's strong move - Japanese Yen unchanged USDJPY 156

• Cryptos: joined the relief rally - Bitcoin above USD 76k

• Volatility: The VIX index falls back below 16 (opportunity for hedging!)

My View: I mentioned ahead of the Fed decision that we could see a relief rally once the uncertainty surrounding the meeting disappeared. That rally has arrived, but I believe it could come to an end relatively quickly.

Listening carefully to Kevin Warsh’s press conference, the message was clearly hawkish. Inflation remains too high, and the Fed appears prepared to tighten monetary policy further if necessary. One 25-basis-point increase will not suddenly bring inflation back toward the Fed’s 2% target.

There has, however, been one important source of relief over the past two days: oil prices have moved lower, although they remain clearly above the USD 100 level. At the same time, oil transportation costs have skyrocketed, adding another layer of pressure to overall energy costs. Tanker freight rates have recently reached record highs amid continued disruptions around the Strait of Hormuz.

Therefore, the recent decline in headline oil prices should not be interpreted as an all-clear for inflation. Unless oil prices and transportation costs decline substantially, I see a strong case for the Fed to raise rates again as early as October.

So the question is: Why should the relief rally continue?
Almost all the major risk factors that existed before the Fed meeting are still there: elevated inflation, historically high bond yields, oil above USD 100, geopolitical uncertainty, pressure on consumers and governments from higher borrowing costs, and the prospect of further monetary tightening.

What did change yesterday is that the Fed demonstrated its willingness to act despite political pressure, therefore strengthened Fed credibility and independence.

Investor sentiment has quickly deteriorated toward “Extreme Fear”, which historically can create attractive entry points for risk assets. This time, however, I remain cautious.

Stress in global bond markets continues to build. With three major central banks in focus within just three days, monetary policy is once again taking center stage.

The US 10-year Treasury yield climbed above 5% yesterday, reaching its highest level since 2007, as persistent inflation concerns, elevated oil prices and expectations of tighter monetary policy continue to put pressure on government bonds.

The move is not limited to the United States. Bond yields remain elevated globally, with Japan’s 10-year yield around 3%, while European government bond yields are also trading near multi-year highs.

Today, yields are moving largely sideways as investors wait for tonight’s Federal Reserve decision. Markets now widely expect the Fed to raise rates by 25 basis points to 4.00%.

And the Fed is not the only major central bank in focus this week.

Tomorrow, the Bank of England is expected to keep interest rates unchanged at 3.75%, despite UK inflation accelerating to 3.1% in August from 2.9% in July.

On Friday, the Bank of Japan is expected to raise rates by 25 basis points to 1.25%, which would bring its policy rate to the highest level in 31 years.

Markets:

• Equities: Rebounding after recent losses

• Bonds: yields moving sideways - US 2y yield above 2.62%, US 10y yield above 4.97%, Japan 10y yield 3.0%

• Commodities: Oil prices moving lower, WTI at USD 102/barrel and Brent around USD 105/barrel
  Precious metals prices higher, gold USD 4’355/oz, silver above USD 64/oz

• Currencies: US dollar almost unchanged - Japanese Yen unchanged USDJPY 155

• Cryptos: continue to fall - Bitcoin towards USD 75k

• Volatility: The VIX index falls back below again 17 (opportunity for hedging!)

My View: What a difference a few weeks can make. Before Jackson Hole, almost no market participants expected a September rate hike. Even a week ago, investors remained divided over whether the Fed would actually move.
My view remained clearly outside the broad market consensus: With Iran war to start, I said the Fed needs to raise rates again to address persistent inflationary pressures.

Before the Iran war and the renewed oil shock, markets expected the Fed funds rate to be around 3% by September. Tonight, it is expected to move to 4%. A 25-basis-point hike itself should not have a major impact on markets, as it is now largely priced in. In fact, the decision could provide some short-term relief.

However, the bigger issue goes far beyond tonight’s decision. In my view, the Fed is still running behind the curve, and the bond market already started to recognize it.
I therefore expect the upward pressure on bond yields and downward pressure on bond prices to persist, even if tonight’s decision temporarily calms markets.

The second oil-price shock within a relatively short period is increasingly feeding through to inflation and, in my view, could have a broader economic impact than the first shock in May.
Much will depend on the oil price from here. Oil inventories are tighter and strategic reserves provide considerably less flexibility than during the first shock. This reduces the ability to cushion another major supply disruption.
I therefore expect upward pressure on oil prices to persist, with the risk of another substantial price spike remaining elevated.
If the current environment persists, I believe another Fed rate hike will ultimately be necessary.

Interestingly, the sentiment index has moved back into “Fear” territory, yet broader financial markets are still showing remarkably little genuine stress.
This divergence deserves attention. As highlighted in my Weekend Mailing, investor complacency could suddenly come to an end. If sentiment turns decisively, today’s highly crowded and leveraged market could quickly face a situation where almost everyone tries to exit through the same door at the same time.

In such an environment, a market drawdown could unfold very quickly.

AI leaders call for a slowdown. Fresh concerns around the rapid development of artificial intelligence are putting AI-related stocks under pressure.

OpenAI CEO Sam Altman said the company welcomes safety requirements for frontier AI labs and joined other leading AI executives over the weekend in calling for the industry to slow the pace of AI development.

Altman warned of two ways AI progress could go “very badly”: society could ultimately lose control of the future to AI, or too much power could become concentrated in the hands of a single person or company.

The warnings are not limited to OpenAI. Anthropic CEO Dario Amodei has also called for an immediate slowdown in the development of increasingly powerful AI models, warning that capabilities are advancing faster than the industry’s ability to ensure adequate safety and oversight.

Safety concerns have intensified significantly in recent days. Last week, an Anthropic researcher resigned, warning that some of those developing advanced AI systems believe the technology could pose catastrophic risks before the end of the decade. Employees at both Anthropic and rival OpenAI have subsequently raised further concerns about the potential consequences of increasingly powerful AI systems.

Markets:

• Equities: Falling mostly led by Tech and AI related stocks

• Bonds: yields moving higher - US 2y yield above 2.6%, US 10y yield above 4.99%, Japan 10y yield 2.99%

• Commodities: Oil prices rise again, WTI at USD 104/barrel and Brent around USD 109/barrel
  Precious metals prices fall, gold USD 4’275/oz, silver above USD 63/oz

• Currencies: US dollar moving higher - Japanese Yen falls sharply USDJPY 154

• Cryptos: rise - Bitcoin towards USD 78k

• Volatility: The VIX index moves higher above 17 (last opportunity for hedging!)

My View: The fact that the companies leading the AI race are themselves calling for the race to slow down should get investors’ attention.

After the extraordinary amount of capital that has flowed into AI infrastructure, semiconductors and related companies, this raises an important question for financial markets:

What happens to today’s extremely optimistic AI growth assumptions if safety concerns, regulation or the industry itself ultimately forces AI development to slow down?

But there may be another dimension investors should consider. Do the leading US AI companies increasingly realize that China is catching up faster than previously expected?

The AI race between the US and China is in full swing, and recent developments suggest that the technological gap has narrowed substantially. This makes calls from some of America's most important AI companies to slow frontier development particularly interesting.

President Trump highlighted exactly this strategic dilemma over the weekend, rejecting calls for a slowdown and stressing the importance of winning the AI race against China.

This creates an extraordinary contradiction: The US government wants to accelerate to beat China, while some of America's leading AI companies are warning that development is moving too fast.

At the same time, the financial stakes are enormous. Anthropic is moving toward a potential IPO, while OpenAI has postponed its own listing plans until next year. Both companies will continue to require enormous amounts of capital to finance the computing power and infrastructure needed to remain at the frontier.

So another question arises: Could the window of opportunity to raise enormous amounts of investor capital be starting to close?

The entire AI investment story still depends heavily on expectations of extraordinary future growth. If concerns about safety intensify, China continues to close the technological gap and broader financial markets enter a period of turbulence, investor appetite, and valuations, could change very quickly.

What looks like an almost unlimited pool of capital today may not remain available indefinitely.

This story adds another layer of uncertainty to an already challenging market environment. Technology and AI-related stocks have held up remarkably well despite the growing number of red flags across financial markets.

Investor complacency could suddenly come to an end, as highlighted in my Weekend Mailing. If sentiment turns decisively, a highly crowded market could quickly face a situation where almost everyone tries to exit through the same door at the same time.

In such an environment, a market drawdown could unfold very quickly.

At the same time, markets are increasingly pricing in another Fed rate hike, with the probability now around 90%, compared with roughly 50/50 only last week.

Higher bond yields, oil above USD 100, renewed inflation pressure, geopolitical risks and now growing uncertainty surrounding the AI investment story create an increasingly challenging combination.

The number of flashing red lights is increasing, while markets are still pricing in remarkably little stress.

US inflation remained stubbornly elevated in August, reinforcing the case for the Federal Reserve to raise interest rates at next week’s meeting.

The Consumer Price Index rose 0.4% month-on-month and 3.4% year-on-year, both in line with expectations.

However, underlying inflation pressures were somewhat stronger than anticipated. Core CPI increased 0.3% month-on-month, 0.1 percentage point above consensus, while the annual core rate came in at 2.4%.

Despite persistent inflation, elevated bond yields and oil prices above USD 100/barrel, investors appear remarkably complacent. US equity futures initially spiked following the release, while volatility moved lower.

Markets:

• Equities: Moving higher, with US futures initially spiking after the CPI release

• Bonds: yields falling from intraday highs - US 2y yield above 2.6%, US 10y yield above 4.92%, Japan 10y yield 2.99%

• Commodities: Profit taking in oil prices, WTI falling back below USD 99/barrel and Brent around USD 104/barrel
  Precious metals prices jump, gold USD 4’390/oz, silver above USD 65/oz

• Currencies: US dollar almost unchanged - Japanese Yen moves higher USDJPY 153

• Cryptos: Risk-on sentiment moves prices higher - Bitcoin above USD 77k

• Volatility: The VIX index falls back towards 15 (good opportunity for hedging)
  

My View: After yesterday’s Producer Prices, today’s CPI report is the final major inflation indicator the Fed will receive before next week’s policy meeting, which concludes on Wednesday.

As highlighted in my Weekend Mail, I continue to believe the Fed needs to hike rates. From an economic perspective, I see little reason not to. The bigger question is one of credibility and independence in case the Fed should keep rates on hold.

What concerns me even more is the market’s reaction. There are currently several major warning signs: persistent inflation, oil above USD 100/barrel, historically elevated bond yields and continued geopolitical uncertainty.

Yet markets are showing almost no signs of stress. Equities remain resilient, risk assets are moving higher and volatility has fallen back towards 15.

This combination should not be ignored. Complacency seems to be the biggest risk right now.

When investors stop taking obvious risks seriously, markets become increasingly vulnerable to a sudden repricing. With volatility still low, I continue to see attractive opportunities to hedge portfolios before markets potentially start taking these warning signs more seriously.

US producer prices added another warning signal for inflation.

The Producer Price Index (PPI) rose 0.4% in August, in line with expectations, while July was revised slightly higher to +0.1%. On an annual basis, producer price inflation accelerated to 5.4%, slightly above forecasts and remaining at a highly elevated level.

Excluding food and energy, core PPI increased 0.2%, slightly below expectations of +0.3%.

The latest data comes at a particularly difficult moment for the Federal Reserve. Oil prices have surged above USD 100/barrel, adding another potential source of inflationary pressure, while government bond yields continue to climb.

As a result, markets are increasingly adjusting their expectations for next week's Fed meeting. The probability of a September rate hike has risen to around 70%, although a significant share of investors still expects the Fed to leave rates unchanged.

Markets:

• Equities: Broadly lower

• Bonds: yields moving to new highs - US 10y yield above 4.92%, Japan 10y yield 2.92%

• Commodities: Oil prices substantially higher, WTI around USD 100/barrel and Brent around USD 106/barrel
  Precious metals prices fall, gold USD 4’365/oz, silver above USD 64/oz

• Currencies: US dollar slightly higher - Japanese Yen falls, USDJPY 154

• Cryptos: Risk-off sentiment is weighing on cryptos - Bitcoin falling down to USD 77k

• Volatility: The VIX index rises slightly 17 (still good opportunity for hedging)
  

My View: Scott Bessent's attempts to calm the bond market have so far produced an uncomfortable result: US borrowing costs have risen even further.

The message from the bond market is becoming increasingly clear. Investors see persistent fiscal deficits, a rapidly growing debt burden, stubborn inflation and renewed upward pressure from energy prices. If Washington wants investors to finance this debt, they are increasingly demanding higher compensation.

The latest PPI reading gives bond investors another reason to demand higher yields.

This is also increasingly moving market expectations towards the scenario I have been highlighting for some time. I have consistently expected the Fed to raise rates in September, while the broader market remained considerably more optimistic about the inflation outlook and monetary policy.

Markets are now starting to price this scenario more aggressively, with the probability of a hike rising to around 70%. However, a significant share of investors still expects rates to remain unchanged.

With producer inflation at 5.4%, oil above USD 100 and bond yields reaching new highs, the Fed's room for manoeuvre is becoming increasingly limited.

The inflation problem is far from solved, and the bond market is increasingly forcing investors to face that reality.

Tomorrow’s CPI figures should provide further clarity on the inflation outlook and could ultimately determine the Fed’s decision next week.

Oil prices continue to rise substantially, with Brent crude trading above USD 100 per barrel again after several weeks below that level.

The main driver remains the escalating conflict between the US and Iran. The US has started targeting Iranian oil tankers, while Tehran retaliated immediately with attacks on US naval assets and military bases across the Middle East.

One fact remains unchanged: the Strait of Hormuz is effectively closed and remains far from normalization.

Markets:

• Equities: broadly down while tech stocks held up well.

• Bonds: yields moving above recent highs - US 10y yield 4.84%, Japan 10y yield 2.88%

• Commodities: Oil prices substantially higher, WTI around USD 97/barrel and Brent around USD 101/barrel
  Precious metals prices higher, gold back towards USD 4’400/oz, silver above USD 67/oz

• Currencies: US dollar slightly higher - Japanese Yen higher, USDJPY 154

• Cryptos: suffer with risk-off stance - Bitcoin back towards USD 78k

• Volatility: The VIX index rises slightly above 16 (still good opportunity for hedging)
  

My View: For several weeks, my view on oil has stood clearly apart from the broader market consensus. While investors were pricing in a normalization of the Strait of Hormuz and relatively contained oil prices, I repeatedly highlighted that oil was trading too low relative to the underlying geopolitical and supply risks.

That risk is now increasingly being repriced.

At the same time, oil inventories fell to historically low levels, limiting the ability to offset supply disruptions through reserve releases indefinitely.

The broader implications are becoming increasingly important for financial markets: higher oil prices → renewed inflation pressure → higher bond yields → tighter financial conditions.

This is exactly the wrong direction for both Washington and financial markets.

With oil above USD 100, bond yields pushing back towards new highs and geopolitical tensions escalating, the probability of broader market turmoil is increasing.

Last week, I increased my existing long volatility exposure, as I continue to see meaningful downside risk in equity markets.

Seasonality adds another risk factor: September and October have historically been challenging months, particularly around US midterm-election years.

For now, my positioning remains defensive.

The US labor market delivered a significant upside surprise in August.

Nonfarm payrolls jumped by 162’000, well above the consensus estimate of just 53’000, while the unemployment rate remained unchanged at 4.1%, in line with expectations.

August marked the strongest monthly job gain since March and represents a clear rebound from the slowdown seen during the summer months.

This comes just one day after markets rallied following comments from Fed Governor Christopher Waller, who indicated that he intends to vote against a rate hike in September.

The combination highlights the growing uncertainty around the Fed’s next decision.

Markets:

• Equities: Mixed

• Bonds: yields moving back higher after yesterday's drop - US 10y yield 4.78%, Japan 10y yield 2.91%

• Commodities: Oil prices almost unchanged, WTI around USD 91/barrel and Brent around USD 96/barrel
  Precious metals prices lower after yesterday's rally, gold at USD 4’430/oz, silver falls below USD 66/oz

• Currencies: US dollar slightly higher - Japanese Yen falls again, USDJPY 156

• Cryptos: - Bitcoin back below USD 80k

• Volatility: The VIX index fell back below 15 (still good opportunity for hedging)
  

My View: With the labor market showing renewed strength, the Fed can increasingly focus on its main remaining problem: inflation.

A resilient labor market gives policymakers significantly more room to keep monetary policy restrictive or tighten further without having to worry immediately about employment.

That makes next week’s inflation data even more important.

If inflation remains elevated or surprises again to the upside, I see a September rate hike as a very realistic scenario, particularly after today’s strong employment report.

Investors remain almost evenly divided on the September decision, highlighting just how uncertain the outlook has become.

In my view, the combination of a resilient labor market and persistently elevated inflation continues to argue for tighter monetary policy rather than an early end to the Fed’s hiking cycle.

The next Fed meeting will be an important test of how independently the central bank can really act.

Global bond yields have climbed to their highest levels since 2008, as rising oil prices fuel renewed inflation concerns and Fed Chairman Kevin Warsh’s hawkish stance pushes markets to price in further monetary tightening.

In Japan, the 10-year government bond yield reached 3.0% for the first time since 1996, while US Treasuries remain under significant pressure. The US 30-year Treasuries are experiencing its worst run since 2006.
Importantly, US yields have now moved clearly above the levels seen before Treasury Secretary Scott Bessent’s recent interventions in the bond market. The temporary relief has effectively disappeared.

As yields rise, bond prices fall. With investors increasingly expecting yields to move even higher, selling pressure in the bond market is building as investors try to avoid further price losses. This creates the risk of a self-reinforcing dynamic: further bond selling pushes prices lower and yields even higher.

Inflation is adding further pressure. Eurozone annual inflation accelerated to 3.3% in August from 2.9% in July, making an ECB rate hike in September increasingly likely.

Markets:

• Equities: Global stocks moving lower

• Bonds: yields moving higher - US 10y yield 4.79%, Japan 10y yield 3.0%

• Commodities: Oil prices moving higher, WTI around USD 87/barrel and Brent around USD 92/barrel
  Precious metals prices lower, gold at USD 4’375/oz, silver falls below USD 65/oz

• Currencies: US dollar slightly higher - Japanese Yen falls again, USDJPY 160

• Cryptos: - Bitcoin back below USD 78k

• Volatility: The VIX index slowly moving highe towards 16 (still good opportunity for hedging)

My View: I started highlighting the trend toward higher yields early, and it seems investors are finally beginning to recognize the reality.

As mentioned repeatedly, investors focusing purely on equities while ignoring the macro picture and developments in other asset classes could be making a serious mistake. Yield levels like these cannot simply be ignored. And neither can what is happening inside bond portfolios.

Bonds are generally classified as lower-risk investments because they typically experience less volatility than equities and, when held to maturity, provide a defined return through coupon payments and repayment of principal.
However, during periods of persistently rising yields along the whole yield curve, bond prices fall, moderately at the short end, but potentially significantly at the long end of the curve.

This matters because conservative and risk-averse investors traditionally hold substantial allocations to bonds. Many of these investors are therefore losing money precisely in the asset class they consider the defensive part of their portfolios.

For much of the period between the Global Financial Crisis and the Russia-Ukraine war, investors operated in an environment of declining yields and disinflation. Falling yields pushed bond prices higher and generated attractive returns for bond investors.

Today, that mechanism is running in reverse with expectations:Higher inflation → higher yields → lower bond prices → negative returns in bond portfolios.

At the same time, higher government yields increase refinancing costs and accelerate the debt problem. The debt spiral is not moving in the right direction, and it is gaining speed.

This becomes particularly important as we enter September, historically one of the more difficult months for equity markets, with midterm-election years deserving additional attention.

The key message remains unchanged: yields are at dangerously high levels, bond markets continue to flash warning signals, and the pressure from debt, inflation and refinancing costs is increasing rather than disappearing.

This is one of the major risks I have highlighted for some time, and one of the reasons why I remai mainly positioned for falling markets.

After roughly a month of relative military calm, the US and Iran have exchanged strikes again, bringing geopolitical risk in the Middle East back into focus.

American forces struck an island in the Strait of Hormuz, while Iran responded by launching attacks on the United Arab Emirates and Jordan.

At the same time, US Treasury Secretary Scott Bessent said today that the objective of the economic pressure on Iran remains to force Tehran back to the negotiating table. However, he also acknowledged that President Trump believes Iran is still “not ready” to make a deal.

Markets: risk appetite fades

• Equities: Most major indices are trading in the red as geopolitical uncertainty returns

• Bonds: Yields are moving higher again. The US 10-year yield is back around 4.76%, while the Japanese 10-year yield has risen to around 2.95%.

• Commodities: Oil prices are higher, with WTI around USD 85/barrel and Brent around USD 90/barrel.
  Precious metals stabilized following Friday's decline, with gold around USD 4,430/oz and silver around USD 66/oz.

• Currencies: The US dollar is weaker against most major currencies, while the Japanese yen has stabilized around USDJPY 160

• Cryptos: slighlty higher - Bitcoin around USD 78k

• Volatility: The VIX index remains at low levels moving back above 15 (still good opportunity for hedging)
  

My View: The resumption of strikes does not come as a surprise to me. The combination of renewed military action and continued economic pressure confirms that the conflict remains far from resolved.

As highlighted repeatedly over recent months, I have remained skeptical that this conflict can be brought to a sustainable end under the current circumstances. The fundamental issues remain unresolved: the Strait of Hormuz, Iran's nuclear ambitions, sanctions and the broader geopolitical balance in the region.

The US increasingly appears to be searching for a way out without having found one. Washington is combining military pressure with economic pressure in the hope of forcing Tehran back to negotiations. But if Iran remains unwilling to accept Washington's terms, the options become increasingly limited.

And the political clock is ticking. The US midterm elections are getting closer. Oil prices remain elevated, inflation remains persistent and US consumers are already paying more for goods and services.
A renewed escalation in the Middle East, particularly one that pushes energy prices significantly higher, would add another layer of pressure on the US consumer and the economy.

That creates an increasingly uncomfortable situation for the Trump administration: maintaining pressure on Iran risks higher oil prices and inflation, while backing away risks appearing politically and strategically weak.

With the midterms approaching, the pressure on Washington to find a solution will only increase.

For markets, the key risk remains unchanged: any meaningful escalation around the Strait of Hormuz could quickly turn today's relatively calm market reaction into a spike in oil prices and a much larger risk-off move.

All eyes will be on Kevin Warsh later today, when he delivers his first major speech since becoming Federal Reserve Chairman at the annual Jackson Hole symposium.

Markets will focus on whether Warsh adopts a hawkish tone on inflation and provides any guidance on the future path of interest rates. Investors will also watch for comments on the recent stress in the Treasury market and Treasury Secretary Scott Bessent’s interventions.

Expectations for clear guidance remain low.

Nevertheless, with inflation rising again, Treasury yields elevated and consumer weakness becoming more visible, his tone alone could move markets.

Markets: wait and see

• Equities: European stocks higher while US falls after yesterday’s move

• Bonds: yields moving higher - US 10y yield back at 4.69%, Japan 10y yield 2.93%

• Commodities: Oil prices stable, WTI around USD 83/barrel and Brent around USD 88/barrel
  Precious metals prices higher, gold at USD 4’610/oz, silver moves above USD 70/oz

• Currencies: US dollar almost unchanged Japanese Yen falls again, USDJPY 160

• Cryptos: lower after recent rally - Bitcoin back below USD 80k after a quick move above USD 81k

• Volatility: The VIX index remains at low levels falling below 15 (still good opportunity for hedging)

My View: A hawkish Warsh could put short-term pressure on risk assets.

Gold and silver could face a short-term setback, although my medium- to long-term constructive view on precious metals remains unchanged. The recent crypto rally could also lose momentum.

A stronger focus on inflation could push bond yields higher again, potentially offsetting the impact of Bessent’s recent interventions.

The Fed faces a difficult combination: inflation remains too high, while higher costs increasingly pressure consumers and an economy already carrying historically high levels of debt.

Cutting rates risks fueling inflation, while staying restrictive increases pressure on consumers, growth and debt refinancing costs.

My view remains unchanged: the Fed is still behind the curve. Therefore, anything other than a hawkish tone from Warsh would come as a surprise to me.

Nvidia delivered another massive quarter last night, reporting USD 96.2 billion in revenue, while Q3 guidance came in at an extraordinary USD 108 billion.

Even more impressive was the longer-term outlook. The company indicated estimated revenue growth of around 70% for fiscal 2028, significantly above previous Wall Street expectations.
Based on the current consensus projection of approximately USD 396 billion in revenue for fiscal 2027, another 70% increase would take Nvidia's annual sales to roughly USD 673 billion.
At that level, Nvidia would overtake Apple and Alphabet based on current Wall Street revenue projections and rank behind only Amazon among the largest US technology companies.

And according to CEO Jensen Huang, even that extraordinary growth rate is constrained by supply rather than demand.

“Our demand is much greater than 70%,” Huang said during the earnings call. “Our supply allows us to confidently deliver 70%, and we’re going to continue to work with our supply chain to increase on that.”

Markets: Nvidia shares are up more than 7% in pre-market trading

• Equities: AI-related stocks are rallying, with Nasdaq futures up more than 1%.

My View: The strong quarter itself is not much of a surprise. Neither is the strong outlook at current stage.
Nvidia remains at the very center of the unprecedented global AI infrastructure buildout, and Jensen Huang's comments make one thing very clear: the immediate problem is not demand. It is supply.

But this is exactly where I continue to question the sustainability of the broader AI cycle. Why?
Because in my view, the AI sector is increasingly driven by the same force currently dominating parts of the equity market: FOMO.

Companies are afraid of falling behind and potentially losing the AI race. As a result, they are buying as much computing capacity as they can secure. The primary question currently does not appear to be: What return will we generate on this investment?

Instead, it is: What happens if our competitors invest and we don't?

That creates an extraordinary demand dynamic. But extraordinary demand today does not automatically mean extraordinary returns tomorrow.

Remember the Toilet Paper?
Think back to the beginning of the pandemic. There was never fundamentally a shortage of toilet paper. But people became afraid that there could be one. That fear itself created the shortage. People rushed to stores and bought far more than they actually needed because everyone feared being the one left without any.

I increasingly see similarities in today's AI chip market. Companies fear being left behind. Therefore, every available chip is being bought. The enormous demand then reinforces the perception that even more capacity is needed, encouraging companies to invest even faster.

The difference, of course, is that we are not talking about toilet paper. We are talking about hundreds of billions, potentially trillions, of dollars in capital expenditure. And that capital is not free.

The bigger question: Who ultimately pays for It?
Nvidia's numbers demonstrate how much money is currently flowing into AI infrastructure. They do not yet answer the much more important long-term question: How much money will ultimately come out of it?
The hyperscalers are spending enormous amounts on chips, data centers, energy infrastructure and networks. Increasingly, part of that expansion is also being financed through debt.

At the same time, several constraints are becoming increasingly difficult to ignore:
Higher bond yields make financing these investments more expensive.

Data centers require enormous amounts of electricity, while power availability and grid capacity are becoming bottlenecks in several regions.

Operating costs remain substantial, even after the infrastructure has been built.

Resistance against new data centers is increasing in some communities because of electricity consumption, water usage, land requirements, noise and infrastructure pressure.

And perhaps most importantly, the end consumer is showing increasing signs of weakness.

That matters because somewhere at the end of the AI investment chain, someone eventually has to generate enough additional revenue and cash flow to justify these enormous investments.

At the same time, pressure on consumer credit is increasing, banks are becoming more cautious and tighter lending standards could further constrain economic activity.

None of this questions Nvidia's current operational strength. The company is delivering extraordinary numbers and currently sits in perhaps the strongest position anywhere in the AI ecosystem.

Another important driver behind Nvidia’s extraordinary revenue growth is its enormous pricing power. With demand exceeding supply, Nvidia can sell not only more chips, but also increasingly expensive chips. However, this raises an important question: How sustainable is that pricing power?
Therefore, today’s exceptional revenue growth should not simply be extrapolated into the future. More competition could eventually pressure both Nvidia’s pricing power and margins.

Nvidia's success today does not automatically validate the economics of every dollar being invested across the AI ecosystem.
That distinction is becoming increasingly important. For the current growth trajectory to continue at anything close to today's pace, AI ultimately needs to generate enough productivity gains, revenues and cash flows to justify hundreds of billions in infrastructure investment.

Maybe it will. But today's valuations already assume that it will.
They leave very little room for a scenario in which AI infrastructure spending slows, financing costs remain elevated, power constraints intensify or companies simply begin asking a question that currently seems secondary:

What is the actual return on all this investment?

Nvidia just crushed the numbers. The bigger test for the AI cycle will come when its customers have to prove that they can do the same.