Author: admin

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MARKETS IN BRIEF

It was a broad selloff. Almost every asset class fell together. Equities, bonds, and gold saw losses, with the US dollar and defensive value stocks holding their ground.

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TOP THEMES THIS WEEK

1. The “higher for longer” trade is back and market are repricing fast Strong US jobs data (172,000 added in May) and the fastest expansion in manufacturing in four years have forced a rethink on where interest rates are headed. Market observers are still divided: JPMorgan and BNP Paribas now expect a rate hike as early as December 2026, while Goldman Sachs and Citigroup still expect cuts. Bond market’s broad weekly selloff suggests traders are siding with the hawks.

2. The AI trade hit a reality check Broadcom’s shares fell sharply after its AI chip revenue outlook, while strong in absolute terms, fell short of the extreme growth investors had already priced in. What matters: this is the clearest signal yet that the AI trade is no longer being rewarded for being good. It now has to be extraordinary, and the gap between investor expectations and corporate delivery is narrowing dangerously.

3. South Korea equities collapsed 14.89% in a single week The South Korean market — home to Samsung and SK Hynix, the backbone of global AI chip supply — suffered one of the steepest single-week drops of any major market this year. What matters: South Korea remains up 80% year-to-date, so this could be technical profit-taking, but given its outsized link to semiconductor demand, a continued unwind would signal that the AI infrastructure trade is undergoing a genuine reassessment, not just a breather.

4. Private credit is showing cracks under the surface Both Cliffwater and Monroe Capital capped investor redemptions at 5% after withdrawal requests hit 17% and 9% respectively — far above the limits allowed. What matters: this is a structural warning for investors in private market funds; the promise of stability in private credit is only as good as the fine print, and when stress arrives, the exit door is much narrower than many investors expect.

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WATCH THIS NEXT WEEK

South Korea and the semiconductor trade. The 14.89% weekly drop is too large to ignore. Watch whether it stabilises or extends — a continued selloff in Korean equities would be an early warning that the broader AI and tech trade is unwinding in a way that goes beyond one week’s profit-taking. Given how much of 2026’s global equity performance has been driven by semiconductors and AI infrastructure, a repricing here would ripple across portfolios with any meaningful Asia or tech exposure.

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MARKETS IN BRIEF

Markets were broadly risk-on this week, with equities rising across most regions and credit spreads tightening, but the mood was driven by a narrow theme rather than broad optimism — the semiconductor and AI hardware trade is doing most of the heavy lifting. The standout move was South Korea, up 13% in a single week, with PHLX semiconductors close behind at nearly 6%; everywhere else, gains were modest. Beneath the surface, the simultaneous rally in both equities and long-duration bonds points to markets pricing in lower rate hike odds.

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TOP THEMES THIS WEEK

1. The AI spending boom is hitting a cost ceiling but not stopping. After an initial period of unchecked enthusiasm, companies are beginning to ration their AI usage as costs have escalated far faster than budgets anticipated, with some firms burning through annual AI spending allowances in under three months. This matters because it introduces the first real constraint on the demand side of the AI trade and raises the question of whether the revenue growth that chip and infrastructure companies are pricing in will actually materialise at the pace the market expects.

2. Hyperscaler debt has reached a scale that is reshaping credit markets. Companies like Meta and Alphabet have collectively borrowed over $250 billion to fund AI infrastructure, driving record activity in the credit default swap market as banks seek to offload their concentrated exposure to a handful of mega-borrowers. For investors, this is significant because it means the AI buildout is now a credit market story as much as an equity one.

3. Higher bond yields are here to stay regardless of what happens in the Middle East. Strategists are warning that even a full resolution of the US-Iran conflict and a reopening of the Strait of Hormuz would not bring long-term Treasury yields down materially, because the dominant drivers are now structural: large fiscal deficits, public debt concerns, and a higher long-run neutral rate.

4. US stocks are at dot-com era valuations, but consumers have never been gloomier. The S&P 500 is trading at valuation levels last seen at the peak of the dot-com bubble in 2000, yet US consumer sentiment recently hit its lowest point in 70 years. This disconnect that has no modern precedent. The difference from 2000 is that today’s high valuations rest on AI-driven profit margin expansion rather than shared public euphoria, but the underlying consumer stress, a $1.25 trillion in credit card debt, a 90-day delinquency rate of 13.12%, the highest in 15 years, is a slow-burning risk that equity markets are choosing to ignore.

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WATCH THIS NEXT WEEK

South Korea. A 13% weekly gain in a country index is not normal. Korea is up 27% over the past month and 112% for the year — an extraordinary run that makes it the clearest live test of whether the semiconductor rally has genuine fundamental support or whether it has simply run ahead of itself. If this week’s move consolidates, it signals that the market believes the chip cycle has genuinely turned. If it reverses sharply, it will pull semiconductors, QQQ, and the broader AI hardware trade down with it. Either outcome tells us something important about where we are in this cycle.

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Equity markets ended the week in a broad risk-on mood, with almost every major index posting gains and both large and small caps participating. The dominant force behind the rally remains artificial intelligence hardware — semiconductors were up 6% on the week and have nearly doubled in some Asian markets year-to-date. The one discordant note came from bonds, where long-dated US Treasuries remain under pressure for the year, quietly signalling that not everyone is convinced the good times will last.

The AI hardware trade is not slowing down — it is accelerating. South Korea and Taiwan are the world’s best-performing equity markets this year, powered almost entirely by chipmakers such as Samsung, SK Hynix, and TSMC. This matters because it confirms that the investment cycle is firmly in the physical layer of AI — the chips, the memory, the data centre hardware — rather than in software or platforms.

The Iran war remains the single biggest macro risk — and it is unresolved. The Strait of Hormuz closure has effectively removed around one billion barrels of oil from global supply, and despite President Trump’s suggestion that talks are in their final stages, observers see no sign of either side backing down. Dec 2026 futures prices remain elevated, as markets see a slow recovery in oil supply even as a deal is seen as the most likely outcome.

Interest rates are not coming down — and bond markets are adjusting. The latest US Federal Reserve minutes show a majority of officials are prepared to raise rates further if inflation stays above target, reversing what many had hoped would be a year of cuts. Sovereign bond yields across the G7 are at two-decade highs, and governments are under pressure to fund growing deficits at a much higher cost. This “higher-for-longer” environment is the backdrop against which equity valuations must eventually be judged.

China is the market that the data and the price are both warning about. Domestic spending and investment missed forecasts in April, reflecting an economy where factories and exporters are thriving but ordinary consumers are not. The MSCI China index is the only major equity benchmark in the red for the year (-7.82% YTD), even as Chinese hardware exporters benefit from global AI demand. A few analysts see a mean-reversion opportunity in beaten-down Chinese sectors — but the price action this week does not yet support that view.

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MARKETS IN BRIEF

Markets sent a mixed and unsettling message this week. Energy surged, Brent oil up over 9%, natural gas up nearly 14%, while Asian equities reversed sharply after a strong month, and bonds fell across the board with yields rising. The overall mood is best described as inflation anxiety: the dollar rose, but gold fell, and safe havens offered no comfort, suggesting markets are more worried about the cost of the war.

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TOP THEMES THIS WEEK

1. Oil is back above $100 — and it is not going away soon The Strait of Hormuz disruption knocked roughly 6 million barrels per day out of global supply in Q1, and while a handful of tankers have been allowed through, freight analysts warn that new vessels are not entering the waterway. This matters because energy prices are already up roughly 78% this year, are now feeding directly into US producer price data, and are keeping inflation expectations at their highest since 2022–23, which constrains what central banks can do next. Can Kevin Walsh cut rates?

2. The AI trade is borrowing its way forward — and the cracks are showing The big tech companies are raising extraordinary sums to fund AI infrastructure. Alphabet alone raised nearly $60 billion in four months, and tech now accounts for close to 40% of all high-grade US corporate bond issuance this year. At the same time, AI-related job cuts are up 33% year-on-year, Chinese tech giants are struggling to turn AI spending into profit, and the Apple–OpenAI partnership is fracturing. The investment implication is that the AI trade is increasingly dependent on continued debt appetite and hardware earnings delivery, both of which are now under scrutiny.

3. AI hardware euphoria hit a wall in Asia South Korea, the year’s biggest equity market winner at nearly +84% year-to-date, fell almost 6% this week. Semiconductors and Taiwan have been the central engines of this rally, fuelled by AI hardware demand, but valuations have become extreme and local retail investors are borrowing heavily to chase further gains. When a market that has risen 84% in five months falls 6% in a single week, it is worth paying close attention — this is how crowded trades begin to unwind.

4. Private credit is showing its first real stress signals KKR’s flagship private credit fund for retail investors reported a $560 million loss in Q1, with default rates rising to 8.1%. Separately, Apollo launched a new financial structure that bundles loans and fund stakes — observers have drawn comparisons to the CDO structures that preceded the 2008 financial crisis, though Apollo disputes the comparison. The broader signal is that while private credit has been presented as a stable, high-returning alternative to public bonds, the quality of underlying loans is now deteriorating in ways that are becoming hard to ignore.

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WATCH THIS NEXT WEEK

South Korea (EWY) and the semiconductor trade. This is the sharpest reversal of the year’s strongest trend. EWY is up 84% year-to-date but fell nearly 6% this week alone — the biggest single-week drop in the entire watchlist. The Kospi’s concentration in electronic equipment (over 50% of the index) and the explosion of retail margin trading among local investors are classic late-cycle signals in a crowded trade. If EWY continues lower, expect the weakness to spread into semiconductors globally, then into QQQ and US tech. If it stabilises, the broader AI hardware rally likely has more room. Either way, this is the clearest signal of what comes next.

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INVESTMENT IMPLICATIONS

The combination of surging energy prices, rising bond yields, and a stronger dollar — all at the same time — is a stagflation signal, not a straightforward growth or recession one. This is the most difficult environment for a balanced portfolio because neither equities nor bonds are offering reliable protection simultaneously. Investors heavily exposed to Asian tech and semiconductors after a remarkable YTD run should be asking whether their gains reflect earnings reality or euphoria — the price action and the private credit stress both suggest the latter is increasingly present. The more durable positioning in this environment points towards shorter-duration bonds, selective exposure to energy, and genuine diversification away from single-country or single-sector concentration.

Investors often assume that rising interest rates are usually bad for equities. Higher borrowing costs should slow economic growth, reduce corporate profits, compress valuations and hurt stock prices.

Yet history tells a slightly different story.

Since 1990, the S&P 500 has frequently delivered positive returns during Federal Reserve tightening cycles. Stock markets are ultimately driven more by earnings growth and economic conditions than by interest rates alone.

The key question for investors is not whether the Federal Reserve is raising rates. The more important question is whether the economy and corporate earnings can continue expanding despite higher rates.

What History Shows

Since 1990, the Federal Reserve has gone through five major hiking cycles. During most of those periods, the S&P 500 still generated positive returns.

Fed Hiking Cycle

The historical evidence challenges the simplistic narrative that “higher rates equal lower stocks”.

In fact, the Federal Reserve usually raises rates because economic conditions are strong. Employment is healthy. Consumers are spending. Businesses are investing. Corporate earnings are growing. Inflation pressures emerge precisely because demand remains robust.

In other words, rate hikes often occur during periods of economic strength rather than weakness.

This explains why equities can continue rising during tightening cycles. Earnings growth can offset the negative effects of higher interest rates.

The 2004–2006 cycle is particularly instructive. The Federal Reserve raised rates 17 consecutive times, taking the Fed funds rate from 1% to 5.25%. Despite this, the S&P 500 still advanced about 12% during the hiking cycle. The economy continued expanding, corporate profits remained healthy and financial conditions initially stayed supportive.

Similarly, during the 2015–2018 tightening cycle, the Federal Reserve gradually raised rates while the US economy benefited from improving global growth, strong labour markets and corporate tax cuts. Equities delivered strong gains during most of the cycle.

Even the recent 2022–2023 tightening cycle (one of the fastest in modern history) did not permanently derail equities. While markets suffered a sharp valuation correction in 2022 as inflation surged and bond yields rose, the market later recovered as earnings proved more resilient than feared, particularly within large technology companies benefiting from artificial intelligence investment spending.

The Real Risk Is Usually Not The Rate Hikes Themselves

History also shows that the greater danger often emerges after the Federal Reserve stops hiking.

This may sound counterintuitive. Investors frequently celebrate when the Fed pauses rate increases. Yet some of the most severe bear markets began after the final hike had already occurred.

Fed Hold Period

The lesson is important. A Fed pause does not guarantee safety. What matters is whether economic imbalances are building beneath the surface.

In 2000, the Fed stopped hiking, but the technology bubble was already unsustainable. Corporate earnings expectations became unrealistic and valuations collapsed.

In 2007, the Fed had already paused, but excessive leverage within the housing and banking systems eventually triggered the Global Financial Crisis.

By contrast, the 1995 and 2019 pauses produced strong equity rallies because the economy avoided recession and earnings remained resilient.

What Investors Should Focus On Instead

For long-term investors, interest rates should be viewed within a broader framework rather than in isolation.

Three factors matter more than the absolute level of rates:

First, corporate earnings. As long as earnings continue growing, equities can often absorb higher rates.

Second, economic momentum. Rising rates become dangerous primarily when they push the economy into recession or trigger financial instability. It is the last rate hike that matters, not the first.

Third, valuations. Higher interest rates are more problematic when markets are already trading at extreme valuations disconnected from underlying fundamentals.

Today’s environment remains unusual. Interest rates are restrictive compared to the past decade, yet nominal economic growth remains positive, labour markets are relatively resilient and large technology firms continue benefiting from substantial AI-related investment spending.

This does not mean risks are absent. Elevated valuations, fiscal deficits and geopolitical uncertainties still matter. However, history suggests investors should avoid assuming that rising rates alone are sufficient to end a bull market.

Markets are far more sensitive to collapsing earnings and recession risks than to the mere existence of higher interest rates.

For investors, the key takeaway is simple: do not fear rising interest rates in isolation. Focus instead on whether earnings remain resilient, whether economic growth continues and whether excesses are building beneath the surface. Those factors have historically mattered far more for long-term equity returns.

South Korea’s equity market has undergone a historic re-rating in 2026, transforming from a discounted emerging market into the world’s seventh-largest equity market with a market capitalization of US$4.59 trillion. Within five months, it overtook Germany, France, the UK, and Canada. The rally is no longer driven purely by speculation or policy optimism. It is increasingly supported by structural reforms, AI-driven semiconductor earnings, and institutional capital inflows.

The first pillar of the re-rating is governance reform. Historically, the “Korea Discount” reflected weak shareholder protections, opaque chaebol structures, and poor capital allocation. The government’s “Value-Up” reforms and amendments to the Commercial Act have materially changed this framework.

Fiduciary duties now extend to all shareholders, firms face pressure to improve shareholder returns, treasury shares must increasingly be cancelled, and English disclosures have expanded significantly. These measures have improved investor confidence and driven strong outperformance in the Korea Value-Up Index relative to the broader market.

The second pillar is the AI semiconductor boom. South Korea now sits at the centre of the global AI supply chain through its dominance in high-bandwidth memory (HBM) and advanced DRAM production. Samsung Electronics and SK Hynix have become major beneficiaries, with semiconductor firms now accounting for around 45% of the KOSPI. Demand from major cloud companies such as Amazon, Microsoft, Google, and Meta has effectively locked in production capacity for 2026. Exports surged sharply, while Samsung’s operating profit is projected to reach KRW 83 trillion, supported by strong pricing power and supply shortages in memory chips.

The third pillar is the institutionalisation of Korea’s bond market through inclusion in the World Government Bond Index (WGBI). This is expected to attract large foreign inflows, diversify Korea’s investor base, and support the Korean won. However, liquidity issues in long-dated “off-the-run” bonds remain a technical risk.

Despite the bullish outlook, vulnerabilities remain as highlighted by observers. The market is highly concentrated in large-cap technology stocks, retail leverage has risen sharply, and South Korea remains exposed to trade tensions, especially potential US tariff increases. In addition, weaker domestic sectors face refinancing pressures as interest rates rise.

Still, we remain impressed by how other “non-AI” sectors are doing. Financials, consumer discretionary and construction stocks are up double digits this year. There is evidence of broad participation, despite the bubbly-like performance of the Korean tech stocks.

Overall, South Korea is shifting from a market defined by a valuation discount to one increasingly deserving of a structural premium, driven by governance reform, AI earnings power, and deeper institutional integration into global capital markets.

Markets were firmly risk-on this week, led by semiconductors, Korea, emerging markets and US growth stocks. The rally was broader than the AI mega-cap trade alone, but the falling US dollar and rebound in gold suggest investors are still hedging against policy, inflation and geopolitical risk.

TOP THEMES THIS WEEK

1. AI remains the dominant market engine, but investors are becoming more selective

Markets rewarded companies with clearer AI revenue links (Google), while punishing firms where AI spending still looks heavy and uncertain (META). This matters because the AI trade is no longer being bought blindly; cash flow, execution and visible payoff now matter more.

2. Semiconductors are still carrying market leadership

Semiconductors surged again this week, with the sector up more than 11% over the week and more than 70% year-to-date. This matters because market momentum remains heavily tied to the AI infrastructure cycle, even though breadth outside semis has improved.

3. Energy risk eased late in the week

Oil reversed sharply lower despite strong year-to-date gains, helped by reports of possible movement towards a US-Iran peace proposal. This matters because lower oil prices reduce immediate inflation pressure and support the risk-on move, but the Strait of Hormuz remains the key tail risk. Expect volatility to be high as both sides remain committed to talks but the gap to breach remains wide.

4. Private credit concerns are rising

Reports of institutional exits, fraud-linked losses and markdowns in software-related loans have damaged confidence in private credit. This matters because stress in private markets can spill into banks, insurers, credit funds and risk appetite more broadly.

According to this article, the US stock market’s rally to new highs has been propelled by so few stocks that it’s reminding some on Wall Street of the run up to the dot-com bubble.

I disagree.

1. Breadth Indicator – % of Stocks Above 200DMA
   ~59% of S&P 500 stocks are above their 200-day moving average. Moderate participation, not extreme weakness.

2. Cap-Weighted vs Equal-Weighted Performance
   S&P 500: New highs.
   Equal-weight S&P 500 (RSP): Recovered all the Iran losses.
   Participation exists despite some concentration.

3. Small Cap Participation
   Russell 2000 trading in tandem with S&P 500. Strong small-cap performance suggests broadening rally.

High yield bonds
JNK is trading at new highs, credit market is joining in the rally.

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MARKETS IN BRIEF

Equity markets posted a broad, mostly positive week. Gains were seen across the US, Asia, and emerging markets. Europe was the laggard. The notable exception was credit, where both high-yield and investment-grade bonds slipped even as stocks rose, a warning that not every part of the market shares the same optimism. Gold fell sharply and long-dated US government bonds continued their slow decline, suggesting investors are antsy about inflationary pressures.

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TOP THEMES THIS WEEK

1. Big Tech is spending like there is no ceiling on AI Microsoft, Alphabet, Meta, and Amazon are collectively on track to spend over $670 billion on AI infrastructure in 2026 alone, driving strong earnings but raising serious questions about when and whether the returns will justify the cost. For markets, this level of spending is both a source of near-term economic resilience and a longer-term vulnerability. If growth disappoints, Big Tech valuations are likely to take a hit.

2. The Iran war is reshaping the energy market in ways that go beyond the price of oil Brent crude hit $126 a barrel this week before pulling back to $108, and an estimated one billion barrels of supply has effectively been locked out of global markets by Strait of Hormuz disruption. More structurally significant: the UAE announced it is leaving OPEC, a move that could eventually trigger a price war with Saudi Arabia. Expect lower prices when the Strait is open for business.

3. The US economy looks resilient on the surface but the underneath is uneven US jobless claims fell to their lowest level since 1969, and Q1 GDP growth came in at 2% annualised, partly driven by a 10.4% surge in business investment linked to AI. But the picture is described as “extremely polarised”. Large companies and wealthy households are doing well, while smaller businesses and average earners are under real pressure, a dynamic that matters for how long the current consumer-driven resilience can last.

4. Emerging markets are quietly having a very strong run The MSCI Emerging Markets index is rising roughly three times faster than US equities this year and trades at a 44% discount to the S&P 500, the widest gap in a year. South Korea, which is heavily weighted towards semiconductors, is up over 66% year to date and gained nearly 5% in the week alone. This is not a small or speculative move; it has the character of a genuine reallocation.

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WATCH THIS NEXT WEEK

Long-dated US government bonds (TLT).

This instrument has now fallen across every time period on a weekly, monthly, year to date, one year, and three years. This week it fell again even as equities rallied broadly. Normally, when risk appetite is healthy, bonds simply go sideways; actively selling government bonds while buying equities is a more pointed signal. It suggests that at least part of the market is worried about the US fiscal position and inflation staying sticky, both of which connect directly to the Iran war energy shock and the AI-driven spending surge.

The decision by the UAE marks a potential shift in how the oil market functions — from a system where supply is managed to support prices, to one where producers compete for market share.

That distinction matters. It changes how we think about oil prices, inflation, and asset markets over the next few years.

The UAE’s decision to leave the Organization of the Petroleum Exporting Countries reflects a growing mismatch between its own economic strategy and OPEC’s system of production quotas. Over the past decade, the UAE has invested heavily to expand its oil production capacity to around 4.5 million barrels per day, yet OPEC constraints have kept output closer to 3.4 million. As a low-cost producer, the UAE increasingly sees these limits as a direct loss of revenue. For it, the priority is no longer simply supporting prices, but maximising total income—producing more oil even if prices are somewhat lower.

This divergence is rooted in fiscal realities. The UAE’s government budget can balance at oil prices of roughly US$50 per barrel, while Saudi Arabia requires closer to US$90. That difference shapes behaviour. Saudi Arabia needs higher prices and is therefore incentivised to restrict supply. The UAE, by contrast, has greater flexibility. Its more diversified economy, combined with income from large sovereign wealth funds, means it can tolerate lower prices and focus on increasing volume instead.

The timing also reflects a shift in the broader energy landscape. Oil demand remains strong today, but the long-term outlook is becoming less certain as electric vehicles, renewables and energy efficiency gain traction. For the UAE, the logic is straightforward: monetise reserves while demand is still robust, rather than risk leaving value in the ground later. At the same time, cohesion within OPEC has already been weakening, with uneven compliance and rising internal tensions. The UAE’s exit is therefore less a sudden break and more a recognition that the system is no longer fully aligned with its interests.

Taken together, the move signals a deeper change in how major producers think about the oil market. If more countries adopt a similar approach—prioritising market share over price stability—the result would be a shift away from coordinated supply management towards a more competitive environment. For investors, that raises the likelihood of greater price volatility and a gradual downside bias in oil over the medium term.

Once the Strait of Hormuz is opened, expect a decline in oil prices over the medium term as oil producing countries begin to increase oil production to maximise revenues. This is a bullish scenario for global equities.