Markets turned defensive this week. US large-cap tech held up and kept the S&P 500 in positive territory, but that strength masked a broad retreat elsewhere. Small caps, value stocks, Europe, emerging markets, and government bonds all fell as the dollar and oil prices rose together. This looks more like markets pricing in renewed inflation risk, which is why bonds sold off and equities narrowed at the same time.
TOP THEMES THIS WEEK
- The AI trade is losing its momentum. Samsung’s enormous profit jump still triggered an 8% share price fall, and Amazon had to offer higher premiums to get its AI-infrastructure bonds away. Both are signs that investors are raising the bar for returns on equity. This matters because if debt and equity markets both start pricing AI infrastructure more cautiously, the “easy” phase of the AI rally is over.
- Oil staged a sharp reversal contrast with the glut narrative during the week. Oil prices started the week at $72 on news that Saudi Aramco was cutting prices for Asian buyers. Yet as the week progressed, Brent was up almost 10% on a breakdown of the ceasefire between Iran and the US, and sporadic attacks on ships traversing the Straits of Hormuz.
- Private credit is showing real liquidity strain. Over $14.5 billion of investor capital is currently stuck in funds — including ones run by Blackstone and Apollo — that have hit their withdrawal caps, and HSBC has reportedly started pulling back from lending to riskier funds after a run of bankruptcies exposed weak underwriting. This matters because private credit has been sold to many investors as a steady, bond-like alternative. A liquidity squeeze here is a reminder that “steady” doesn’t mean “liquid,” and redemption gates can trap capital exactly when investors want it back. Nonetheless, markets are still on show a contagion to the broader financial system.
- Market breadth has narrowed. This week’s equity gains were carried almost entirely by large-cap growth and tech, while small caps, value, and most of the rest of the world fell. This bears watching as a failure to recover will challenge the rotation thesis that we have seen thus far. The trend is not broken yet.
INVESTMENT IMPLICATIONS The inflation signal coming from oil, bonds, and the dollar moving together is a result of the failed Iran-US ceasefire. We remind readers to note the need for both parties to resume shipment of oil in the Strait, and also how the Middle East producers are finding ways to ship oil without relying on the Strait. Nonetheless, how high oil prices go in the short term and how long it stays there can push inflationary pressure higher for longer. There will be implications for central banks and risk assets.
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