Today, the committee, led by Christine Lagarde, raised its deposit facility rate by 25bps to 2.25%, its first rate hike since September 2023. Even though the move was widely anticipated (65 of 67 economists surveyed by Bloomberg expected this outcome), it was the updated staff projections on inflation and growth that caught our attention, as did Lagarde’s own comments at the press conference.

It’s clear to us that the ECB have swiftly pivoted to a “go big or go home” approach to tackling the inflationary impact, and we now think the deposit rate can rise multiple times this year. Lagarde clearly did not frame today’s 25bp hike as a one-off response or an insurance hike, as we thought they might, to retain optionality further out.

Yet we believe the multiple likely hikes this year will ultimately prove to be a mistake, given the likely hit to economic growth, and could see EUR come under pressure later this summer. This leads us to add a six-month EUR/USD option structure.

Inflation Projections Lifted…

The ECB revised its inflation forecasts significantly upward and trimmed growth expectations, as detailed below.

That makes it difficult for the ECB to sound dovish. In the baseline, inflation is not back at target until 2028, while core inflation remains above target through the entire projection period. The ECB also expects headline inflation to peak at 3.4% in Q3 and Q4 2026 and remain above 3% until early 2027, with the energy shock gradually feeding through to food, goods, and services.

The scenario analysis strengthens the point. In the milder scenario, oil normalises faster, inflation undershoots the 2% target in 2027 and 2028, and growth recovers more robustly. But that is essentially the “everything calms down quickly” case. The more policy-relevant risks sit in the adverse and severe scenarios. In the adverse scenario, HICP inflation runs at 3.3% in 2026, 3.0% in 2027 and 2.3% in 2028, with core inflation peaking at 2.7% in 2027. In the severe scenario, headline inflation reaches 4.0% in 2026 and 5.3% in 2027, while core inflation rises to 3.8% in 2027 as energy costs feed into domestic prices and wages.

So even though Lagarde did not pre-commit to further hikes, the updated inflation figures clearly shifted the burden of proof. With inflation revised higher, core inflation above target through 2028, and adverse scenarios indicating a meaningful risk of second-round effects, the GC has effectively told markets that today’s hike won’t fix all of that and, therefore, more tightening is needed.

It’s not even just our perception here, as the ECBspeak Index continues to climb.

The extent of any further tightening wasn’t specified, with Lagarde saying there would be no preset rate path. The neutral rate wasn’t discussed either, but consensus is that it’s around the 2.50-2.75% range, which would suggest at least two further hikes this year. Arguably, in order to materially provide an impact to dampen the inflationary pressure, we’d say it needs to be at least at the neutral range, if not higher.

…But Growth Downgraded

The problem as we see it lies in the health of the economy, which will only be put under further pressure from monetary policy tightening.

The ECB now sees eurozone GDP growth at just 0.8% this year and 1.2% next year, both lower than previously expected. That is not recessionary, but it is hardly an economy with much spare capacity to absorb additional tightening. The central bank is raising rates into an economy already being squeezed by higher energy costs, weaker consumer confidence, slower household spending and pressure on exporters.

If the inflation problem was being driven by excessive domestic demand, we’d be less concerned. But it’s not. It is being driven by an external energy shock.

There’s also concern that although higher interest rates can cool demand and lean against second-round effects, they cannot produce more oil, reopen supply routes or remove the geopolitical risk premium from energy markets. What’s to say that the base rate needs to go higher still in 2027 if we don’t get a conflict resolution in H2?

The central bank statement concluded it could no longer wait out the shock, prioritising price stability over economic momentum. That’s all well on paper, but markets aren’t stupid when assessing longer-term implications.

Turning to the Trade

Read more

US equities began the week with another record on Tuesday, as another burst of AI enthusiasm carried the market higher. Nvidia (NVDA US) pushed deeper into the PC market, Alphabet (GOOGL US) raised $80 billion for AI-related capex, and Marvell (MRVL US) surged after Jensen Huang declared it could be the next trillion-dollar company.

By Friday, the same mega-cap and semiconductor names that had dragged the market higher since March became the source of the drawdown. Broadcom’s (AVGO US) disappointing forecast was the first real warning that AI expectations are now running ahead of even strong fundamentals. In a market priced for perfection, “good” no longer clears the bar.

The jobs report then turned a valuation wobble into a rates shock. May payrolls came in far stronger than expected, with positive revisions reinforcing the idea that the US economy is not slowing enough to justify easier policy. Fed pricing moved further toward hikes, while the dollar squeezed higher.

Geopolitics remained in the background rather than the driver. The US-Iran ceasefire looked increasingly fragile, with little progress toward reopening the Strait of Hormuz and fresh clashes testing the truce. Oil and the dollar still carried some war premium, but the dominant move was domestically in the US.

The CTA setup adds another layer of fragility. Goldman Sachs estimates that systematic flows now look asymmetric, with downside scenarios carrying far more potential selling than upside scenarios offer buying. The rally has leaned heavily on momentum, positioning, and forced participation. Once those flows turn, the same mechanics that supported the market can amplify the reversal.

The burden of proof has shifted. AI still has the structural story, earnings are not collapsing, and the S&P 500 remains close to highs after an extraordinary run. But the combination of stretched expectations, narrow leadership, and a Fed path moving toward hikes leaves the market much less forgiving.

Let’s get into the guide to trades moving markets, where things stand and where they may be heading.

• “Equity Risk-Off”

• “US Rates View”

Equity Risk-Off

Read more

On paper, issuance is still a long way from the madness of 2021. US IPO volume has edged higher in recent years, but the five-year average remains near its lowest level in four and a half decades.

A few aftermarket stats: mean first-day returns (equal-weighted) were 11.9% in 2023, 15.3% in 2024, and 29.3% in 2025.

More revealing still is the quality of the appetite. 53% of 2025 IPOs had negative trailing earnings, and the loss-making cohort enjoyed mean first-day returns of 39.8%, against 17.2% for issuers with positive EPS. That trend tracks back in five of the six years this decade. Markets react as much to narratives as they do to fundamentals.

Ahead of the big release, we wanted to run through some comments on Musk’s history of selling narratives, some equity market plumbing on float size and Nasdaq inclusion/S&P exclusion, and the read-throughs for the upcoming AI IPOs.

Subscribe now

Not Just a Space Company

In 2018, SpaceX President Gwynne Shotwell said that the company would not go public until it was flying regularly to Mars. Musk himself had echoed a similar thought over the years. For a space company, that makes sense. Having to stand up and explain your quarter to shareholders has its drawbacks. And for a research-heavy, capex-heavy company, focusing on engineering progress matters far more than quarter-to-quarter bottom lines. But that old logic has collided with a new reality. The dream has got bigger, as has the bill.

Read more

That’s what makes the latest sell-off more interesting than the usual crypto drawdown. Tuesday’s uncorrelated move took Bitcoin’s weekly decline to 11% and erased roughly $160 billion in market value. This does not mean Bitcoin is dead. Assets do not die just because their holders have a bad week. But Bitcoin’s newfound characteristics suggest that the trade has entered a different phase.

In our view, the old pitch relied on volatility, purity, and unfinished upside. All three now look weaker. Speculative capital has found a more exciting outlet in AI, semiconductors, and memory stocks. The largest symbolic buyers are no longer quite as mechanically one-way as the market assumed. And the great institutional and regulatory catalysts that once sat in the future have largely arrived.

Bitcoin has not lost its relevance, but it is increasingly losing its edge. The asset that began as a rebellion against the financial system is now liquid, institutionalised, ETF-wrapped, policy-recognised, and increasingly well-behaved.

Bitcoin has become what it swore to destroy.

Subscribe now

The Monopoly on Volatility

Part of Bitcoin’s recent underperformance can be explained by a shift in where speculative capital now believes the best trading assets are located to generate large short-term returns.

For much of the last cycle, Bitcoin was the high-beta expression of liquidity and retail risk appetite for those chasing what was coined “financial nihilism.” This is the belief that traditional methods of building wealth are broken or inaccessible, driving the younger generation to an “all or nothing” mentality via dumping money into highly volatile assets.

Throughout periods of 2024 and 2025, it offered these nihilistic speculators regular large price moves with perceived permanent narrative optionality (institutional adoption, CLARITY Act, etc.). More than that, Bitcoin contained a market structure loose enough for momentum to feed on itself.

That proposition has become less compelling as the asset has matured. ETF ownership, institutional hedging, deeper liquidity, and a broader derivatives market have made Bitcoin more investable, but also less feral. In other words, the same institutional adoption that helped legitimise the asset has also dampened some of the volatility premium that made it attractive to retail and pro traders in the first place.

For example, the one-month ATM implied vol for Bitcoin is currently 36.9. Contrast this to some large-cap equity names that have been the flavour of the month (and arguably the past year).

The implied vol is direction agnostic, but that’s not the point we’re trying to prove here. Traders don’t really care whether the asset is moving higher or lower, they just want the potential for future price movements to be high. The greater the potential volatility, the greater the chance of loading up on quick riches.

Speculative capital that seeks these riches is not loyal. It follows realised movement and implied volatility. If Bitcoin is no longer offering the sharpest upside tails, traders will look elsewhere for volatility with a better story attached.

As we’ve just visually depicted, that story right now is in AI infrastructure, semiconductors, and memory.

They contain the same formula as Bitcoin did a couple of years ago. We’re talking about violent moves, strong narrative momentum, and a credible structural growth backdrop. If you removed the legend from the chart below and asked someone two years ago which normalised return was linked to the Galaxy Crypto Index and which was linked to the semiconductor index, gold, and silver, we’d wager the majority would get it wrong.

To a certain extent, this thesis extends into the future. May was a tough month for outflows from IBIT, and logically this cycling out of Bitcoin hasn’t just found a home in the money markets. Money is actively flowing out of crypto and into higher-volatility assets, which, in turn, makes those assets more volatile and attracts more capital. That’s the problem for Bitcoin going forward. It has not entirely lost its narrative; it has simply lost its monopoly on volatility.

Bitcoin ETF flows turn persistently negative over May…

…while VanEck Semi ETF trading volume enjoyed a bumper month.

While the AI boom is grounded in genuine fundamentals, it has also become the latest vessel for financial nihilism, offering a new arena for speculative hope at a time when crypto’s promise of escape no longer feels quite as compelling.

Sayl-ing Away

Bitcoin’s short-term weakness has also been amplified by a more subtle confidence shock, as news broke that Saylor’s Strategy sold Bitcoin. In absolute terms, the sale was irrelevant. A disposal of 32 BTC against a treasury still measured in the hundreds of thousands does not change the supply-demand balance of the asset.

According to Citi, the sale was anticipated as Strategy had signalled plans to dispose of certain tax-disadvantaged bitcoin holdings during its Q1 earnings call as part of a portfolio optimisation effort.

But markets do not trade only on size. They trade on symbols, and Strategy has been one of the most important symbols in the Bitcoin ecosystem. Michael Saylor built the company’s public identity around the idea that Bitcoin was not a trading asset, but a permanent treasury reserve. Strategy was not supposed to sell Bitcoin. Strategy was supposed to buy Bitcoin, hold Bitcoin, issue paper against Bitcoin, and then buy more Bitcoin (even if this doesn’t actually make sense in the real world).

So when we boil it down, the issue is not that 32 coins hit the market. The issue is that one of the flag-bearing corporate holders has introduced a new uncertainty into what had previously been a very simple story. For years, the appeal of Strategy and the wider Bitcoin treasury cohort was that they behaved almost mechanically. They bought, they held, and they reinforced the idea that institutional adoption would create a one-way absorption vehicle for supply. The moment that model becomes conditional, even at the margin, the market has to reprice the narrative.

If the most evangelical holder can sell a small amount to fund obligations, then investors have to at least consider whether other Bitcoin treasury vehicles might also become sellers if financing costs rise, equity premia compress, or balance sheet pressure builds.

In the age of misinformation on social media and the plethora of so-called crypto gurus, it’s also hard for some retail traders to see the wood from the trees. For anyone who instead listens to their favourite crypto doomsayer, the story can easily be spun into Strategy starting to sell holdings due to being underwater, etc. Again, it’s the narrative, not the size.

Bitcoin has not been damaged by the size of the sale. It has been damaged by what the sale says about the purity of the holder base.

“We’re So Early”

We touched on it earlier, but another factor at play is that crypto bros are no longer early to the party.

For much of the last decade, Bitcoin was the cleanest expression of being early to the next financial architecture. Institutions hadn’t arrived. Regulators had not fully turned. ETFs had not been approved. Traditional finance had not built the pipes. Buying Bitcoin felt under-owned and under-discovered.

That is harder to argue today, and therefore pushes it more towards a maturing asset where reasons for explosive growth are harder to justify. Institutional adoption has already happened. Spot Bitcoin ETFs are live, asset managers have products, custody has improved, corporates have put Bitcoin on balance sheets, and the language of digital assets has been absorbed into mainstream finance.

Let’s also not forget that the regulatory environment (particularly in the US) is also about as favourable as it has ever been. Bitcoin has already received the policy and institutional recognition that bulls once argued would unlock the next leg of demand.

The crypto crowd might argue that the “we’re so early” tagline can’t apply to AI either, but we’d disagree. Semiconductors have been a popular feature of the AI trade since the unofficial beginning of the trade (the launch of ChatGPT in November 2022). The picks-and-shovels approach. And yet, March 2026 may have presented itself as the ideal time to go long semiconductors in this cycle.

For Bitcoin, the problem is not that the story has disappeared. The problem is that the story has matured. The easy narrative tailwinds have been harvested. The asset is still investable, but it no longer carries the same informational edge.

The Bottom Line

To reiterate, we’re not perma-bears on crypto. We could argue why a diversified portfolio might still deserve small allocations to the major coins. However, the narrative of Bitcoin heading “to the moon,” with some forecasting earlier this year of a $250k target by the end of 2026, just lives in fairy land.

It no longer has the volatility appeal, it’s no longer the early trade, and short-term actions from Saylor expose the sensitivity of the market.

Crypto isn’t dead, but the investment pitch has changed over the past six months more than we believe some people appreciate.

AP

The market’s leadership remained heavily concentrated in AI beneficiaries. Micron crossed the $1 trillion market-cap threshold, while AMD and Broadcom advanced again. Dell was the standout, surging after lifting its annual sales outlook on the back of AI server demand as RetroTech continues its omeback.

Oil provided the other major support. Crude fell around 7% as hopes for a 60-day US-Iran truce extension gathered momentum, easing some of the inflation anxiety that had dominated the previous month. The energy sector lagged as a result. Lower oil gives equities breathing room, especially when the Fed is still more worried about inflation than growth. The problem is that the peace process remains incomplete. Mixed signals from both sides mean markets are pricing progress, not resolution.

The macro backdrop improved, but not enough to change the Fed story yet. Core PCE came in slightly softer than expected, giving equities a clean disinflation impulse for the first time in a while. Fed speakers remained firmly cautious, with several officials still openly discussing the possibility of hikes if inflation fails to cool.

Rates reflected that tension. Treasury yields moved lower on Iran optimism and softer inflation, but the curve itself was stable and demand at supply remained healthy. At the same time, options flow still showed traders paying for upside yield risk, with 10-year structures targeting levels above 5%. In FX, the dollar ended broadly flat as month-end support offset the risk-on selloff following positive Iran headlines. Spot markets still look ready to fade dollar strength on peace news, but options continue to price a more durable USD premium, especially in USD/JPY.

Subscribe now

Let’s get into the guide to trades moving markets, where things stand and where they may be heading.

• “Earnings Season Takeaways”

• “Japan’s $73bn Speed Bump”

• “NFP Preview”

Earnings Season Takeaways

With the bulk of corporates now having reported for Q1, there’s enough data to get clean takeaways from a helicopter view rather than just at a company-specific level.

Read more

AI has spent the past three years proving that it can write, summarise, and imitate. One of the next phases will be far more commercial: can it lift, sort, grasp, walk, inspect, and do it repeatedly enough to earn a line item in an operations budget? Of course, we’re talking about physical AI.

Nvidia’s (NVDA US) own definition is useful here. “Physical AI” is not just a humanoid that represents the science fiction future we imagined as children, but AI that can understand and interact with the physical world, spanning industrial manipulators, mobile robots, humanoids, and even robot-run infrastructure such as warehouses and factories. In that sense, physical AI is the attempt to turn intelligence into labour.

The installed base is already large before the humanoid dream fully arrives. The International Federation of Robotics says 542,000 industrial robots were installed globally in 2024, taking the worldwide operational stock to 4.664 million units. Physical AI is already underway. It began in factories, fulfilment centres, and logistics networks that already buy automation.

Amazon (AMZN US) is the clearest reminder that the “physical” part of AI need not look like a person to matter. In mid-2025, the company said it had deployed its one millionth robot across more than 300 facilities, making it the world’s largest operator of mobile robotics, while its new DeepFleet foundation model is designed to improve fleet travel time by 10%. Far from science fiction. Long before a humanoid folds your laundry, a more prosaic machine will probably move your parcel.

Humanoids, though, are where the imagination and the optionality sit, because the world is built to human dimensions. Apptronik says Apollo1 (a General Purpose Humanoid Robot) is designed to work in areas built for people, and Amazon made the same point about Agility’s Digit2: its size and shape are suited to buildings designed for humans. Figure’s 11‑month deployment at BMW’s Spartanburg plant gives the best recent evidence that this is moving, slowly, from concept to shift work: its Figure 023 robots ran 10-hour shifts, loaded more than 90,000 parts and contributed to the production of more than 30,000 X3 vehicles. GXO, meanwhile, says it has trialled three humanoid prototypes and was the first logistics provider to deploy such technology in a live operating facility.

This is the real split in the theme. The public sees the sci-fi skin, while corporates see another way to fill a repetitive task in a human-native space.

The Market Shift

This theme has plainly become louder over the past year. Investor interest in embodied AI accelerated meaningfully after Jensen Huang’s CES presentation on physical AI and robotics in 20254, adding that it was fielding questions daily from investors on how to express the theme in public markets. By January 2026, Arm Holdings (ARM US) had reorganised to create a dedicated Physical AI unit. In market terms, that is how a phrase becomes a sector. Humanoids are the next phase of the AI hype cycle, but turning viral machines into useful workers remains difficult and expensive.

The reason the fascination is not only promotional is that the underlying software stack has improved meaningfully. Nvidia’s Isaac GR00T N1, launched in March 2025, is presented as the first open humanoid robot foundation model and is paired with synthetic-data generation blueprints and a robotics physics engine. Figure’s Helix, unveiled in February 2025, is a vision-language-action model that combines perception, language and whole upper-body control, and Google DeepMind’s Gemini Robotics and Gemini Robotics‑ER extend Gemini 2.0 into robotic action, embodied reasoning and spatial understanding. In non-technical terms, the market hears that large-scale AI may now translate language and perception into motor control with fewer hand-coded rules and more generalisation.

Embodied AI may be a secular trend even while many of its listed beneficiaries still look, and are priced, like industrial or automation companies. The first money made in a theme is often made by the infrastructure.

The Economics of Embodied Labour

The long-run economic case for physical AI is not difficult to sketch. Start with labour. Labour shortages raise recruitment and operating costs, disrupt production, and can weaken growth and innovation. The UN’s latest population work points to a world that is ageing steadily, with the global population aged 65 and above projected to reach 2.2 billion by the late 2070s, surpassing the number of children under 18. Sure, we’re not looking at 2070 for this thesis to play out, but it goes to illustrate the direction of travel. GXO makes the same point from the warehouse floor, arguing that growth in the working-age population is slowing. This is the first durable pillar of the theme: in many rich economies, the question is whether there is enough labour in the right place, on the right shift, at the right cost.

The second pillar is that the human form can be economically convenient. Humans designed the world for the human body, so a humanoid can, in principle, operate without a full factory redesign. Mercedes-Benz said much the same when it announced its Apollo pilot, noting that humanoids could automate physically demanding, repetitive tasks in spaces designed for people, not robots. For a meaningful class of environments (brownfield logistics, general manufacturing, internal transport, tote handling, machine tending), the retrofit burden can be lower than many sceptics assume.

The third pillar is the cost curve, and here the market should watch what is already happening. Morgan Stanley estimates that the cost of a humanoid in a high-income country may fall to around $150,000 by 2028 (from $200,000 in 2024) and $50,000 by 2050, with lower-income supply chains potentially far below that. Meanwhile, Unitree’s G1 is currently listed at $13,500 on the company’s own shop page. Those are not like-for-like products in capability, of course, but the hardware price tag is coming down, especially at the lower and narrower end of the capability curve. When paired with software improvements, an absurd prototype becomes a tolerable capital request.

The fourth pillar is the financing model. In the latest IFR service-robot dataset, professional service robot sales reached almost 200,000 units, with transportation and logistics accounting for 102,925 units, or 52% of the market. This is already the most commercial part of the physical AI stack: mobile robots moving goods through warehouses, factories and hospitals. The category grew 14% year-on-year, while robots-as-a-service adoption in transportation and logistics rose 42%, with the broader RaaS fleet up 31%. The payment model turns robotics from a capex decision into an operating-cost decision, allowing the technology to get out of the demo room and into the P&L. Apptronik explicitly pitches Apollo through a RaaS lens, arguing that it can deliver ROI from the start and reduce total labour cost.

The fifth pillar is the learning flywheel. Nvidia says synthetic data, simulation and post-training are central to robot improvement, while Amazon’s DeepFleet shows that once large robotic fleets exist, software can extract additional efficiency from the installed base. This is what makes the sector potentially self-reinforcing. More deployments produce more data > more data produces better policies > better policies improve ROI > better ROI produces more deployments. The bridge years are unlikely to be cleanly autonomous. They will probably be messy, with narrow-task deployments, supervised autonomy, and staged roll-outs. But economically, that’s good enough. Markets rarely wait for perfection if acceptable productivity arrives first.

The Bottlenecks

“Bottlenecks” might be the most featured word in research this year. However, Dexterity remains the most underappreciated hurdle. Useful robot models must be general, interactive, and dexterous. Many everyday tasks still require fine motor skills that remain difficult for robots. One of the top hardware failure points in the field was the forearm, a subsystem constrained by tight packaging, dexterity demands and thermal limits. The machine can look splendid in a demo and still lose a shift to heat, cabling, or wrist complexity.

Battery life, payload, grip quality, and stability are equally unforgiving. Apptronik’s own specifications still centre on a four-hour battery pack and a 55-pound payload, while GXO says its field feedback has focused on battery life, ability to carry heavier loads, floor stability, dexterity, and integration with other automation. In other words, the three unlovely ingredients of industrial reality (uptime, safety, and interoperability) are still doing the vetoing.

Timing, then, is the issue. Morgan Stanley’s forecasts assume adoption remains relatively slow until the mid-2030s, with acceleration later in the decade, and it expects roughly 90% of humanoid use in 2050 to be industrial or commercial rather than domestic. Investors should think in layers: arms and AMRs are already commercial, humanoids in structured industrial settings are the emerging wedge, and the household generalist remains the expensive mirage that sells narrative before it sells units.

So, who are the beneficiaries in the short-term?

A Public-Markets Basket for Physical AI

To build a public-markets basket around physical AI today, we would avoid the temptation to bet everything on one future humanoid champion. Most of the marquee OEMs are still private, and the listed route is cleaner through the stack: compute, simulation, factory automation, motion control, machine vision, and precision components. Morgan Stanley’s “Humanoid 100” value-chain framing is the right instinct (more details of this further on). Deployed automation already exists, while the sexier part of the story is only just entering controlled commercial use. The best basket is therefore a barbell between AI infrastructure and industrial incumbency.

Read more

In what has become a predictable start to these week-ahead notes, US equities extended their winning streak to eight weeks, the longest run since 2023. Improving signals out of US-Iran negotiations helped ease geopolitical risk that has been present in markets since Q1. Oil was lower on the week off due to that same sentiment, but feed-throughs to inflation are already causing problems elsewhere. US rates have pivoted from two cuts priced pre-war to a hike before the year is out. But then again, equities are higher still.

Nvidia (NVDA US) was last week’s main course, but sang a familiar tune of realised coming in below implied vol. We’d call it a non-event compared to NVDA of old. Off 4.5% from prior Friday’s close. As for the results themselves, the flagship of the AI chip trade beat headline expectations, lifted its dividend and announced an $80 billion buyback. The disappointment in price action did not spread across the entire complex (SMH +3.5% on the week), with Dell (DELL US) and Qualcomm (QCOM US) still posting strong gains, but it did reinforce the point that the market is becoming more selective. AI is still the anchor, but not every beat is enough anymore.

UBS noted that the S&P 500’s recent six-week advance was the narrowest in 35 years, which captures the tension well: the index keeps making progress, but its leadership structure looks fragile. Positioning in semis is quite something.

The most important macro development was expressed most cleanly in rates. Waller struck a hawkish tone and backed, removing the easing bias from the FOMC statement, joining other officials who have pushed back against the idea that policy is close to turning easier. The FOMC minutes showed a majority of officials believe a hike could be warranted if inflation persists. Longer-term inflation expectations were revised higher.

A well-received 20-year auction at 5.122% on Tuesday helped stabilise bond sentiment mid-week. UK 30-year gilts surged toward 6%, and German bund yields also rose, making this a coordinated global bond selloff, not a US-specific story (market memo: “Making Sense of Yields”). Japan’s 30-year exceeded 4%, quite the move from near-zero yields just six years ago.

In currency land, the dollar remained steady, with dips on positive Middle East headlines being bought, suggesting underlying demand remains intact. The dollar bid is increasingly tied to Fed repricing and energy dynamics rather than safe-haven demand.

Let’s get into the guide to trades moving markets, where things stand and where they may be heading.

• “Rates: Cuts Are Buried, But Hikes Look Too Certain”

• “Equities: Shrugging Off Yields, China’s Chips, and WHAM”

• “Commodities: Returning to an Old Favourtie”

Subscribe now

Rates: Cuts Are Buried, But Hikes Look Too Certain

Kevin Warsh was sworn in last week, but not into the environment markets once imagined when his name first moved into serious contention.

The original Warsh trade was straightforward. A Trump-aligned Fed governor with a public record of criticising the Fed for keeping policy too tight and with a more optimistic view on AI-driven productivity… it all looked like a clear dovish impulse.

That was then.

Read more

Implied yields on G7 government debt with maturities beyond 10 years had climbed above 4.6% for the first time since 2004. The US 30-year Treasury is around 5.17%, the UK 30-year gilt touched 5.82%, and the Bank of Japan is being forced to consider whether market instability might require a slower pace of balance-sheet run-off.

Each country may have individual reasons adding to its bond selloff, but the selloff itself is global.

There is one main story driving this higher, a noisy one of war, oil, and inflation expectations. Markets now have the Fed on hold through 2026, and have shifted far enough to price a possible hike by January. Beneath that headline story, there are a few dynamics we think deserve more attention.

• The first is that hyperscalers are funding an AI buildout of extraordinary scale, and have increasingly leaned on debt markets to do it.

• The second is that a continued shift higher in rates changes the equity leadership map, making financials and banks a more natural home for risk than the most duration-sensitive parts of the market.

• The third is that the UK has its own idiosyncratic fiscal and political vulnerabilities, which give long-end gilts a higher beta to the global duration selloff than US Treasuries or most other G10 markets.

Not all rising yields are equal. A move driven by collapsing credit quality is one thing. A move driven by stronger nominal growth, higher real rates, and a fatter term premium is another.

Read more

Earnings helped sustain momentum in the semiconductor complex for much of the week, with investors increasingly treating any short-term weakness as a buying opportunity rather than the beginning of a broader unwind. Q1 has shown that semiconductor earnings strength is fundamentally different from the late-1990s revenue mirage.

Geopolitics added another layer of pressure. During his visit to China, President Trump’s remark that the US did not need the Strait of Hormuz open triggered a sharp rebound in oil prices, reinforcing the view that even if active hostilities in the Middle East fade, energy markets are unlikely to return quickly to pre-war normality.

The final pressure point came from abroad. Political instability (“The Starmer Drama”) in the UK triggered a disorderly selloff in gilts, particularly in the long end, which spilt directly into global bond markets. The combination of higher inflation prints, elevated oil prices, and fiscal concerns abroad created a toxic mix for duration. Treasury yields accelerated sharply higher into Friday’s open, with the move in long-end rates finally becoming too large for equities to comfortably ignore.

That dynamic was particularly visible in the market leadership reversal late in the week. High-duration growth equities, especially speculative technology and non-profitable tech names, came under renewed pressure as real yields rose.

On policy, OIS markets now fully price a 25bp hike by March 2027, a remarkable shift from early March, when traders were still pricing cuts for late 2026. The direction of travel matters as much as the level itself.

In FX, the dollar benefited from almost every major macro theme simultaneously: higher oil prices, stronger rate differentials, geopolitical uncertainty, and weakness in sterling.

For months, AI enthusiasm, resilient earnings, and systematic inflows have been able to overwhelm macro concerns. Friday served as a reminder that there are still limits. As long-end yields move toward cycle highs and inflation remains sticky, the market’s tolerance for expensive duration-sensitive assets becomes increasingly fragile. The AI trade remains intact. The question now is whether it can continue carrying the broader market alone in a world where the cost of capital is structurally moving higher.

Let’s get into the guide to trades moving markets, where things stand and where they may be heading.

• “Inflation, Inflation, Inflation”

• “Semi’s: 2000 vs. 2026”

• “You Win Summ(it), You Lose Summ(it)”

• “Nvidia Earnings, Same Old Story?”

Subscribe now

Inflation, Inflation, Inflation

UK

The week ahead for the UK promises a lot to digest for markets, both on the political front and in the economic data.

Let’s start on the data side. April UK inflation is expected to deliver a modest fall, with headline CPI forecasted to slow 0.3% to 3.0% y/y, broadly in line with the Bank of England’s April MPR forecast, while core CPI is expected to fall more sharply, down 0.5% to 2.6% y/y.

This might surprise some, given the UK economy’s sensitivity to the energy spike. Yet if we look below the surface, the headline print should be restrained by softer services inflation, even as the energy complex moves higher. Pump prices are expected to rise materially as the shock continues to feed through to petrol and diesel, but this is partly offset by the fall in the Ofgem dual-fuel cap following measures announced in last autumn’s Budget.

If we had to summarise what the inflation print is likely to show us, it’s that services disinflation is doing the heavy lifting, energy is moving in the wrong direction, and food remains sticky but not accelerating. However, this print shouldn’t be treated with much slapping on the back from politicians or even from MPC members. There’s still plenty of work to be done on price levels, and the caution is not to get lulled into a false sense of security here.

Now let’s pivot to politics, which has been the main driver behind the spike in Gilt yields, particularly at the long-end.

Read more

The additional domestic risk premium continues to drive UK yields higher. On Tuesday, 30-year gilt yields touched 5.81%, the highest level since 1998, while the 10-year reached 5.13%, the highest since 2008. Although we often roll our eyes at “the highest since” comparisons, we believe the above references are worthy of inclusion.

With Britain’s borrowing costs now the highest among rich economies, and having risen the most since the Iran war began, it’s being priced most aggressively at the long end, where fiscal risk conventionally lives. If the two-year trades around the policy actions from the next few BoE meetings, the thirty-year is all about whether the policy regime still looks coherent five to ten years from now.

Simply put, the current policy regime isn’t sustainable, and we believe we could be close to a serious yield melt-up that could cause significant headaches for the Government. But for macro traders, there’s potential for several attractive rate trades.

Subscribe now

Election Results Fuse Politics With Duration

The short-term driver behind the latest leg higher in the UK long end came from the local election results late last week. This matters because they converted a bad macro situation into an open political one.

By last Friday evening, the governing Labour Party had lost 1,229 council seats, while the right-wing Reform UK had gained 1,372. It was one of Labour’s worst-ever defeats in local elections, and by Tuesday, more than 80 Labour lawmakers had publicly called on PM Keir Starmer to go or set out a timetable for departure.

For gilts, the question is what the government has to promise, spend, delay or abandon in order to make survival politically viable. Investors can see two paths leading to the same fiscal destination: the current leadership loosens policy to claw back voters, or a successor arrives with a looser bias already built in.

Option 1: Starmer Remains But Loosens Purse Strings

Read more

Technology once again carried. The semiconductor complex remained the clearest expression of the market’s conviction around the durability of the AI capex cycle, with Advanced Micro Devices (AMD US) delivering the standout report of the week. The company’s stronger-than-expected sales outlook reinforced the view that hyperscaler and enterprise spending on AI infrastructure remains robust, even after months of investor concern around saturation and monetisation. Importantly, the strength was not confined to GPUs. AMD highlighted renewed demand for CPUs tied to AI workloads, a reminder that the buildout story is broader than a single chip category. The positive read-through extended across the ecosystem. Akamai Technologies (AKAM US) rallied after securing a major agreement with Anthropic, underscoring the degree to which AI demand is beginning to pull through into adjacent infrastructure providers.

Beneath the surface, however, the rally retained a distinctly geopolitical undertone. The fragile ceasefire between the US and Iran held together for another week, helping suppress the tail-risk premium that had dominated markets earlier in the quarter. Yet the absence of meaningful progress on reopening the Strait of Hormuz continues to leave a structural risk embedded within energy markets. Traders have become more comfortable fading escalation headlines, but not fully comfortable removing the risk premium altogether.

On the macro side, the latest payrolls report effectively reinforced the market’s baseline assumption: the Federal Reserve remains firmly on hold. The data was neither weak enough to force easing discussions nor hot enough to revive serious tightening fears. Wage growth continued to moderate, revisions softened the headline strength, and the broader labour-market picture still points toward gradual cooling rather than collapse. The Fed is trapped in wait-and-see mode, with officials increasingly acknowledging inflation risks while simultaneously resisting the idea that hikes are imminent.

Rates and FX markets reflected that equilibrium. Treasury curves finished little changed as oil price fluctuations continued to dominate day-to-day moves more than domestic data releases. In currencies, the dollar ended broadly flat, though USD/JPY remained the key source of volatility amid growing suspicion of renewed Japanese intervention activity. More broadly, FX markets appear stuck in a holding pattern, unwilling to fully re-engage structural dollar bearishness until the geopolitical backdrop becomes cleaner.

The bigger picture remains one of a market climbing despite, rather than because of, the macro environment. Earnings are holding up, AI spending remains relentless, and positioning dynamics continue to provide support on pullbacks. But underneath the surface, the rally is increasingly reliant on a narrow set of conditions remaining intact simultaneously: contained geopolitical risk, stable growth, moderating inflation, and continued faith in the AI investment cycle. For now, markets are willing to extend that benefit of the doubt.

Let’s get into the guide to trades moving markets, where things stand and where they may be heading.

• “Party Like It’s 1999”

• “Energy Keeps CPI Warm (US Inflation Preview)”

• “Global Rates Rundown”

Party Like It’s 1999

Equities have reached the part of the move where momentum is both the argument and the risk. Following one of the strongest short-term rallies in modern market history, the S&P 500 has broken into fresh all-time highs, with its 14-day RSI now sitting around 72. In isolation, that normally argues for caution. Markets that move this far, this fast, tend to digest the move. Two-week forward returns after similar momentum bursts have historically been weaker, as some degree of mean reversion usually follows the initial chase.

But overbought is not the same thing as bearish. It is often the condition of a market with genuine force behind it. The ability to get this extended, particularly after a “blue sky” breakout into all-time highs, is also evidence that the underlying trend has become durable.

Read more

We think the answer is more nuanced than much of the commentary suggests. The move higher in US long-end yields is not best understood as a purely domestic Treasury story. It is part of a broader global repricing of long-duration risk, with the US dragged into a move that has been far more aggressive elsewhere.

In the US, 5% 30-year yields still attracts buyers. In the UK, 30-year gilt yields at the highest level since 1998 are forcing investors to reprice political risk and diminishing fiscal credibility.

Rather than treating higher US yields as the cleanest expression of bearish duration, we think the better setup is relative, and outline a new spread trade below on the premise that US long bonds may remain volatile, but UK gilts look more vulnerable.

The Global Tail Wagging the US Dog

Let’s start our case by looking at the front-end policy logic, where recent meetings from the Bank of England (BoE) and the European Central Bank (ECB), presented a much easier stance to understand to see than for the Fed. The BoE kept the bank rate at 3.75% at the end of April, but its scenarios explicitly contemplated a “forceful tightening” if the energy shock produced material second-round inflation, and markets still price roughly two hikes this year.

The ECB also stood pat, but openly debated a hike at its April meeting and has since signalled that the chance of a move has risen, with markets now expecting the first increase by July and more coming by the end of the year. If the UK and the euro area are repricing for actual tightening, Treasuries were never going to ignore the same global energy shock altogether.

Read more

The S&P 500 notched a fifth consecutive weekly gain, grinding to fresh record highs as month-end flows and a late-week risk bid helped offset what was otherwise a choppy, headline-driven stretch. Friday’s push higher, driven by institutional rebalancing and renewed optimism around US-Iran negotiations, masked a more uneven tone beneath the surface, where dispersion across sectors and within mega-cap tech continues to define the market.

AI beneficiaries once again led from the front. Strength across semiconductors remained the clearest expression of the current macro regime (“chips as macro”). The latest round of mega-cap earnings highlighted a more nuanced reality. Alphabet (GOOGL US) and Amazon (AMZN US) were rewarded for tangible progress, while Meta Platforms (META US) and Microsoft (MSFT US) were punished for leaning further into spending without yet delivering a commensurate payoff.

Outside of tech, leadership broadened modestly. Caterpillar (CAT US) provided a reminder that the AI buildout extends beyond silicon, with power and construction demand feeding into industrial upside. Energy also continued to grind higher as geopolitical tensions lingered, even as the market has grown more accustomed to trading around the Iran conflict rather than through it.

Under the surface, however, the setup is becoming more technical. With month-end rebalancing behind us, attention shifts to systematic flows, where Goldman Sachs flags CTAs as potential sellers across scenarios in the week ahead. That introduces a degree of fragility to what has been a flow-driven advance, particularly given how much of the recent strength has come from positioning resets rather than fresh fundamental conviction.

“The one-month change in US positioning across the major systematic cohorts is the 2nd largest re-leveraging in our dataset going back to 2016. Systematics have bought almost $80 billion of US equities in the past month, and CTAs are now long $44 billion of US equities.”

Macro signals remain broadly supportive, but not emphatically so. The Federal Reserve delivered a hold as expected, though the presence of multiple hawkish dissents complicates the path forward for policy under incoming leadership. Growth data continues to show resilience, particularly in business investment and consumption, but the mix is not clean enough to shift the policy narrative decisively. Markets briefly reverted to a more textbook reaction function on softer ISM data, suggesting that the distortion from geopolitical noise may be fading at the margin.

In rates, the tone was more cautious. Treasury yields edged higher following the FOMC, with the long end approaching key technical levels that could act as a volatility trigger into May. In FX, dollar weakness was more about external shocks, most notably intervention in USD/JPY and a hawkish tilt from the ECB.

That all results in an equity market that continues to move higher, but with a shifting burden of proof. AI remains the anchor, flows remain the accelerant, and geopolitics remains the wild card. The trend is intact, but the composition of the rally (narrower leadership, greater sensitivity to earnings quality, and growing reliance on technical support) suggests that the next leg higher will require more than just momentum.

Let’s get into the guide to trades moving markets, where things stand and where they may be heading.

• “Software and Private Credit”

• “The Market Chooses Its Own Adventure”

• “Yentervention”

• “A Broken Cartel”

Subscribe now

Software and Private Credit

For much of the last six months or so, private credit has traded as a software derivative. Private credit funds lent heavily to software businesses during the last cycle, and the market has spent this year marking down anything that looks vulnerable to AI substitution, lower seat growth, or weaker pricing power. Last week brought the first real shift to that narrative.

Ares (ARES US), Blackstone (BX US), and Blue Owl (OWL US) all moved to reassure investors last week on software exposure, with scorecards, outside consultants, and portfolio reviews designed to separate actual AI vulnerability from market panic. Blackstone’s BCRED said less than 5% of investments faced AI headwinds, Ares said 85% of its software-oriented investments were low risk, and Blue Owl reportedly found “minimal” risk after re-underwriting loans for AI vulnerability.

There is an obvious “talking your own book” element here. That is not a criticism of them. Private credit is built on confidence, marks, funding access, and the continued belief that senior secured exposure can survive equity volatility. Nobody in this ecosystem has an incentive to declare the collateral impaired before the cash flows force the conversation. The question is, however, whether the next refinancing cycle agrees with their scorecards.

The other narrative shift came from software itself. Atlassian (TEAM US) was the cleanest expression last week. TEAM surged after earnings, with revenue and adjusted earnings ahead of expectations, cloud revenue growth of 29%, and management leaning hard into the idea that AI is a product accelerant rather than a terminal threat. After months in which “AI risk” was enough to flatten almost anything with recurring revenue, the market is finally rewarding a software company for showing resilience and a path toward profitable growth.

Don’t get us wrong, this one shift does not kill the software bear thesis, but we will see a more selective market approach to software going forward.

For markets, that is the important transition. The first phase of the trade was indiscriminate. Software was sold first and analysed later. Private credit firms with perceived exposure were dragged into the same bucket. The next phase should be more dispersion-led. Some software companies will show that AI improves distribution, workflow depth, and customer value. Others will discover that AI compresses pricing, reduces seats, weakens moats, or gives customers a credible reason to renegotiate.

Our read is that last week marked a shift from panic to underwriting. That is constructive for the best software names and the cleaner private credit platforms, but it does not remove the fault line. That is where we think the market will spend the next few months. Not in a broad private credit collapse, and not in a full exoneration of the asset class either. More likely, we get a slow separation between managers that can prove genuine insulation and those that merely disclose it.

The indiscriminate short-software / short-private-credit trade has probably lost its momentum, and the easy leg is behind us. The software names that can show AI-enhanced demand, stronger retention, and improving profitability will outperform, especially out of oversold conditions.

In case you missed it, we released our latest primer over the weekend mapping private credit and the software risks.

The Market Chooses Its Own Adventure

US equities pushed to fresh highs and capped their best month since 2020, even as the Fed delivered a more divided message and Japan stepped back into the yen market. In another regime, either of those stories would have been enough to cause headaches. A fractured Fed path would have been the rates story. Yen intervention would have been the global macro story. Instead, both were treated as supporting characters, all to the leading role which still belongs to AI.

Read more

Most private loans are negotiated directly between a borrower and a small group of nonbank lenders, do not trade in a secondary market, and are typically held until maturity or refinancing. Price discovery is therefore episodic. Volatility appears lower, not necessarily because the underlying businesses are any safer, but because the loans are not forced through a public screen every second of the day. In calm periods, it looks resilient. In stressed periods, less so.

That dynamic explains why the first real tremors in private credit tend to show up outside the loans themselves. Commonly today, they are appearing in listed business development companies (BDCs), in discounts to net asset value, and in the share prices of listed alternative asset managers. Software stocks, which account for a larger sector weighting in private credit, fell almost 30% between October 2025 and February 2026 (SaaSpocalypse), while BDC shares fell about 10% on average, and discounts to NAV deepened. Public wrappers have started doing the price discovery that the private loans themselves do not.

It is also important to keep some restraint. Private credit is not a deposit-funded banking system. Nonbank private credit lenders generally have limited asset-liability mismatches and modest leverage compared with banks, while redemption gates and lockups can reduce the risk of fire sales. Even now, some large market participants argue that current strains are more liquidity- and rate-driven than evidence of a systemic default cycle.

The reason this debate has sharpened (and the purpose of this primer) is software. A growing share of private credit is now effectively exposure to sponsor-backed software businesses, concentrating risk in a sector whose assumptions are beginning to be tested.

What follows in the first part of this primer is as straightforward as we can make it. Strip private credit back to basics, map the money, and explain why the model looked so good for so long. Then we explore why software sits much closer to the centre of the story than many investors appreciated, and how the stress travels if conditions worsen.

Table of Contents

1. Private Credit Primer
   1.1 What Private Credit Actually Is
   1.2 Who the Players Are and How the Money Flows
   1.3 Why It Worked
   1.4 The Bridge to the Fault Line

2. Software Stress Test
   2.1 This Is No GFC Call
   2.2 The Market Is Already Speaking
   2.3 Why Software Is the Pressure Point
   2.4 Plumbing Matters More Than the Headline
   2.5 How the Stress Travels
   2.6 A Banking Spillover Looks Limited But Real
   2.7 What to Actually Worry About

Subscribe now

What Private Credit Actually Is

The cleanest way to define private credit is functionally rather than academically. It is credit that is originated, structured and held by lenders. It is debt-like, non-publicly traded instruments provided by nonbank entities such as private credit funds and BDCs. In practice, when most investors talk about private credit, they usually mean direct lending: a nonbank lender makes a loan (or a small club of lenders makes a loan) directly to a company and keeps that exposure on its balance sheet rather than distributing it across a broad syndicated market. Direct lending is also the dominant sleeve of the asset class, accounting for roughly 54% of global private credit AUM2.

That sounds simple, but the distinction from public credit is important. A broadly syndicated loan or a high-yield bond must be marketed to a wider investor base, often with ratings, fuller disclosure, a syndication timetable, and the risk that market conditions change before a deal clears. Direct lenders sell something else: speed, confidentiality, certainty of execution, bespoke terms, and a smaller lender group on the other side of the table. Borrowers are willing to pay a premium for that. In short, fewer disclosure requirements and far fewer lenders.

The instruments themselves are fairly recognisable. Almost all private credit loans are senior secured and floating-rate, usually priced at a spread over a benchmark such as SOFR. Direct lending loans are typically senior in the capital structure and often built around financial covenants. The point, from the lender’s perspective, is to sit high in the capital stack, collect current income, and avoid unnecessary duration risk.

Historically, the core borrower was a middle-market company (EBITDA between $25 million and $100 million), though the borrower profile continues to evolve alongside the broader growth of the asset class, with some companies above $100 million in EBITDA and loan sizes above $1 billion (jumbo loans). Among the growth in borrower type has been an increase in these “jumbo” loans, and, in recent years, the count of sponsor-backed direct lending deals in US dollars has exceeded that of the broadly syndicated loan market. Private credit has moved from a niche funding source for undersized companies to increasingly compete with public leveraged finance markets for mainstream sponsor-backed deals.

Sponsor backing3 is central to the machine, which accounts for roughly 80% of the direct lending market. Private credit is especially well-suited to leveraged buyouts, add-on acquisitions, recapitalisations and refinancings, where a sponsor values certainty and a lender values control. Put differently, private credit finances more than just organic corporate capex, and can often finance ownership structures, too. The borrower may be a company, but the real counterparties are frequently the sponsor and the lender.

So, what problem is private credit solving that banks no longer want to?

The answer is not mysterious. A large part of post-crisis nonbank lending reflects regulatory constraints on banks’ ability to lend to unprofitable and highly leveraged borrowers. US commercial banks have halved in number since 1998; the top 25 now hold more than half of all C&I loans (commercial and industrial), and balance-sheet priorities have shifted away from smaller, riskier corporates. Private credit stepped into that financing gap, then discovered it could do much more than fill it.

Who the Players Are and How Money Flows

There is a tendency to treat private credit as a single pool of capital. It is better understood as a chain. At the centre sits a relatively concentrated group of managers. Some estimates state the top 10 US private debt managers hold roughly 40%–45% of industry dry powder4. That helps explain why public sentiment around the asset class often concentrates in a handful of listed names (Ares Management, Apollo Global Management, Blackstone, Blue Owl Capital, BlackRock) when software concerns or redemption fears spill into equity markets. A market that looks private at the asset level still has very public transmission channels.

Behind those managers sits the LP base. The classic closed-end private credit fund still draws most of its capital from institutional allocators: pension funds, insurers, sovereign wealth funds, family offices, and high-net-worth investors. Private credit investment funds represent about $800 billion of the US market and are typically structured so that LP capital is locked up until loans are repaid, often over five to seven years. The attraction is floating-rate income, diversification, and lower observed volatility than public bonds.

One example of this came during the March 2023 episode of banking stress and public credit market volatility, when an increasing number of large companies and their private equity sponsors preferred to borrow from private credit lenders, given the certainty of loan execution.

Then there are BDCs, which matter disproportionately because they bring retail capital into an otherwise opaque market. BDC assets are roughly $500 billion of the US private credit market. These companies must distribute at least 90% of income to shareholders, most of whom are retail and high-net-worth investors. Non-traded BDCs raise equity, pair it with leverage and then lend mainly to mid-sized companies, while offering investors periodic liquidity windows that are usually capped (5% per quarter). That makes BDCs both a funding channel and a pressure point, and they are one of the clearest ways for public market sentiment to force itself onto private credit.

At the borrower end, the ecosystem is dominated by sponsor-backed mid-sized companies using debt for buyouts, acquisitions, and refinancing. Increasingly, a meaningful share of those borrowers are in software or software-adjacent sectors. Around one-third of private credit funds have extended loans to SaaS firms, on top of their rising exposure to big US tech firms and other artificial intelligence (AI) companies, while another estimate measures broader direct lending to software and technology as around a fifth of total debt exposure. That is why the asset class cannot be properly analysed by talking about “middle market” in the abstract. Much of the collateral is actually exposure to a specific ownership model (private equity) and a specific business model (recurring-revenue software).

Even the risk is not fully warehoused outside the banking system. Activities and related risks of banks and private credit funds are intimately interwoven5, such that under an extreme economic scenario, stress in the private credit industry could affect the banking system. In some cases, banks now fund the funds, warehouse the leverage, or provide the lines and financing infrastructure around the loans rather than the loans themselves.

Why It Worked

Private credit’s golden decade was not an accident. It was built on an unusually powerful alignment of macro and market structure. The footprint of private credit is larger in countries with lower policy rates and more stringent banking regulation, and the post-GFC regulation accelerated banks’ retreat from smaller and riskier borrowers. When policy rates were low for years, and bank balance sheets became more selective, private credit could offer borrowers speed and certainty while offering investors incremental yield. It was exactly the right product for exactly the right regime.

The LP side of the story is just as important. Fundraising demand is explicitly linked to a period of historically low interest rates and the associated search for higher returns. Pension funds, insurers, and other institutional investors were drawn to an appeal of higher expected returns and lower observed volatility than public bonds. In plain English, ZIRP (zero interest rate policy) created a shortage of income, and private credit looked like a way to manufacture it without taking public-market mark-to-market pain.

The operating environment then helped the model look even better. Low default rates over most of the past decade reflected low interest rates, regular covenant monitoring, and the ability to renegotiate flexibly with a relatively small lender group when borrowers came under pressure. That last point is key. A small club of lenders can amend, extend, or restructure far more quietly than a dispersed public market. A period of cheap money, therefore, did not merely reduce defaults mechanically but also gave sponsors and lenders time and optionality.

There was also a structural pull from the public markets themselves. High-yield bonds and leveraged loans increasingly serve larger borrowers, with average new issue sizes often too large for most middle-market firms, while companies have stayed private for longer and private equity hold periods have lengthened. As private credit funds grew, their average fund sizes rose too, allowing them to write larger cheques and compete for bigger deals. The result was a natural expansion from a niche lender to undersized borrowers to a third major funding channel alongside banks and public credit markets.

Software was almost the perfect borrower for that world. From a lender’s perspective, the pitch was compelling: recurring revenue, sticky customers, high gross margins, low capital intensity, strong sponsor backing, and products embedded in enterprise workflows. The most resilient software businesses tend to be mission-critical systems of record with long sales cycles, proprietary data, and high switching costs. In a low-rate world, that translated into a seductive kind of collateral: businesses that felt more stable than cyclical industrials, cleaner than consumer names, and easier to value on growth plus retention metrics.

But this is where the regime has changed.

Pressure is already building in parts of the market, with lenders tightening terms and becoming more selective. AI makes software economics more contestable. Slower growth, longer sales cycles, pricing pressure, and weaker exit multiples do not need to produce instant insolvency to make a highly levered capital structure feel much tighter than it did under the assumptions of 2021.

The Bridge to the Fault Line

The danger in private credit is not usually that fundamentals deteriorate on a Tuesday and the market collapses on a Wednesday. It is that the signs of deterioration surface first in public proxies (BDC discounts, asset manager equities, software valuations) while the private loan book remains comparatively still. The mark lags the market, and the refinancing test arrives later. By the time a quarterly valuation fully admits the problem, the question of whether a borrower is weak is stale, and the new question is whether the system can still roll the loan on terms that preserve the illusion of stability.

Private credit repackaged credit risk into a slower-moving, more bespoke, less transparent form. That was enormously attractive in its golden age. There is no question about whether that model ever worked. It clearly did. The issue is whether a market built to look steady can stay steady once one of its favourite borrower cohorts starts repricing faster than the loans written against it.

This Is No GFC Call

The right way to frame this section is not “private credit will be the next 2008.” That’s too lazy, and it misses the shape of the problem. The more useful framing is that private credit is finally being tested in a new regime, and one that it never really had to underwrite for at scale: weaker software valuations, stickier refinancing risk, more sceptical investors, and public proxies that now move faster than private marks. There may be pain, contagion, and some losses, but that is not the same thing as saying the asset class is about to detonate into a system-wide event.

That said, the fact that this is probably not a classic banking crisis does not make it any less important. What changes the tone in 2026 is that regulators no longer treat private credit as a niche corner of the market. The US Securities and Exchange Commission (SEC) is explicitly warning that opacity, valuation, transparency, and credit quality matter amid elevated redemptions and rising default projections.

“The SEC is closely monitoring both the lending gap that private credit has filled and the emerging pressures that it has experienced, including elevated redemption requests and rising default-rate projections.”6

More so, the Bank of England (BOE) has launched a system-wide stress test to understand how banks, insurers, and non-banks active in private markets behave in a downturn. The European Central Bank (ECB) has begun flagging private credit as a financial stability concern. And the Financial Conduct Authority (FCA) has already warned that private markets require stronger valuation governance, as much depends on judgment rather than continuous price discovery.

Whether an asset class built on infrequent marks and patient capital can absorb a shock is a far more interesting debate than simply saying the whole thing explodes.

The Market Is Already Speaking

If you want to know where the stress is showing up first, don’t begin with default data. Begin with the public wrappers. Listed BDCs recently traded at their deepest discounts to net asset value in more than five years, with the average ratio around 0.856 at the end of March.

At the same time, Moody’s has shifted its outlook on US BDCs to negative, citing redemption pressure, higher leverage and weakening access to funding markets. That is all before you get to flows. Direct lending fundraising fell to $10.7 billion in the first quarter, the weakest quarterly number in three years, while new money into private credit funds aimed at wealthy individuals fell 45% year on year.

The loans themselves don’t trade every hour, but the equity around them does. So when investors have concerns, the first real price discovery happens in the discount to book and share prices of listed managers.

There is also a structural reason that this matters more now than it would have a decade ago. Some of the largest managers have made retail and high-net-worth fundraising a central growth engine, and some estimates put retail assets at around a quarter to two-fifths. A market that was sold as institutional and relatively insulated from mood swings becomes more exposed to investor behaviour. That in itself is not automatically dangerous. But it does mean that sentiment can now tighten conditions for the asset class even before credit losses force the issue.

Why Software Is the Pressure Point

The critical fault line is software, not because every software company is suddenly broken, but because private credit ended up with more software exposure than much of the rest of the sub-investment-grade universe.

Lending by private credit funds to SaaS firms rose from almost $8 billion in 2015 to more than $500 billion by the end of 2025, equivalent to 19% of total direct loans (chart below). Even that may understate the true exposure, as classification can blur the picture. A software company selling into healthcare may be reported as healthcare exposure; one serving financial services may sit under financials. The result is that “software risk” is often larger than headline sector buckets suggest.

BDCs extended over 15% of their loans to SaaS firms in 2025, and firms with greater software exposure underperformed peers by around five percentage points last year. Analysis of more than 2,400 sponsor-backed middle-market borrowers shows software accounts for roughly 17% of borrowers and 22% of total debt exposure.

A concentration of that size was not irrational in the old regime because of the business model that software offered. But the same characteristics that made software look safe also encouraged aggressive underwriting. Much of direct lenders’ exposure to software originated at elevated valuations and leverage, and a meaningful slice consists of annual recurring revenue loans to companies with little or no positive free cash flow. Software-heavy deals have tended to cluster in the upper middle market, precisely where covenant protection and underwriting discipline have weakened the most.

The AI angle should also be kept in proportion. We do not buy into the interpretation that “AI kills software, therefore software kills private credit.” AI risk is likely to be diffuse and manageable overall, and most software-adjacent borrowers still have time and flexibility to adapt. But sponsor-backed borrowers with near-term maturities and structural exposure to disruption may come under real pressure. The risk falls in two channels: obsolescence, where customers build or buy cheaper functionality elsewhere, and margin compression, where incumbents have to spend more and price lower to defend their position.

This debate is no longer theoretical. In the week of publication, several of the largest private credit managers moved to reassure investors on this point. Ares, Blackstone and Blue Owl have begun running AI vulnerability reviews across their software books, using internal scorecards, external consultants, and refreshed underwriting work to separate potential beneficiaries from genuinely exposed borrowers. The message was deliberately calming (talk your book, so to speak). They state the risk is present, but most senior loans are presented as insulated, with only a limited share of exposures deemed high-risk. Blackstone said less than 5% of its flagship private credit fund investments faced AI headwinds, while Ares said 85% of its software-oriented investments were low risk and only 1% were high risk.

We would treat that as useful, but not conclusive. The exercise itself tells you the market has moved from abstract concern to active portfolio triage. The fact that managers are now producing AI scorecards is encouraging from a transparency perspective, but it also reinforces the broader point: software exposure is a meaningful risk. It is now something investors are actively trying to measure and stress-test.

Plumbing Matters More Than the Headline

The next fault line is liquidity structure. Semi-liquid private credit vehicles generally offer quarterly repurchases capped at about 5% of NAV, and those limits are now being tested. Gates are not evidence of collapse so much as a contractual mechanism to manage cash flow when the underlying assets are less liquid and must be held to maturity. Private-loan drawdowns in stress are more a function of wider spreads than sudden fundamental impairment, and portfolio cash flows through 2025 still ran above standard quarterly and annual redemption maximums. Redemption limits appear to have worked as designed by reducing the risk of fire-sale liquidation in recent months.

But it would be a mistake to stop there and declare everything fine. Once investors learn that liquidity is conditional rather than instinctively available, and if that change in expectations persists, the consequence is not necessarily an immediate run. The feed-through would more likely be slower fundraising, more cautious deployment, and a higher hurdle for new money. That is already evident in the drop in retail-oriented fundraising and in the broader scepticism towards non-traded BDCs.

How the Stress Travels

The most plausible stress path is mechanical rather than dramatic. It begins with weaker software equity values and more uncertainty around terminal value. That makes sponsors less willing to support marginal borrowers, makes EBITDA add-backs look more heroic, and raises doubts around whether old marks still deserve to be carried where they are. Investors then express that doubt in the places they can actually trade: listed BDCs, alternative asset managers, public software equities and the financing exposures of banks to private credit funds. This first part is already underway. It would be hard for anyone to argue against that.

JPMorgan Chase has already re-marked some loans to private credit funds with software exposure, and banks have become tighter and more selective in lending against the sector.

The next stage (sorry if this is not sexy or doomer enough for a Substack post) is not a wave of defaults. It is a worsening in the refinancing environment. As this year’s market has shown, private credit funds can cap redemptions and avoid forced liquidation. But a manager facing slower inflows, scarcer warehouse financing, and more cautious investors will also be less eager to extend and support every marginal software name on borrower-friendly terms. That is where the public and private feedback loop begins. Discounts in listed vehicles raise the cost of equity, wider bond spreads raise the cost of liabilities, banks re-mark or tighten facilities, and the marginal borrower discovers that the old assumption of endless maturity extension was a feature of the previous regime, not a permanent right.

A Banking Spillover Looks Limited But Real

This is also where the “not 2008” point needs to be held carefully rather than used as a comfort blanket. Bank commitments to private credit vehicles rose from around $8 billion in 2013 to about $95 billion by late 2024, and to roughly $322 billion when private equity and private credit vehicles are combined. Financial-stability implications appear limited so far, as exposures remain relatively small and the credit quality of bank loans is high. As we discussed in the previous section, banks and non-banks are not separate but interwoven, with risks transformed and repackaged rather than cleanly migrating outside the system.

Recent headlines support this middle-ground view. The Fed has asked major banks for details on their exposure to private credit firms, and the Treasury is consulting insurance regulators about fund-level leverage, ratings consistency, and liquidity. Several regional banks have now disclosed more than $230 billion in loans to non-bank financial institutions while insisting their books remain sound. Regulators can clearly see the transmission channels: bank credit lines to funds, leverage against loan portfolios, insurer demand for credit risk, and the possibility that tighter conditions in one part of the ecosystem reduce credit supply elsewhere.

So is the right conclusion “contained, therefore harmless”? Probably not. The answer is more “contained for now, but increasingly relevant.”

What to Actually Worry About

Our base case is not a sudden unravelling, although that would make for a catchy title. We’ll likely see a wider gap between good and bad underwriting. The era of uniformly strong, low-dispersion direct lending returns to an end, with outcomes increasingly driven by manager quality and sector selection. The primary transmission of AI risk is likely to be greater differentiation in returns rather than a wholesale ratings event (there will be software winners from AI, too).

The bear case is still easy to sketch, however. If AI pressure on software coincides with a more general slowdown, the weak cohort is obvious. In that world, BDC discounts stay wide, unsecured funding costs travel higher, and sponsors triage portfolios more aggressively. Today’s valuation problem becomes tomorrow’s refinancing problem. And none of that requires a banking panic, just enough borrowers to discover that the private market will not keep extending time on yesterday’s assumptions.

That, to us, is the real fault line. Private credit has not abolished the credit cycle. It has concentrated the lender group and shifted risk into vehicles that appear calm until they are forced to explain themselves. Software and AI matter because they accelerate the repricing of one of the asset class’s favourite borrower cohorts. Private credit is not the next crisis, but whether it can remain stable enough once the repricing reaches the refinancing calendar remains to be seen.

If you enjoyed this dive into the world of private credit and the stress test markets are currently facing, please leave a like to show your support. As always, comments and opinions are welcome. If you want to read more primers, you can check out our library here.

AP Research

The public line was deliberately dull. Powell said he planned to keep a low profile as Governor, a sort of phrase central bankers use when they would like everyone to stop listening quite so carefully. We are less interested in the formal wording than in the reality behind it.

Powell may no longer be the frontman, but that does not mean he exits the stage. In a Fed facing political pressure, legal scrutiny, fiscal dominance, and a policy regime increasingly reminiscent of earlier episodes of Treasury-Fed tension, a former chair sitting on the Board is a shadow power centre.

So, while the president may prefer Jerome “Too Late” Powell, we think the more useful title for his next act is Jerome Powell, The Shadow Anchorman.

Learnings From the Past

The last time a Fed chair stayed on the board was in 1948, when Marriner Eccles served as a policymaker until 1951.

In formal terms, nothing required his departure. In practical terms, his continued presence became highly consequential given the macro regime the US was navigating, which we feel signals what Powell could be steering towards in 2026.

During World War II, the Fed had committed to capping Treasury yields to ensure cheap and stable government financing. By the late 1940s, however, rising inflation and a shifting economic backdrop made this arrangement increasingly untenable. Eccles had already begun to pivot toward a more orthodox central banking stance by the time his term was up.

His decision to stay on as a Governor was therefore strategic. Eccles became one of the leading internal voices pushing for a reassertion of Federal Reserve independence from the Treasury. This culminated in the Treasury–Federal Reserve Accord of 1951, which restored the Fed’s ability to conduct monetary policy without direct fiscal oversight.

There was also a reputational and legacy dimension. Eccles had been instrumental in shaping the modern Federal Reserve framework during the 1930s and 1940s, including its expanded role in macroeconomic stabilisation. Remaining at the Fed through this transition allowed him to complete that project.

In that sense, his tenure beyond the Chairmanship mirrors, in part, what we think Powell is guiding for, namely that influential policymakers stay on in a reduced formal capacity to guide the system through uncertain periods.

Uncertainty in 2026

What is the uncertainty that Powell could be staying on to help guide? Last night showed further signs of dissension in the ranks, with an 8-4 voting split, marking the highest level of dissent since 1992.

Miran voted for a rate cut (no surprise there), while three others opposed the statement’s “easing bias” that hints at future reductions.

If he left now, Powell would be handing the reins over to Warsh, who we’d argue is leaning dovish, setting the scene for higher friction in policy setting right at the time where inflation remains elevated and a “low hire, low fire” employment setting.

Although he’s a one-man army, Powell firmly sits in the centre of the hawk-dove scale.

We believe this centrist positioning becomes more valuable, not less, once he steps down as Chair. Without the formal authority of the Chairmanship, influence shifts toward persuasion, credibility, and coalition-building within the FOMC.

A policymaker anchored in the middle of the distribution is structurally better placed to bridge internal divides, particularly in the likely future regime where disagreement is likely to widen. Powell, in this capacity, can act as a reference point for both sides of the spectrum, shaping outcomes at the margin by nudging the committee toward compromise rather than amplifying factional splits.

Read more

We are sharing the latest BoJ note here for AP Research readers.

The Bank of Japan (BoJ) meeting earlier today was the first major G10 central bank meeting, with many looking for clues on how the respective bankers will position policy amid reflationary pressures.

Not for the first time, the BoJ made a bit of a hash of its meeting, issuing a mismatch of comments that saw the Yen initially appreciate before giving back all gains and then some.

When we dig into the details of the meeting and subsequent press conference, the desire to continue holding our short Yen position (expressed via a long BRL/JPY) remains firmly intact.

SUMMARY

• The significant revision higher in inflation forecasts should have merited a precautionary rate hike from the BoJ today.

• The 6-3 split, and unclear comments from Ueda, only add to the worry that the central bank doesn’t have a clear vision for policy going forward.

• Clear risks of getting behind the curve or hiking aggressively and quashing domestic demand mean we continue to play the Yen from the short side.

Inflationary Pressure

Read more

Technology, as is often the case, again did the heavy lifting. At this stage, the equity market is a continuation of the “chips as macro” regime, where incremental demand signals from AI infrastructure drive index-level performance.

Elsewhere, the rotation out of defensives was notable. Healthcare lagged amid a combination of weak earnings and softer prescription data, with pressure on weight-loss drug narratives feeding through to the broader pharma complex. Financials also underperformed, weighed down by disappointing results and a lack of clear participation in the broader rally. The divergence highlights a market that is still selective, rewarding growth visibility while penalising anything that hints at cyclical or structural fragility.

Macro remains in a holding pattern. The absence of major data or Fed communication ahead of the blackout period has left markets trading predominantly on geopolitical headlines and earnings anticipation. Strong retail sales provided a reminder that the US consumer remains intact for now, but the broader picture has not shifted materially. Policy expectations are largely unchanged, and the market continues to operate within a narrow band of outcomes: resilient growth, sticky but manageable inflation, and a Fed that remains on hold unless forced to act.

Across assets, volatility continues to compress. FX markets were notably subdued relative to recent weeks, with the dollar trading in line with incremental Iran-related developments rather than leading them. Risk reversals point to a market that is tactically long USD on geopolitical uncertainty but structurally biased toward weakness over a longer horizon.

In rates, the move higher in yields, particularly in the 2y–5y, reflects a modest re-pricing of risk rather than a decisive shift in the policy outlook.

The broader takeaway is that equities are grinding higher without a clean macro anchor. The leadership remains narrow and micro-driven, the drivers remain flow-driven, and the geopolitical backdrop continues to inject episodic volatility. As long as the AI capex narrative holds and ceasefire dynamics avoid a renewed escalation, the path of least resistance may still be higher. But the market is increasingly behaving like one that is being pulled upward by momentum.

Let’s get into the guide to trades moving markets, where things stand and where they may be heading.

• “Micro Is Leading”

• “Carry Trade Indication”

• “The Reverse ‘Saudi Put’ on Oil”

• “A Crypto Stealth Rally”

Subscribe now

Micro Is Leading

Macro factors have dominated equity direction in recent weeks. The S&P 500 moved lower in a relatively orderly fashion, as markets priced in war risk and attempted to map the economic spillovers from the Middle East. Positioning played a role here, with little appetite to press shorts. Memory of last April’s squeeze is still fresh.

As tensions between the US and Iran appeared to peak, markets were quick to rebuild length and chase the rebound, helped along by the reassertion of well-worn themes.

Last week marked a shift. Micro factors re-emerged as the primary driver, even if the headline index barely moved. E-mini S&P 500 futures finished the week up just 0.4%, masking a more active underlying tape. The index may look flat on the surface, but beneath it, areas of the market are running hot.

Semiconductors.

April has not yet drawn to a conclusion, but semiconductors are firmly living in the right tail.

Read more

Alongside that, we outline a tactical UK rates expression. The recent run of inflation and PMI data has nudged the market toward a hawkish near-term narrative ahead of next week’s Bank of England meeting, and we do not think it is priced correctly.

Before turning to those trades, however, it is worth pausing on a potential macro constraint that sits just ahead. A statutory deadline tied to President Trump’s handling of the Iran conflict could bring Congress more directly into the decision-making process, shaping the next phase of the conflict in a way markets have not yet fully engaged with.

Subscribe now

Trump’s D-Day

We could be approaching an inflexion point in US policy toward the Iran conflict, not due to commodity supply chain issues or the Hormuz Blockades-of-all-Blockades, but rather to statutory constraints imposed by the 1973 War Powers Resolution.

Under this framework, the president can conduct military operations without congressional authorisation for up to 60 days following formal notification to Congress. Given that Trump notified Congress on March 1st, the current case sets a key deadline of May 1st.

To date, congressional Republicans have largely supported the administration, blocking Democratic efforts to curtail the campaign. However, the upcoming deadline is beginning to expose fractures within the GOP, which we believe markets haven’t fully appreciated. Several lawmakers have signalled that their support may not extend beyond the 60-day window without explicit congressional approval, raising the probability of a policy pivot or heightened political tension as the deadline approaches.

What are Trump’s options? Beyond the 60-day mark, the president faces three main pivots.

1. Seek formal authorisation from Congress

2. Begin a withdrawal of US forces

3. Invoke a limited 30-day extension to facilitate a safe exit

Notably, this extension does not legally permit continued offensive operations, constraining the administration’s flexibility.

Importantly, precedent suggests the administration could challenge or sidestep these constraints, which wouldn’t surprise us with Trump. Yet, in terms of the precedent we speak about, it was actually President Obama who continued the 2011 engagement in Libya beyond the 60-day mark and argued that US operations didn’t involve sustained fighting or ground troops. This did incur bipartisan backlash, so any similar move by Trump risks increasing political pressure, particularly as some Republicans have already framed the 60-day mark as a meaningful legal and institutional boundary.

We could term the May 1st deadline as “a discrete political catalyst.” What we mean by this is that Trump is going to struggle to keep this conflict going on his own terms. Rather, as of next week, Congress is likely going to have a much larger say in deciding the path of the war. In some ways, it should help resolve the question of where the conflict goes from here, given that the range of outcomes is relatively constrained; the conflict is either extended, curtailed, or escalated through congressional involvement.

Notable Mini-Thematics

We’ve added three new standalone baskets on Plutus this week, focusing on topical areas where we believe investors can generate alpha in the coming months.

AI vs AI-At-Risk

We believe this group of 20 names is well-positioned for the current regime, as the market increasingly distinguishes between beneficiaries of AI capex and those exposed to its second-order disruption.

Read more

A 13% drop in WTI crude acted as the immediate release valve, easing inflation expectations and unlocking a broad rotation into fuel-sensitive sectors. Autos, airlines and discretionary gained, while the unwind in energy positions marked a clean reversal of one of the most crowded trades of the conflict period. Beneath that, however, the move had the hallmarks of a classic positioning squeeze. Heavily shorted baskets surged double digits, and both dealer desks and systematic flows pointed to continued mechanical buying.

Goldman Sachs estimates a further $70 billion in CTA demand for global equities over the coming sessions, on top of already significant inflows ($86 billion last week), suggesting the rally has been as much about forced participation as about improving fundamentals.

“Previous episodes of accelerated demand have seen short-term consolidation, followed by medium-term strength for the S&P 500,” Goldman Sachs’ Brian Garrett wrote, noting the US index is typically up by an average of 2.2% a month after such a buying spree, and up 8.2% three months later.

Earnings season has not yet provided a clean fundamental confirmation of the move, but it validates an economy that is neither overheating nor rolling over, giving a sturdier foundation for markets beyond the near-term bounce. Bank results were broadly underwhelming, with strong equity trading offset by softer FICC performance, pointing to a more mixed underlying environment than headline index levels might suggest. The market has been willing to look through this for now, aided by upward revisions to full-year earnings expectations, particularly in sectors tied to energy and semiconductors.

Macro data offered a constructive, if incomplete, backdrop. Softer-than-expected PPI and stronger regional activity surveys helped reinforce the idea that underlying demand remains intact as inflation pressures begin to moderate.

Alongside this, Fed communication continues to emphasise patience, with policymakers broadly aligned around the view that current policy is appropriately restrictive given lingering uncertainty on inflation. The modest re-pricing of rate cuts in OIS reflects that balance, shifting back toward easing (white) but without the conviction seen earlier in the year (blue).

Across assets, the response has been more nuanced than the equity rally might suggest. The dollar weakened sharply as geopolitical risk premia unwound, with positioning and hedging flows now pointing back toward a broader structural downtrend. The decline in oil has allowed for a partial re-steepening of the curve as front-end easing expectations returned. Options positioning, particularly in the 10-year sector, indicates growing confidence in lower yields into the next data cycle.

Taken together, the past week marks a clear inflexion in sentiment, but not necessarily a resolution of the underlying macro tensions. The market has moved quickly to price in a best-case near-term outcome (stable geopolitics, easing inflationary pressures, and resilient growth), but that equilibrium remains fragile. If the ceasefire holds and oil remains contained, there is scope for positioning and flows to carry equities higher in the near term. However, the speed and nature of the rally suggest it is still being driven more by the removal of tail risks than by the emergence of a new, durable macro regime.

Subscribe now

Let’s get into the guide to trades moving markets, where things stand and where they may be heading.

• “Thematic Leaders and Beta Chasing”

• “EZ Rates: Between the Baseline and Adverse”

• “Play the Dollar Range”

Thematic Leaders and Beta Chasing

US Equities

What stands out in the current tape is the clarity of behaviour. Leadership has re-emerged quickly, and it is unmistakably high beta. The market has pivoted from discounting a meaningful deterioration in growth to re-embracing the same pro-cyclical, momentum-driven themes that defined the pre-conflict regime.

The cross-section of returns reinforces that point. Month-to-date performance is dominated by Q1 leadership, with capital rotating back into the most reflexive expressions of the AI buildout. Memory has reasserted itself at the centre of that trade. Names such as Teradyne (TER US), Micron Technology (MU US), and Sandisk (SNDK US) — all of which delivered outsized gains into the pre-conflict peak — are once again among the primary beneficiaries of the rebound. The reappearance of these names in the top decile of performance is a re-leveraging of existing narratives.

Alongside this, the speculative layer of the market is behaving as one would expect in a positioning-driven rally. High short-interest baskets, meme equities, and de-SPAC cohorts have all materially outperformed, with month-to-date gains exceeding 20%. This reflects a mechanical unwind of bearish positioning rather than any fundamental reassessment of underlying cash flows. Short covering remains a core driver of the move, and it tends to be self-reinforcing in the early stages of a squeeze. Even Alt AMs and BDCs had a good week.

The chase for speculative beta is also prevalent in the market right now. Short interest, meme stocks, and de-spac baskets… all more than 20% higher month-to-date. The former is a fundamental example of the short covering underscoring this move higher.

Where the signal becomes more nuanced is in the options market. In a typical relief rally, implied volatility compresses in line with rising spot. Yet that relationship has loosened. While the S&P 500 has advanced, implied volatility (proxied by the VIX) has not declined proportionally. Instead, it remains relatively firm, reflecting a market that is not simply adding exposure but actively paying for convexity on the upside.

Flow data corroborates this. Institutional call-put ratios have reached their most elevated levels since late 2024, while call skew has repriced sharply higher. Non-0DTE index call volumes have accelerated, and single-name call demand has intensified. Investors are expressing bullish views through leverage.

This matters for the durability of the move. The current options positioning, particularly into expiry this Friday, leans heavily toward calls on a delta-adjusted basis. SpotGamma estimates suggest the latest expiry profile is among the most call-skewed on record, following a double-digit rally in the index over a compressed time frame. That creates a dependency on continued dealer hedging support. Should flows slow, or should investors choose to monetise rather than roll exposure, the hedging dynamic flips. Dealers would move from buyers of strength to sellers of weakness, amplifying any downside move in spot. After all, the tail risks have lessened, but it’s not out of the question for a spanner to be thrown into the works of the negotiation.

In that sense, the rally is increasingly endogenous. It is being sustained by flows that, if reversed, would act in the opposite direction with similar force. That does not invalidate the move, but it does make it more fragile than the surface price action suggests.

From an allocation perspective, the distinction between beta and fundamentals is important. The former has already moved aggressively; the latter still offers more durable entry points. Two areas we like:

Read more

Global markets were busy dealing with the situation in the Middle East for much of Q1. This overshadowed events in Brazil, where a combination of early positioning ahead of the elections in the autumn, an energy-driven export tailwind and a continuing carry appeal in FX provided some with healthy gains across various Brazilian assets.

We turn to Brazil as one of our favourite places to allocate capital in the emerging market space right now. For some of the thematic drivers, like carry, the consensus framing is relatively simple and attractive. Yet for other narratives (that a shift to a right-wing regime under junior Bolsonaro would be a large positive), the picture is more nuanced.

Below, we outline our outlook on Brazilian politics, energy, interest rates, and broader cross-asset dynamics, alongside actionable trade ideas. Consider this a structured guide through one of the more compelling opportunities in emerging markets, best read with a caipirinha in hand.

SUMMARY

We believe that Brazil has the potential to outperform both at an absolute and relative level this year, based on three strands of reasoning:

• A Lula continuity victory could be taken as a better outcome than a right-wing regime change. Lula is not fighting Jair Bolsonaro, but rather his unproven son, who risks alienating voters from better right-wing candidates.

• The net energy export status provides beneficial terms of trade, boosting related domestic equities and providing a tailwind for continued BRL appreciation.

• Elevated interest rates will continue to satisfy yield-hungry investors, especially when paired with low-yielding currencies like JPY, which is likely to remain under pressure throughout this year. The potential for an energy-driven inflation shock further reduces the likelihood of any material easing from the BCB.

Continuity Over Convexity

A BTG Pactual/Nexus ​poll published at the end of March showed Brazil’s President Lula da Silva and Senator ‌Flavio Bolsonaro tied at 46% in a potential run-off in the October elections. When you consider that Bolsonaro only entered the race in December and had an assigned probability of winning of 15% in the middle of January, the poll highlighted a trend that had gone under the radar for much of Q1, namely that Bolsonaro is now seen as the main challenger to Lula.

Read more