At least, that was the narrative to start this week. Following an unusual presser from Warsh after the FOMC held rates, and an AI capitulation leading to Wall Street’s golden child of the AI trade, Leopold Aschenbrenner, on the receiving end of a forced liquidation (just for Citadel’s Ken Griffin to sweep up his holdings), people are asking, “Is the bottom in?”

It may be. Despite the short-term shift, though, we still prefer the question of “Where are the safe havens?” And that answer isn’t immediately obvious. Currency havens offer little respite. Treasury auctions for 5-year bonds earlier this week tailed with bidders AWOL, while the reception for the 2-year signalled no broad shortage of Treasury demand in policy-sensitive paper, where duration risk is limited. And even though equities (S&P 500) may only be 1.5% below highs set on June 2nd, equity exposure in portfolios feels anything but calm.

So, what next? August is now upon us, a seasonally low period of market liquidity. We’ve spoken already about recent Fed and ECB actions; we’ve touched on shifting portfolio exposure towards financials and our search for single-stock catalysts in global markets; and we’ve highlighted idiosyncratic risks in debt markets on our home turf.

It felt right to, instead, turn our attention specifically towards two questions:

• What factors are driving the AI trade other than a hawkish rates environment?

• Do the unusual events of this week signal short-term relief for crowded themes?

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Rates Are Only Part of the Story

The easiest explanation for momentum weakness is the same story that has kept markets busy since March. Higher oil raises inflation expectations, higher inflation expectations raise yields, higher yields reduce the present value of the distant cash flows on which long-duration technology valuations depend.

If this were simply a rates shock, one would expect growth stocks to fall in tandem with the broader market. Instead, the market has become increasingly bifurcated. The equal-weight S&P 500 has reached new highs while the main index has fallen and hundreds of individual stocks have advanced on days when the headline index appeared becalmed.

Rates may have lit the match. But what is now burning through the AI trade is a broader reassessment of spending and returns. We call this “The Three Cs.”

Capex. China. Credit.

A full autopsy of the AI selloff is incomplete without exploring each.

Capex - Unambiguously Bullish No More

For much of the past two years, rising capex was treated as evidence of rising conviction. A hyperscaler announcing an upward revision to its investment plans was seen as confirmation that demand remained strong. Yet, investors no longer treat spending as unambiguously bullish. A quick rundown of recent earnings/outlooks highlights this.

Alphabet (GOOGL US) was an early warning this quarter. Underlying operating results were strong, but another increase in expected capex was received as a liability rather than a sign of confidence. The market’s concern is that the amount of capital required to maintain leadership continued to grow faster than the evidence of monetisation.

Meta (META US) provided the clearest example of what the market doesn’t want to see. Advertising remained resilient, but another increase in capex arrived alongside collapsing FCF. Again, the concern here is that investment is accelerating faster than management can demonstrate where the eventual returns will come from.

Microsoft (MSFT US) offered the opposite case. Capex remains high, but accelerating Azure growth and a sharp increase in paid Copilot adoption provided tangible evidence that AI investment is already translating into revenue. The market will tolerate the spending because Microsoft showed both monetisation and flexibility, including an ability to slow infrastructure investment if demand begins to cool.

Amazon (AMZN US), however, showed that the market has not rejected higher AI spending altogether. It raised its capex outlook again, and FCF turned negative (the same story as peers), but the strongest AWS growth in more than four years gave investors a credible demand story against which to judge that investment.

Apple (AAPL US) remains the outlier. Rather than participating in the infrastructure race, the company continues to consume technology developed elsewhere, which leaves capex low and cash available for shareholder returns. That relative discipline has helped Apple remain less volatile than other names. Yet the latest selloff showed that Apple is still not immune to more conventional concerns around guidance and supply constraints, even if they are more fiscally disciplined than other tech names.

In short, if markets suspect that revenue growth can only be sustained by using an ever-larger share of FCF, capex will be the killer of share price. Tech still has to answer to markets whether the incremental revenue generated by the next dollar of investment is sufficient to justify it.

There is an uncomfortable asymmetry emerging. If hyperscalers maintain or raise spending, investors worry about FCF and returns. If they slow spending, investors worry about the earnings outlook for AI beneficiaries. More capex is no longer unambiguously bullish. And less capex would not necessarily be bullish either.

China - Changing the Calculation

The second pressure is competition, particularly from China, turning the debate away from investment payoffs and towards underlying assumptions of an AI buildout.

The release of Moonshot’s Kimi K3 model revived the questions posed by DeepSeek early last year: How much infrastructure is really required to produce a competitive model, and how durable are the economics of the incumbent AI stack if capable models can be developed or deployed at lower costs?

While much of the debate centres on national security risks to US leadership, a market-relevant question for us to answer concerns capital intensity. The bullish AI investment thesis has rested, in part, on the belief that increasingly capable models require exponentially more compute. If improvements in model architecture and open-source development allow users to achieve similar outcomes with less expensive hardware, that relationship between intelligence and capital expenditure narrows.

We can get our little AI friends to create a visualisation of this relationship.

Some argue that cheaper models do not necessarily mean less aggregate AI demand. Falling costs can broaden adoption and increase usage. But as far as the market is concerned with that assumption, there remains a timing problem. The infrastructure is financed today and built today, yet much of the demand expected to justify it remains forecast rather than realised. This creates a vulnerability whenever technological progress appears to reduce the amount of hardware required per unit of useful output.

A similar issue is appearing further down the supply chain. Progress, for example, in Chinese deep-ultraviolet lithography equipment (used for chipmaking), combined with the expansion of domestic memory producers such as CXMT, force the question of durability on the industry’s moats of today. This is another factor behind a broad semiconductor selloff. The most expensive names, the most crowded positions, the companies perceived to face the greatest risk of Chinese substitution have generally suffered the largest declines.

We also have to call into question the revenue assumptions. As users gain access to cheaper models and more efficient inference, AI adoption can be viewed as bullish, but bearish for the companies attempting to monetise each unit of compute. An index of large-language-model token expenditure has recently continued to weaken, consistent with customers migrating towards lower-cost options.

The optimist has plenty of history on their side. 1) Falling hardware costs brought computing to the household. 2) Collapsing storage prices created an almost limitless appetite for data. 3) Cheaper bandwidth enabled streaming, cloud software and the modern internet economy. In each case, lower unit costs created uses that had previously been uneconomic.

Yet the investment paths of history do not always deliver the intended results. Hard-drive capacity exploded while manufacturers consolidated and struggled to earn attractive returns. Telecom operators financed the networks over which software platforms captured much of the value. The current market assumption is that those funding the buildout reap the rewards, but history’s example is hardly dismissible right now. Cheaper intelligence could produce enormous growth in consumption without guaranteeing that the companies financing the infrastructure earn returns commensurate with the capital committed.

If the price of intelligence falls faster than usage rises, the companies funding the buildout may find themselves generating less revenue per unit of capacity at a time when depreciation and financing costs are accelerating. That shockwave would travel through the entire chain.

And on financing…

Credit - Equity Concerns Become Financing Concerns

Maybe it comes as no surprise that credit risks feature in this article.

AI investment has become an interconnected web of chip suppliers, cloud providers, start-ups, infrastructure companies, and financing vehicles. One participant invests in another, which commits to purchase capacity from a third party, which then uses those commitments to finance additional construction. “Circular financing...” Explaining such feels like the below.

Young industries frequently require creative financing, especially when demand is outpacing existing infrastructure. Circularity, however, can become dangerous when valuation depends partly on the continued spending of others. The widening of CDS spreads across parts of the AI complex, therefore, deserves more attention. Equity investors can debate whether vendor financing deserves a higher multiple or a lower one. Neither will stop credit markets from analysing the balance-sheet risk.

Big tech is widening, with clear inflexion points happening in July…

…but ORCL and CRWV need their own axis. ORCL CDS sits 90bps higher than its peers above.

Take-or-pay agreements may be described as cloud contracts, but economically they function much like credit. Providers commit billions upfront to data centres and GPUs against customers’ promises to purchase capacity over several years. The infrastructure becomes the collateral, and future revenue becomes the asset supporting today’s investment. That leads us to pose another new question:

Is AI demand growing quickly enough to justify the financial commitments already embedded in the system?

Financing can become strained even without an industry contracting. A data centre underwritten on expectations of 70% demand growth can disappoint if growth slows to 40%. Revenue may still be reaching records, the industry is certainly not contracting, but the assumptions supporting the financing change. That is the second-derivative problem.

If this sounds similar to the GFC, your connections would be correct. But this is a different market, but both rely on future growth validating commitments made in the present.

This point ties together the first two Cs we mentioned.

If more efficient models and cheaper Chinese alternatives reduce the amount of compute required per task or compress the economics of inference, it pressures the investment cycle. Ultimately, balance-sheets will determine who can absorb that adjustment.

This explains the spread that Coreweave and Oracle have over the other tech CDS. CoreWeave finances GPUs against contracted demand, and Oracle has become increasingly concentrated in AI infrastructure through debt financing and lower cash flow bases than the likes of MSFT, AMZN, and GOOGL.

So the first two Cs culminate to this. Credit will be the market’s first attempt to distinguish between the companies capable of funding the AI transition and surviving adjusting assumptions of monetisation.

A Clearing Event, Not an All-Clear

The above questions help us to navigate the AI trade in the medium- to long-term. What happened this week, however, can guide us in the short term.

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The Federal Reserve’s credibility problem has rarely been about finding the right words. Central bankers have no shortage of those (although if Warsh has set a precedent, he’d like to have less in the future). The harder task is convincing markets that the words describe a reaction function rather than a pre-committed strategy.

Warsh entered his congressional testimony insisting that the Fed has “no tolerance” for persistently elevated inflation. Had the CPI report landed hot, that language would have been perceived as a threat to markets, with an appropriate hawkish extension of recent moves to follow. Instead, those words arrived alongside the weakest inflation print since 2020. Headline prices fell 0.4% month-on-month against expectations for a 0.1% decline, while core CPI was unchanged rather than rising the expected 0.2%. Annual core inflation slowed to 2.6%, undershooting the 2.8% consensus.

Warsh did not have to demonstrate his inflation credentials by delivering an immediate rate hike. The data has done some of the work for him. In that sense, the credibility question received a favourable answer. Warsh can continue to present the Fed as intolerant of inflation without forcing policy tighter into a cooling price backdrop. His rhetoric looks more like a framework that is producing the desired outcome.

The two-year Treasury yield fell about 10bps, July hike pricing fell back, and the expected timing of the next move was pushed back towards the autumn.

The most effective inflation hawk is sometimes the one who does not need to hike. If households and companies believe the central bank will respond when necessary, inflation expectations can moderate before the response itself arrives. The “Maradona theory of interest rates,” as Mervyn King once said. Tuesday’s report therefore strengthened Warsh’s hand, giving him permission to sound hawkish while remaining patient.

(For those looking for added context to this theory, Mervyn King coined it in 2005, comparing monetary policy with Diego Maradona running virtually straight through the England defence because defenders moved in anticipation of where they thought he would go. King’s point was that markets react to what they expect the central bank to do. Those expected future rate changes can influence spending and inflation even when the official policy rate moves relatively little. He described this as the monetary-policy framework “doing the work” through expectations. An interesting economic insight and incredibly well timed, given Wednesday’s game…)

Yet, one benign report cannot settle an inflation debate. Credibility is not earned by a singular win, but by how the Fed responds when the next uncomfortable number arrives. Oil is rising again, underlying measures of sticky inflation remain above target, and the economy is not obviously weak enough to rule out another inflation wave.

Warsh has passed the first test, but more difficult ones are likely still ahead. In the spirit of the ongoing World Cup… it’s Warsh 1 - 0 Inflation as the ref calls for the first hydration break.

The Disinflation Engine

The immediate temptation is to dismiss the report as an energy story… the market bear and the rates hawk might do just so. Motor fuel did much of the work in pulling headline CPI lower, reflecting the retreat in prices following the earlier easing in geopolitical tensions. That component is volatile and may reverse quickly now that oil has moved higher again.

Shelter inflation rose just 0.1% on the month. Core services excluding energy were flat. Price pressures moderated across a broad range of goods and services, with several major categories making a negative contribution. Services inflation posted its smallest contribution since the early months of the pandemic.

The report was unusually soft, which raises the more important question:

Why?

Part of the answer may be that the consumer is increasingly unwilling, or unable, to absorb further price increases. Real wage growth has been weak for several months, the labour market is losing momentum, and businesses are finding it harder to pass costs through without sacrificing volumes. Inflation is cooling partly because demand is becoming more price-sensitive.

The post-pandemic period brought excess savings, strong employment, and rising asset prices… all contributing to why households could look past repeated increases in the cost of living. That cushion is now thin. This is healthy from an inflation perspective, although less bullish for nominal growth. The economy may enter a phase in which slower demand performs some of the work that monetary tightening previously had to do.

Call that the less celebratory reading of Tuesday’s report.

Our broad view remains that inflation is not out of control. Shelter is moderating, goods disinflation has returned, and consumers are becoming more resistant to price increases. The risk of a renewed wage-price spiral has fallen meaningfully.

The path back to target will still be uneven. June benefited from a large energy reversal, while oil has since moved higher on renewed geopolitical tensions. If sustained, that will feed back into petrol, transportation and distribution costs, making the next few prints firmer. Of course, the higher oil rises, the more incentivised DJT will be to diminish tensions in the ME.

A rebound in headline inflation would not necessarily invalidate Tuesday’s message. The key distinction is between an energy-driven bounce and a broader reacceleration across shelter and labour-intensive services.

Our central case remains for headline inflation to rise from June’s unusually soft reading while core inflation trends lower more gradually. That leaves room for recurring inflation scares, but not another inflation crisis. The report changes the timing of the Fed’s next move more than the destination.

What does this mean for our cross-asset views? A softer inflation print changes the near-term policy path, but its implications extend beyond the next Fed meeting. From the shape of the Treasury curve to the outlook for gold and the durability of the equity rally, the more important question is where the market has already moved too far, and where the best asymmetries now sit.

Rates Waiting for Warsh

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That is increasingly the story in our home base of the UK. For years, the equity market has been described in the language of polite dismissal: too old-economy, too low-growth, too politically messy, too easy to ignore. But neglect has a habit of creating value. British takeovers are up 250% year-on-year, with overseas buyers rediscovering that one of the most unloved corners of global equities still contains real assets, cash flows, brands, and strategic value that public markets have been reluctant to price properly.

EasyJet (EZJ LN) is the latest example from our Master Fund of that cheapness being tested in public. Castlelake, the US investment firm, made a series of approaches for the airline, initially at levels the board rejected as opportunistic and undervaluing the group. On Monday, however, easyJet agreed in principle to a sweetened 690p-per-share offer, a meaningful premium to the prevailing 603p share price.

The market had already started to close the gap. EasyJet shares have risen almost 100% over the past two months as investors have gradually come around to the value proposition. At the beginning of June, Citi argued that the airline’s fleet alone could be worth double the share price. When the aeroplanes are worth more than the equity market’s view of the company, maybe it’s not such a surprise when a financial buyer starts circling.

There is also a wider macro footnote here. The strength of inbound UK M&A may help explain one of the more surprising moves in FX this year: sterling’s resilience. The pound has had to digest geopolitics, domestic political noise, and shifting rate expectations, yet it has remained one of the better performers in G10. Deal flow will never dominate a market as deep as sterling, where daily turnover dwarfs even the largest transactions. But cross-border acquisitions do create real currency demand, hedging flows, and corporate activity.

With the bulk of the profit from our easyJet long position now locked in, the focus turns to sniffing around for other cheap UK purchases that could be ripe for a move higher.

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Why the UK Remains Attractive

Before moving into the more speculative part of the exercise (which UK-listed companies might be next?), it is worth stepping back and asking why the bid for UK assets has returned at all.

There are three reasons private equity firms and overseas strategics keep circling London: the valuation gap remains wide, the domestic buyer base has withered, and the market is full of cash-generative companies that public investors have deemed too unfashionable to own.

The UK is cheap for reasons that are both structural and self-reinforcing. The market has the wrong sector mix for the current cycle, too little technology, too much exposure to banks, energy, staples and healthcare, and a domestic investor base that has spent decades walking away. Although the discount has become embedded, it does not mean it is justified.

1. The Valuation Gap Remains Wide

Start with the obvious point. UK equities are still cheap. The FTSE 100 trades on roughly 16x earnings, compared with 27.7x for the S&P 500, and remains at a discount to most European and Asian markets as well. Some of that discount is deserved. The UK does not have the same technology weighting as the US, nor the same earnings momentum from AI. But the size and persistence of the discount has created a clear arbitrage for strategic buyers.

For public-market investors, a UK-listed company can remain cheap forever. For a buyer with a longer time horizon, a balance sheet and a willingness to act, that same company becomes something different: a decent global asset trading at a local-market discount.

That is the essential appeal. Buy real assets in London at UK multiples, then own them privately, restructure them, or fold them into a larger global group where the same cash flows may be valued more generously.

2. Domestic Ownership Has Collapsed

The second issue is ownership. The UK market no longer has a strong domestic buyer standing behind it. Pension fund allocation to UK equities has fallen from more than 50% around 25 years ago to roughly 4.4% today. LSEG has estimated that more than £1.9tn has exited UK equities since 2000 as pension funds and wealth managers shifted capital toward global markets, especially the US.

Valuation is not only about earnings. It is also about who is willing to take ownership of those earnings.

The answer in the UK has been “not enough people.” Persistent domestic selling has kept valuations depressed, liquidity thin in parts of the market, and boards more exposed when a credible bidder turns up offering a 30–40% premium.

3. London Is Cash-Generative But Unfashionable

Third is composition. The UK’s discount is not a mystery. The market looks the way it does because of what it owns. The FTSE 100 is roughly 28.1% financials, 15.1% consumer staples, 14.2% industrials, 12.2% healthcare, 9.8% energy, and only about 0.4% technology.

That is almost the opposite of what global investors have wanted to own over the last decade. The FTSE 100 is dominated by banks, miners, insurers, energy companies, consumer staples, and healthcare names rather than Big Tech, software platforms, or AI infrastructure winners. A market built this way can look optically cheap for a very long time.

But that is also why it keeps attracting buyers.

For public investors chasing growth and narrative, many UK-listed companies look dull. For private equity firms and overseas corporates, “dull” can be another word for “useful”. These businesses often have real assets, steady cash flows, defensible market positions, and underappreciated strategic value. They may not deserve US-style multiples, but they don’t need to. When the starting valuation is low enough, the upside can come from someone else deciding the asset is worth more than the London market is willing to pay.

Where to Look Next

Jupiter Fund Management (JUP LN)

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Keir Starmer is out, which is to say Westminster has once again managed to produce a surprise everyone had spent weeks preparing for.

The exit was priced before it happened, and the market reaction since has reflected that. The Makerfield byelection gave Andy Burnham his route back to Westminster, and Donald Trump, never knowingly under-briefed on another country’s political instability, had already previewed the ending from across the Atlantic the weekend prior.

Andy Burnham looks set to replace Keir Starmer as Labour leader and prime minister, thus becoming the seventh occupant of the “top job” in just the last ten years. That said, while removal firms busy themselves once more in Downing Street, Burnham will likely face the same challenges his predecessors have faced and quickly find himself boxed in on all sides. While it is not confirmed yet, a lack of competition and polling websites suggest a near certainty that Burnham takes No. 10.

From a political perspective, there is clamour among Labour MPs to shift leftwards, to counter an insurgency in the polls from the Greens, and to provide an offering that is distinctly different from Nigel Farage’s reform. Such a shift, if it were to pan out, would likely tee up a “populist left” vs “populist right” contest at the next election, due to be held in 2029, and unlikely to be called sooner, considering the current parliamentary arithmetic.

Burnham is more interventionist in tone, but he has also tried to reassure markets. He has pledged to stay within existing fiscal rules and honour Labour’s promise not to raise taxes on working people, while arguing that privatisation and deregulation have created inefficiencies, especially in housing and utilities. The view is enough to make gilt investors nervous, but not yet to make them panic.

Gilts sold off the week after Burnham’s emphatic Makerfield victory, with the 10-year yield pushing higher and the long end once again becoming the most sensitive part of the UK political weather map. Sterling weakened too, which was the more revealing move. In normal circumstances, higher yields should support a currency. When yields rise and the currency falls, the market is not rewarding policy credibility. This has been much of the same reaction that we saw following the most recent ECB “policy mistake” (After You, Christine).

There is an echo of 2022, albeit on a far smaller scale. No Liz Truss moment has played out. No forced selling or pension-fund stress. However, markets are marking up the chance that the next prime minister might be more relaxed about borrowing, more willing to test the fiscal rules, and more tempted to treat the bond market as a political opponent rather than a funding source.

A lot was already in the price. Starmer’s authority had been fading for months. The UK was already carrying a political risk premium. The gilt market was already dealing with heavy supply, sticky inflation anxiety, weak growth, and a public-sector balance sheet with very little margin for error. Burnham did not create those constraints, but he inherits them for his reign (Gilt Trip, Starmer Drama).

In Hock, Whether He Likes It or Not

“We’ve got to get beyond this thing of being in hock to the bond markets.” — Andy Burnham, September 2025. For Andy, this may instead be the factor he has to live by. If Truss left us with anything, it’s that you have to have credibility with the bond market to survive.

That last line may be the constitution of modern British fiscal politics, a line not written down but enforced daily at the 8 a.m. open by gilt traders, liability-driven investors, overseas reserve managers, and anyone else absorbing a round of long-duration UK paper.

Burnham appears to understand this, and his tone has changed since that remark in September. In the wake of the market wobble last week, Burnham moved to contain any concerns by bringing in what we could call an A-list of fiscal personnel: former Bank of England chief economist Andy Haldane, the former Goldman Sachs economist and Conservative government minister Jim O’Neill, and the former head of the Office of Budget Responsibility Richard Hughes. A team of economic centrists, so to speak. Bringing in people with credibility around monetary policy, fiscal rules, and institutional economics sends a clear, positive signal.

Bringing in fiscal adults is in stark contrast to Starmer’s efforts (sorry, Rachel).

Markets can tolerate redistribution. They can tolerate higher taxes. They can even tolerate selective intervention if it is funded, explained, and tied to a plausible growth story… but talking about growth in a country that has become allergic to it does sound strange. What they cannot tolerate is unfunded ambition on ideological views alone.

That is where the Truss comparison is useful up to a point. Truss tried to tell markets that credibility could be asserted. Burnham’s challenge is to show that credibility can be borrowed, at least initially, from the institutions and people around him. Fiscal rules, OBR oversight, Bank of England independence and a serious chancellor are the guardrails.

There is also little to no desire among the general population for broad-based tax hikes, unsurprisingly, given that the tax burden is already on its way to a record high. And, make no mistake, the days of “just tax someone else” are now behind us. Wealth is too mobile, and the tax base far too top-heavy, for that to be a coherent strategy anymore.

Substantial additional borrowing is also off the cards, whether within or outside the fiscal rules, or whether dressed up as “borrowing to invest” or suchlike. The nub of the matter remains that higher borrowing is just that, no matter the clothing it wears, and that greater Gilt issuance would increase not only the fiscal risk premium that the UK must pay in the form of higher yields, but also the inflation risk premium that is paid.

While Burnham’s political capital will never be greater than the moment he enters No. 10 for the first time, plenty of fiscal stumbling blocks have already emerged.

The ‘Defence Investment Plan’ requires £4.7bln of funding that has not yet been found, while last year’s Budget was conditioned on departmental spending cuts and pre-election tax tweaks that always looked somewhat far-fetched. As a result, any honeymoon period that Burnham might’ve been expecting is likely to prove relatively short-lived.

Pre-Budget trial balloons will likely start flying almost as soon as Parliament returns from recess in September, beyond which Burnham’s choices will likely boil down to either growth-negative tax hikes, or politically unpopular spending cuts. With that in mind, any near-term relief experienced either by the GBP or Gilts is set to prove relatively short-lived, as after a summer of relative stability, may come yet another tumultuous autumn.

Where We Go From Here

The immediate market reaction also tells us what investors are really worried about. If we take a look at sovereign default swaps, fiscal irresponsibility is not showing up as it did in previous instances such as Covid and the Truss moment.

The concern is subtler and will show up more in yields, the curve, and currency markets.

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1. Where to allocate capital on the basis of global rates either remaining elevated for longer or simply moving higher.

2. Where the better areas of the market are, from a valuation perspective, to rotate some profit from AI/tech names.

3. And defensive angles to portion some funds to help hedge or protect against an expensive market.

In our view, the common area that addresses all three points is financials. We believe bank equities have a credible case as a 12-month thematic. As with anything, it’s not simply as easy as saying “all banks benefit from higher rates,” or that “all banks trade on a low book multiple.” But there are plenty of options for finding likely winners among banks with the right balance-sheet structure (especially asset-sensitive franchises), sticky deposit bases, effective hedging, and manageable credit risk.

There are three drivers to consider: higher global rates, relative value, and defensives in an expensive market. We’ll start with the former ahead of the Fed this evening and the BOE tomorrow.

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1) Higher Global Rates

The current policy backdrop is directionally supportive for global bank stocks, but it is not the same story everywhere.

In the US, we pivoted our view earlier this month and now expect the Fed to hike rates this year. The move came after the strong employment report, with labour market conditions now tighter rather than deteriorating. At the same time, growth has remained resilient, and that’s before we start talking about inflation.

The economy is not overheating in a crude sense, but the policy stance is now too easy relative to the data. We think it plausible that the unemployment rate will fall gradually toward 4.0% by year-end, but see the headline CPI staying in the 3.5-4% range over the same period — a “higher-for-longer” backdrop for US banks.

In the euro area, the story is even cleaner for the theme. The ECB raised all three key rates by 25 basis points on 11 June, taking the deposit rate to 2.25%. The ECB’s own statement said euro-area headline inflation is expected to average 3.0% in 2026, and Eurostat’s May flash estimate put current euro-area inflation at 3.2%, up from 3.0% in April.

The tone of the presser was hawkish. Even though Lagarde did not pre-commit to further hikes, the updated inflation figures (and downgraded growth projections) 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. We spoke about this factor specifically in our note last week, “After You, Christine.”

In the context of today’s equity focus, European banks have been among the main beneficiaries of post-2022 margin normalisation, and we expect this to continue into H2 2026.

The UK sits between those two cases. Headline May CPI out today held at 2.8% YoY, defying consensus expectations of a rise to 3.0% and coming in at the low end of the forecast range (2.8%–3.2%). The ONS attributed the softer reading in part to lower food costs, particularly meat and dairy products, which offset other upward pressures. Money markets trimmed BOE rate-hike bets, with swaps implying ~27bps of hikes for the year versus ~29bps the prior day.

The data reinforces expectations that the BOE will hold the benchmark rate steady at 3.75% at its meeting tomorrow, but the consensus view of one hike for this year still makes complete sense. The services inflation beat, and broader inflationary pressures already in the system, are likely to push CPI higher into year-end.

For UK banks, that makes the coming period less a pure hiking story than a higher-for-longer plus structural-hedge story.

Japan is the smallest absolute-rate market in this set, but arguably one of the most important in directional terms because it is coming off decades of ultra-loose policy. For Japanese banks, the thematic is therefore about normalisation from a very low base, which can have an outsized effect on margins and investor perception.

TLDR: The thematic is strongest in Europe and Japan, where policy direction is still moving towards tighter conditions, constructive but more selective in the UK, and more valuation-driven in the US, where the benefit comes less from fresh hikes already delivered and more from the market’s retreat from rate-cut expectations.

2) Relative Value

Cheap sectors are only interesting if they are cheap for no good enough reason. Other than that, they’re cheap for a reason.

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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

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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.

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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.

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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.

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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.

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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

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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.

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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

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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.

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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.

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A ceasefire in Iran has come closest to fruition since the escalations began in late February. However, in keeping with the current administration’s preference for maximalist leverage, this isn’t so much a white flag as it is a tactical timeout defined by an aggressive “15-point plan.”

From “Obliteration” to “Optimisation”

For the markets, the shift is strong. We were staring down the barrel of a Tuesday evening deadline, the point at which the Strait of Hormuz was either to be reopened or the Iranian military was to face what President Trump termed an “obliteration” attack.

Instead of the fireworks, we got a two-week, “double-sided ceasefire.” The geopolitical risk premium in Brent is currently being re-indexed. Equities, particularly those sensitive to energy inputs, can finally take a breather. We are moving from a fear of escalation regime to a sceptical stabilisation regime.

The architecture of this truce, brokered via Pakistani mediation, is precarious. It hinges on Iran agreeing to the “complete, immediate, and safe opening” of the Strait of Hormuz.

While Tehran has signalled acceptance, the devil is in the jurisdictional details. Iran has stipulated that “safe passage” would occur in coordination with their own military. In market-speak, this is counterparty risk. If the Iranian Navy is the one coordinating the passage, the definition of “safe” remains entirely at their discretion.

The 15-Point Reality

The diplomatic math here is a hybrid of two competing visions:

1. The Iranian 10-Point Proposal, which Trump surprisingly called a “workable basis” for negotiations.

2. The US/Israel 5-Point Overlay, the “hard” conditions regarding regional proxies and nuclear enrichment.

Combined, this 15-point plan represents a messy Venn diagram. Some points overlap (opening the Strait), while others (disarming Hezbollah) remain total non-starters for Tehran.

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This provided another Jenga-style piece removal of security with which the US economy is currently being propped up. The ongoing conflict in Iran is causing some to increase their probability of a recession. Although we wouldn’t position ourselves in the eternal optimists bucket, we believe there are several reasons why it’s still far too premature to start throwing around the R-word.

Things Are Different From 2022

Ok, technically, the last official US recession was in 2020. However, US GDP in the first two quarters of 2022 almost triggered a technical recession and provides us with the most recent blueprint to compare to. It’s also a relevant comparison due to surface similarities around an energy shock and geopolitical uncertainty from the start of the Russia-Ukraine conflict.

However, on reflection, the current macro backdrop differs materially from the 2022 recession template. Most importantly, the inflation dynamic is far less entrenched today. In 2022, economies experienced a shock as accelerating wage growth and tight labour markets emerged from the Covid pandemic, creating the conditions for a wage–price spiral. By contrast, wage growth is now moderating and labour market sentiment has softened significantly, reducing the risk of persistent inflation and pointing instead toward a more disinflationary or even deflationary impulse.

Policy settings also start from a fundamentally different place. Central banks entered 2022 well behind the curve, with rates deeply below neutral and forced into aggressive catch-up tightening (Powell might never live down his “transitory” comment from that time). Today, policy rates are already closer to neutral, with the Fed well into its easing cycle.

Finally, the labour and technology backdrop introduces a new asymmetry. Whereas 2022 was defined by labour scarcity, today’s environment is increasingly shaped by concerns around AI-driven labour displacement, contributing to weaker employment expectations and dampening wage pressures. Taken together, the current cycle lacks the key ingredients that drove the stagflationary shock in 2022.

Granted, this doesn’t excuse the worries about US vulnerability to growth downside, but it’s unlikely to result from a 2022 repeat of persistent inflation.

Current Indicators

There’s no exact science in determining which metric is the best when trying to predict a recession. Yet even if we take a spread of some of the most widely used or vouched-for, the probability still appears to lack any significance:

Bloomberg median forecasted probability of recession in 2026 (%):

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The recent drawdown in gold prices has been, in a word, violent. After a multi-year rally that seemed to defy the gravity of high real rates, the yellow metal has hit a wall of selling pressure. But to paraphrase a market adage: do not mistake a liquidity event for a change in regime. Our assessment is that the fundamental drivers of the gold bull market remain not only intact but are actually being strengthened by the very volatility that is currently depressing prices.

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Sovereign Sellers

The primary question on every desk right now is why gold is falling exactly when the geopolitical risk, specifically the escalation of the Iran war, is at its zenith. That answer lies in the plumbing of global finance, not in a sudden loss of faith in gold’s value. Gold is often described as the “ultimate haven,” but in the initial stages of this crisis, it functions as the “ultimate liquidator.”

The recent selloff has been predominantly driven by the urgent liquidity needs of major sovereign actors. For several years, central banks, particularly those in emerging markets, have been the dominant source of inflows into the gold market. However, a war in the Middle East and the resulting closure of the Strait of Hormuz create a specific kind of financial stress. When oil prices spike and regional currencies come under pressure, these same sovereigns often have to de-gross their portfolios to raise immediate cash.

In the early stages of a major macro correction or a geopolitical shock, investors and sovereigns alike sell what they can, not necessarily what they want to. Because gold is a highly liquid, deep market with no counterparty risk, it is the first ATM that central banks visit when they need to defend a currency or cover margin calls on falling equity positions. These liquidity-driven moves often disregard long-term fundamentals in favour of immediate solvency. When the Strait closes, the need for dollars becomes the only game in town.

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Markets tend to assume that geopolitical crises escalate until something breaks. History suggests the opposite is often true. The moment when investors begin to imagine the worst is often when the incentives to avoid it become overwhelming.

The confrontation around Iran has quickly become one of those moments. Oil has surged, tanker traffic has slowed almost to a stop, and risk assets have been forced to price a scenario that earlier this month sat firmly in the tail of the probability distribution.

Yet crises are rarely governed purely by ideology or military logic, and are more often constrained by economics, domestic politics, and the basic question of who, if anyone, actually benefits from prolonging the conflict.

Viewed through that lens, the current standoff begins to look less like the start of a long war and more like a high-stakes game of incentives (something we should be used to in Trump-office markets). And once those incentives are mapped out, several conclusions follow, including one that markets may not yet fully appreciate.

Hormuz has to reopen.

Problems in the Strait

At a fundamental level, a prolonged conflict is not in the economic or political interest of most actors involved, including Iran itself.

The Strait of Hormuz, through which roughly 20% of global oil and LNG flows transit, is a critical artery not only for Gulf exporters but also for Iranian crude shipments. Sustained disruption would therefore undermine Iran’s own ability to export oil (much of which is sold to China) and deprive the regime of one of its most important sources of foreign currency. Even amid the current crisis, tankers carrying Iranian crude have continued to transit the strait toward Asia, highlighting Tehran’s reliance on the route for revenue.

A similar logic applies to the broader region. Gulf producers, Asian importers, and Western governments all have strong incentives to prevent a durable closure of Hormuz, given the scale of global supply at risk. Tanker activity has slowed to a snail’s pace, with severe implications for global growth and energy prices if it continues for much longer.

Trump Has an Eye on Midterms

From a domestic political perspective, there are also strong incentives for the White House to avoid a prolonged conflict. President Trump has historically framed his foreign policy around decisive outcomes and rapid demonstrations of strength rather than open-ended military engagements.

A drawn-out confrontation with Iran risks undermining that narrative, particularly if it results in sustained instability in energy markets, higher fuel prices for US consumers, or the perception that Washington has been pulled into another costly Middle Eastern conflict. With the US midterm elections approaching, the administration will likely be acutely aware that geopolitical crises can quickly become domestic political liabilities.

Energy prices are particularly sensitive in this context. A persistent spike in crude would feed directly into gasoline prices, a metric closely watched by voters and historically correlated with shifts in political sentiment. For any administration heading into a midterm cycle, a sharp increase in pump prices can act as a powerful amplifier of broader concerns about inflation and the cost of living.

The optics are therefore important: a conflict that drives oil materially higher risks turning a geopolitical event abroad into an economic grievance at home.

In that sense, the political calendar matters. Midterm elections often serve as referendums on the incumbent administration’s economic management and overall competence. Allowing a geopolitical crisis to evolve into a persistent economic shock, particularly through higher energy prices or financial market volatility, would risk complicating the administration’s domestic narrative at a sensitive moment.

Peak Fear Priced

There are increasing indications that markets may already have priced in peak geopolitical fear around the Iran conflict, which could limit the scope for further large downside moves in risk assets.

Recent price action across asset classes suggests that the most aggressive phase of the risk-off adjustment may already be over (see Brent, G10 STIR, etc.).

Positioning indicators flagged levels of stress comparable to major crisis periods, with volatile markets briefly showing dynamics similar to those seen during the early stages of the pandemic. At the same time, cross-asset repricing was swift and broad, with equities, rates, and commodity markets all rapidly incorporating a higher geopolitical risk premium. This type of sharp, front-loaded adjustment is often characteristic of the point where markets begin to price worst-case scenarios rather than base cases.

From a market-structure perspective, the key point is that large directional moves become harder to sustain once investors have already repositioned defensively. In the latest selloff, the biggest drawdowns occurred in markets that had been the strongest performers earlier in the year, suggesting that investors rapidly reduced risk in crowded positions.

Historically, such episodes of intense repositioning often mark the moment when fear peaks rather than when the decline begins, as the marginal seller becomes exhausted.

Importantly, the focus for markets tends to shift from the absolute level of geopolitical risk to the change in expectations. Even if tensions remain elevated, what matters for pricing is whether conditions are getting worse or simply becoming “less bad.” Once the trajectory of events stabilises, markets often begin to recover even while the underlying geopolitical situation remains unresolved.

The likely outcome is that volatility gradually subsides and the geopolitical risk premium embedded in assets begins to compress as investors reassess probabilities rather than possibilities.

Positioning for De-Escalation

Oil Lower

• Buy a 2x1 put spread on COM6 (spot ref 102.50)

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Yet what we have seen this week (and as a partial follow-up to Software-as-a-Selloff) is the rise of what we’re calling the AI disruption vigilantes. This new breed of hungry equity traders has been out in full force this week, targeting various areas of the market where a high-fee, labour-intensive operating model could prove ripe for disruption.

Three key areas have been targeted this week, but the consensus trade for each one is different, as AI nuances are already becoming apparent.

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Financial Services (Tuesday)

The market reaction to Altruist’s latest release underscores growing investor concern that generative AI is encroaching on bespoke advice in the sector, one of the most defensible layers of the wealth management value chain.

The firm announced that its Hazel AI platform can now construct client-specific tax strategies by ingesting 1040s, payroll data, and account-level information and produce actionable recommendations within minutes. What has historically been a manual, high-labour component of advisory work is being reframed as a data-processing problem, and markets immediately priced in the implications for operating leverage across the sector.

Two companies we noted that took a hit (which has been exacerbated as the week has gone on) are LPL Financial and Charles Schwab.

In our view, the hit to both reflects fears that AI-enabled workflow compression could erode both pricing power and the perceived scarcity value of human advice.

If a single advisor can service materially more households (Altruist CEO Jason Wenk suggested as much when he said Hazel “expands what a single advisor can handle”), then revenue per advisor may rise, but industry-wide fee pools risk dilution as capacity expands faster than demand.

Tax optimisation has long been one of the most defensible justifications for advisory fees because of its complexity, regulatory sensitivity, and the need for cross-account coordination. By automating this function, AI threatens to commoditise what was previously a high-margin, expertise-heavy offering.

To clarify, we believe the concern is less about outright disintermediation and more about margin normalisation. Simply put, advisory firms may retain clients, but with lower incremental economics per relationship.

As far as the vigilante pursuit goes, we don’t see this area of the market posing serious risks relating to a complete decimation of related stocks. But we do believe the move lower is justified based on repricing long-term earnings expectations.

Real-Estate Services (Wednesday)

The vigilantes turned to real estate services the following day, using the same argument as they had used against finance firms.

The narrative that AI-driven workflow automation is migrating from back-office experimentation into core transaction functions caused significant hits to the likes of CBRE and JLL.

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Against that backdrop, we wanted to flag a few developments that feel more durable. Some thoughts, and a few charts, on (1) oil’s recent move higher, (2) a new allocation to copper, and (3) the latest turn in the critical minerals story.

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Oil, An Under-Positioned Rally

Oil, burdened in 2025 by signs of a glut, is having a resurgence this year. Two tailwinds are at play.

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On the latter, the real question is whether we’re about to see a continuation of a positive-correlation shock (stocks, bonds, and the dollar down) as foreign holders ditch the US further. Europe has relatively few effective levers against Trump’s America, but targeting US assets is one way that the Trump economic bloc will feel pain. For those who want to read more about these events, we wrote a few words in our secondary publication:

One Basis Point

Bye, America.

An across-the-board selloff in US assets on Tuesday (the dollar, stocks and bonds all sinking in unison) uncannily resembled the turmoil sparked by President Donald Trump’s blanket tariffs last year. On several occasions from March through August, these three asset classes repeatedly slid together, fueling speculation of a global rotation out of America…

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7 months ago · 5 likes · Jesse Williamson

Brutal As It Has Been, It Can Go Further

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Beneath the surface, we can gather more detail. The quarter-point move went through over the objections not only of a few voters, but also of several regional presidents who weighed in despite not holding a vote this year. Markets are also pricing a different path than what the median dot plot says, and by one measure of where the neutral rate is, maybe the Federal Reserve won’t need to cut at all.

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Silent Disenters

There were dissents, but maybe not as many as feared. Rumours leading up to the meeting were that as many as five voting members might dissent in a display of independence. But for now, a divided Fed is more together than expected. Schmid and Goolsbee voted to keep rates on hold. Miran, the most recent appointment from Trump, unsurprisingly voted to cut 50.

A quick look at the dots shows that not much has budged since September. For 2027, one lonely dot crept 25bps higher. For 2028, the same story—a single participant nudged their estimate up. Otherwise, stasis.

Officials still don’t see fed funds rising above 4% for the foreseeable future, and most of them don’t see it falling much below 3% either. The distribution has settled into a narrow corridor, reflecting a quiet consensus on what “normal” looks like in a world that keeps refusing to behave normally.

But there exist “silent dissenters.” These are the regional Fed presidents who joined the discussions but didn’t hold a vote this year, several of whom signalled they would have opposed the cut. Their dots imply a 2026 hike and, in some cases, no cuts at all over the next three years. They don’t have a formal say, but they do have a view, and it sits uncomfortably against the majority’s glide path.

The voting roster rotates in January. Cleveland’s Beth Hammack, Dallas’ Lorie Logan, Philadelphia’s Anna Paulson, and Minneapolis’ Neel Kashkari step in as Boston, Chicago, St. Louis, and Kansas City step out.

Hammack and Logan have leaned hawkish, arguing that inflation progress is still fragile. Paulson is new and focused on labour-market softening. Kashkari remains data-dependent but has cautioned that inflation may be harder to pin down than markets hope.

However, the Fed (and the market) seem to have an upbeat view of inflation next year.

Inflation

The statement still calls inflation “somewhat elevated,” but Powell avoided turning up the temperature in his press conference. Inflation estimates edge lower across the next three years, and everyone dutifully forecasts a clean return to 2% by 2028.

Markets seem even less bothered. One- and two-year inflation swaps have drifted back to pre-tariff levels. The gap between horizons has narrowed, effectively pricing the tariffs as a one-off shock that fades within a year.

For now, the Fed and the market are aligned. Both are acting as though inflation has been brought to heel.

But even with inflation viewed as comfortable or tolerable (even if elevated above the official “target”), we feel markets may be ahead of themselves with pricing rate cuts next year.

R*

The terminal rate has ticked up over the past month, despite Hassett being stated as the clear front-runner.

Theoretical economics offers its own guides to the neutral rate, such as the Laubach-Williams estimate, near 3.84% in nominal terms, or the Fed’s long-run dot plot, closer to 3%. At roughly 3.2%, the market’s expected terminal rate is parked near the bottom of that range.

If you want a market-based read on the neutral rate, the 10y1m OIS is a measure.

The rate has been drifting upward for the better part of two years. It now sits comfortably above 4%, and more importantly, the gap between the 10y1m rate and the market’s expected terminal rate has widened. In other cycles, whenever the terminal rate traded too far below this forward neutral proxy, it eventually snapped back toward it, the market’s way of acknowledging that the Fed cannot sustainably run policy below neutral without re-igniting inflation pressures.

If the market’s estimate of neutral is rising while the expected policy rate a year out is falling, that’s a tension that usually resolves in one direction: fewer cuts, not more. A central bank that cuts into an upward-drifting neutral rate would be easing policy outright, not delivering an insurance cut or a calibration tweak.

Of course, the debate around the neutral rate is ongoing, and we are not here to say the 10y1m is the only benchmark. But it highlights our one concern for interest rates going into 2026.

For other areas of the markets, a recalibration of the terminal rate may not be detrimental. Equities have proved they can be driven by many other tailwinds, such as the ever-increasing AI narrative, which has become the cornerstone of returns over the last three years, despite the stop-start nature of this Fed cutting cycle.

Cutting Through the Noise

At AP, we hold the view that markets are overpricing rate cuts next year.

• 57bps are priced for next year.

• The median dot plot (3.25-3.50%) is for just one quarter-point cut in 2026.

• And by one measure, the Federal Reserve already have an accommodative rate.

SFRZ6

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