A risk-off episode centered on AI financing concerns

19 October 2026

AT A GLANCE

Stocks were sharply down and treasury yields fell last week, in what looks like a risk-off episode
It was however not about activity or inflation data, but a focus on massive AI capex financing
The current earnings season is crucial both fundamentally and for investors behavior

A 17 basis points drop in the US 10-year combined with a sharp drop in global stock markets would typically suggest that last week market participants were holding serious growth concerns.

But details are much more nuanced. No doubt, US Treasury investors must have had some relief as yields bull flattened with the long-end falling while the shorter tenors remained steady. This happened, interestingly, despite negative surprises on US September inflation where both the CPI and most impressively the PPI came out higher than expected. Still, longer-dated bonds rallied and we can highlight two reasons. The first one is the Fed: looking at the subcomponents of both CPI and PPI, they don’t suggest a massive deterioration in the core PCE which should come around 3.1%; it’s not great, but it’s not terrible, especially as Fed officials continued to talk about patience and focussing on trend rather than a single datapoint. The second reason is that when equity sentiment deteriorates, bonds are a safe haven and to that extent last week was quite reassuring. Diversification is not totally lost.

As for equities: it was not a broad recession scare, as we also had positive trade numbers in China and robust retail sales in the US, but a sector specific sell-off affecting the AI ecosystem, as illustrated by semiconductors or Korea literally tumbling, but many other sectors being positive. Investors are questioning the massive AI capex and the associated cost of capital. To that extent, earnings and guidance from big tech will be crucial in the coming days. Selectivity remains absolutely paramount in a field where most of the returns will happen in a relatively distant future.

The week ahead will not provide major economic data, but the earnings season will be in full swing and we will continue to look at developments in a geopolitical picture where visibility is certainly not improving yet.

Have a great week.

Cross-asset Update

Last week markets were roiled by growing anxiety about the funding of the AI trade and elevated crude prices. The Nasdaq 100 lost 4.6% led lower by semiconductors, that plunged over 10%. Brent crude rose towards $110 a barrel with the White House developing new strike plans in the Gulf. While we hold the view that crude prices should remain supported by unabated geopolitical risks, investors should not shy away from IT or AI-related stocks. TSMC reported 15 October and its revenue guidance was impressive, while ASML, that reported one day earlier, said its customers see demand outstripping supply “through at least 2028”. Indeed, on Wednesday Coreweave, the cloud-computing provider, fell 15.5% and its high-yielding bond traded near -15%. Investors should anyway separate CoreWeave’s more leveraged capital structure from the broader, booming AI ecosystem. The primary drivers of the AI trade are the “hyperscalers’, Microsoft, Alphabet, Meta and Amazon, funding AI infrastructure buildouts partially via their cash flows. The solid reporting from semiconductor companies tells us that the manufacturing pipeline remains solid. The market is simply transitioning form a more speculative phase to a more selective one where fundamentals play a more relevant role. The industrial appetite for hardware, compute and foundational model training is showing no signs of slowing.

The reading of the geopolitical tea leaves on the other hand makes us more worried. The US-Iran front is now heightened by the Houthi-Saudi conflict. Flows through the Strait of Hormuz are again down to a trickle as more tankers are hit by missiles or drones. Markets are repricing higher the crude prices at the longer end of the curve. That means that investors now tend to see the current issues becoming more deeply rooted rather than being considered temporary as earlier assumed. Fair values for crude prices are being revised higher not only for the current year, but also for 2028, again a sign that concerns are stretching well beyond the short term. Oil stocks are direct beneficiaries of the steepening of the crude curve and last week recorded new highs for the year, up 4.9%.

How should investors be managing their portfolios if the economy remains strong, while at the same time oil prices stay above $100 a barrel? In equities the only two sectors showing consistently positive beta to rising yields are IT and energy stocks and for very different reasons. IT stocks tend to be less cyclical than other economy-sensitive sectors and are now supported by AI investments, while energy stocks benefit from higher cured prices that in turn drive yields higher.

Equity leadership has been narrow and it is likely to remain so, as the macro and the geopolitical backdrop continue to suggest.

Risk aversion came back last week and it wasn’t about geopolitics

Fixed Income Update

Global government bond yields fell sharply over the week, driven by a mid-week flight-to-quality move as AI-related equities sold off. Despite stronger-than-expected US CPI, PPI, retail sales and jobless claims, Treasuries rallied as risk-off sentiment outweighed inflation concerns. The 10-year yield fell 16.5bps to 5.077%, the 30-year dropped 17.4bps to 5.425% and the 2-year declined 8.1bps to 4.710%, steepening the curve. The front-end of the curve stayed put with 2-year at 4.73%. The rally peaked on Thursday, with yields down 10–15bps intraday. However, the unrest in Europe during the weekend threatens the nascent rally. We suspect there will be contagion effect of European government bonds sell-off on the US Treasuries.

The IMF Annual Meetings in Bangkok provided a key forum for central bank communication. The ECB signalled December as the more likely timing for another rate hike, though October was not ruled out. Fed Vice Chair Williams reiterated that one more hike remains appropriate this year but saw no need to act in 2027. BOJ Governor Ueda reaffirmed plans to raise rates in line with economic and price developments, while BOE Governor Bailey noted signs of a higher neutral rate, with UK September CPI expected to rise to a nine-month high of 3.4%.

Spread performance was mixed. US credit underperformed, with HY OAS widening 23bps to 331bps and IG OAS widening 3bps to 84bps. The rate rally still supported IG returns, with the Bloomberg US IG Corporate Index up 0.86%, while the Bloomberg US HY Index fell 0.33% as wider spreads offset the duration tailwind. IG break-even spreads remain high indicating that the Investment Grade bonds can absorb higher rates and spread volatility compared to 2022. Sector dispersion was evident, with telecom, housing and technology most affected, while financials remained tight. High Yield spreads have reached a six-month high in sympathy of the AI scare. The ratings distribution of the HY index says benign with the lowest percentage of CCCs and the highest percentage of BBs on record along with robust corporate balance sheets. This should support the spreads barring any black swan events.

In MENAT, Moody’s upgraded Egypt from Caa1 to B3 with a positive outlook, citing fiscal consolidation, reforms and an improved external position. The primary surplus reached 4.9% of GDP in FY2026, while debt fell to 81.8% of GDP in June 2026 from 95.2% three years earlier. Greater FX flexibility and tighter monetary policy helped ease shortages, with reserves rising to $57bn by September 2026. Egypt is now single-B rated across Moody’s, Fitch and S&P. We expect Türkiye’s central bank to cut the one-week repo rate by 100bps to 36% this week, resuming its easing cycle. Regional issuance has reopened, with TAQA marketing long 5-year and 10-year bonds at IPTs of T+130bps/T+140bps. Kuwait launched 3-year and 10-year bonds at T+105bps/T+130bps.

Risk aversion came back last week and it wasn’t about geopolitics

Equity Update

Markets fell as the financing of the AI buildout became the main question and the selling stayed unusually selective. The S&P 500 lost 1.9%, its worst week since June, the Nasdaq 100 dropped 5.5% with a decline every single day and the chip index fell for an eighth straight session, leaving it roughly 24% below its June peak. The Dow actually rose 0.7%, because money rotated into defensives and value rather than leaving the market. At the center sat CoreWeave, the AI cloud company that builds data centers with borrowed money, bonds it sold at par in June traded near 78 cents on the dollar, default protection priced a better than even chance of failure within five years and the stock lost 25% in the week, pulling Oracle and the other debt funded builders down with it. Broadcom's CEO set the tone by saying capital, not chips or power, will be the constraint on AI growth and Gartner estimated more than $3.5 trillion of planned AI infrastructure spending could face impairment by 2030 if revenue does not catch up. What did not weaken was the demand evidence, TSMC beat and called AI demand extremely robust, ASML raised its sales outlook for a third straight quarter and said customers are asking about machine orders for 2029 and 2030 and Apple's first foldable phone sold out to January within minutes of preorders opening. The first full week of the season also ended with about 85% of early reporters beating estimates, even though all six big US banks fell after mostly good results. So we keep the distinction we have recommended all year, companies that fund AI spending from their own cash flow and the memory names remerging at attractive levels, over companies that depend on raising more debt.

Europe rose 2.1%, its biggest weekly outperformance against the S&P 500 since April 2025 and the mix explains it, technology was the worst European sector while food, beverage and the defensives led, so the AI selling produced rotation into Europe rather than selling of Europe, the FTSE 100 added 3.1%. Earnings helped and consensus expects about 20% European earnings growth in the second half, so the season carries real weight from here, with Barclays opening for the large banks on Thursday and the US results setting a high bar on margins. Emerging markets fell 5.1% and Korea took most of it, the Kospi lost 14.5%. Thursday's session was halted as Samsung and SK Hynix dropped around 10% each and the index now sits about 37% below its June record. The difference from July's episode is that no buyers stepped in, the main Korea funds have seen no inflows since August and a Chinese competitor's progress in DRAM added a fresh worry. Taiwan fell 4.5% with the component makers hit hardest. China lost 1.6% and its technology boards remain the weakest anywhere this half year, but Beijing moved, regulators met on stabilization, state funds accelerated purchases and insurers were guided not to sell, third quarter GDP lands Monday with the plenum at month end. Dubai rose 1.5% and Dubai Investments Park begins investor meetings this week for what could be the UAE's first listing of the year. Anthropic told investors quarterly revenue reached $16.8 billion, up 45% on the quarter, profitable on an adjusted basis with an 85% gross margin and the catch is growth slowing from the prior quarter's 140, with marketing expected from the week of November 9. The week ahead decides the AI question, 70 S&P 500 companies report, Meta and Tesla on Wednesday, Netflix and the defense names Tuesday, Western Digital on Thursday for the memory read and Barclays opens Europe's bank season.

Risk aversion came back last week and it wasn’t about geopolitics

Written by:

Maurice Gravier Chief Investment Officer , [email protected]
Nawaf Alnaqbi Head of Equity Strategy , [email protected]
Satyajit Singh Fixed Income Analyst , [email protected]
Giorgio Borelli Head of Asset Allocation , [email protected]

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