The Week in Markets
Brent closed the week above $107, its highest since May, and the rates market had already reached its own conclusion before the moves even settled: fed funds futures now put a 25bp hike on 16 September at 72%. Next week the Federal Reserve, the Bank of England and the Bank of Japan all meet, and that pricing gets tested three times in five days.
Aviva Investors traced the surge through $100 to Middle East escalation, with European gas back at 2022 levels. That combination revived higher-for-longer inflation fears just as the US 10-year approached 5% and the 30-year Treasury reached its highest yield since 2007.
BNY Investments went further: the shift, in their view, is that supply shocks are no longer temporary. Tariffs, energy and bottlenecks are broadening into core inflation and testing anchored expectations, which may force central banks to respond rather than look through the noise. HSBC Asset Management flagged the resulting oddity: government yields have jumped, while corporate credit spreads have barely moved.
UBS put the odds of a 25bp Fed hike to 3.75 to 4.00% on 16 September at 72%, with a further hike in December as its base case. Invesco described a broader higher-for-longer repricing that pushed the 30-year Treasury to 5.32%.
The ECB has already moved, raising rates 25bp to a 2.5% deposit rate and upgrading its inflation forecasts, per Aviva. BNY expects the Bank of England to reverse its recent easing on sticky services inflation, even as it expects the Fed to settle into an extended pause after this month.
UBS's Paul Donovan showed foreign official institutions now hold below 10% of US Treasuries, down from about 25% in 2012. He reads that as stagnant reserves against surging US debt rather than a dollar exodus, which leaves a more fickle private buyer base in charge of the marginal bid.
Western Asset pointed to Norway's $2.3trn fund, which is proposing to shift about $80bn from Treasuries into agency MBS. The US exposure stays the same; the composition moves towards higher-yielding, near-sovereign-quality assets. J.P. Morgan Asset Management sits on the same side of the dollar debate, favouring a modest long-yen, short-dollar position as the yen hit its strongest level since February.
Apollo's Rob Bittencourt framed AI's defining question as a $2trn test: roughly $5trn will be spent on infrastructure by 2030, and that requires about $2trn a year of AI revenue to justify it. He argues private capital may be better placed than public markets to finance the build-out.
Columbia Threadneedle reframed the bubble debate: as intelligence becomes abundant, value migrates to what stays scarce, meaning chips, power, materials and trusted infrastructure, much of it in Asia. Their sharpest risk is a terms-of-trade shock to labour-arbitrage economies, India's white-collar IT sector especially. Their conclusion: be selective rather than absent, because, as they put it, the railway crash still left behind the railways.
With the long end volatile, several houses converged on the same instinct: earn income without taking duration risk. BNY set out four routes, including short-dated investment-grade credit, at about 90% of the full-market yield for far less rate risk, short-dated high yield, floating-rate credit and asset-backed securities. Invesco made the Asian version of the same case, preferring China investment-grade while underweighting long-dated tech and semis on AI-related supply, and calling BB the sweet spot in high yield. HSBC's framing: resilient credit, where spreads have stayed calm even as government bonds have sold off.
UBP's Norman Villamin flagged November's US midterms. With Trump's approval at 36%, he puts an 80% probability on the House flipping to Democratic control and the Senate landing at 50:50, which would push the president towards foreign policy and deregulation for his final two years. Since 1950, the S&P 500 has been positive in the six months after all 19 midterms, median 15%.
Tuesday brings Chinese activity data and US retail sales. Wednesday: UK CPI, then the Fed decision at 7pm UK time, with that 72% hike probability about to be tested. Thursday: eurozone CPI and the Bank of England decision. Friday: the Bank of Japan, where a further hike is widely expected.
Ten houses this week: Apollo, Aviva Investors, BNY Investments, Columbia Threadneedle, HSBC Asset Management, Invesco, J.P. Morgan Asset Management, UBP, UBS and Western Asset.
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