• Meanwhile in markets, the bond and rates markets remain remarkably unperturbed by stress in corners of the credit market and the violent sectoral rotations that are still taking place in equities;

• The equity market has gone from insane levels of AI euphoria to different stages of AI fears. Last year’s fear about a collapse in AI kingpin stocks (Nvidia, Google, etc.) because of over-investment collapsing has been replaced this year by fears of the great displacement. Displacement of vast swathes of large and often listen corporates by AI eating their lunch. A prime example is customers replacing SaaS with their own AI-written software. I could go on here with a dozen or more different examples;

• Nvidia’s earnings release last eve is a case in point. Earnings and the outlook both easily beat consensus expectations, but the stock is still modestly lower in after-hours trading. If you read the reports on the earnings, the common theme is persistent doubts about massive AI investments actually paying off;

• Since no one has a crystal ball, the smart money has piled in the AI-proof stuff (in the broadest sense), or the sectors that are commonly seen as defensive and late cyclical or even recession-proof (the dreaded R-word). On the Stoxx 600 we see stiff double-digit YTD gains for basic resources and oil, telecoms, and utilities. After all, AI doesn’t mean we no longer need steel and oil to build and produce stuff. And the lights must stay on as well;

• These late-cyclical plays are reflected in the bond market, where Bund and UST yields have grinded lower this year on the back of falling real yields. Yield curves have flattened in the central bank-sensitive segments – two to ten years. EUR and USD OIS forward curves remain inverted, but the low points of the forward curves have inched up several bps from this year’s low;

• If you have a long enough memory, you might remember last year’s scare stories about a ‘bondmageddon’ – Dutch pension funds cutting back on long bonds because of the shift to defined contribution from defined benefits pensions. It turns out the 2026 bondmageddon is a big dud. Nothing happened. As a matter of fact, we now see stories of pensions funds merrily buying more stuff in the long end. In any case, I am sure bank sales desks were perfectly happy with punters trading on this BS;

• Right now, I think it’s hard to argue with the bond market. There’s a cyclical upturn in growth in Europe and probably in the US which is modest in nature, but in both Europe and the US the labor market is softening further, which keeps a lid on inflation. I have no recession warning signals on my dashboard, though my indicators are useless when there’s a sudden drop in business investment (read: AI investment), which is the common cause or trigger of a recession;

• Turning to some overnight market commentary, US Treasury yields are – you guessed it – bog steady. The broad dollar is weaker, especially versus EM currencies. As a matter of fact, the EM currency index that we track, the one from JPM, hit a new multi-year high. Both gold and Brent crude are stable ahead of today’s resumption of US-Iran nuclear talks in Geneva. Japanese government bond yields have steadied following the recent spike that was the result of the government nominating two doves for the Bank of Japan’s Board. Asian equities are mixed, with the Nikkei inching higher still (YTD gain now more than sixteen percent) while Chinese markets are modestly lower. S&P 500 futures are flat, fitting for a market that is basically flat for the year;

• Looking ahead, we have obligatory US jobless claims on tap plus a bit of central bank speak. And that’s pretty much it.

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