Pigs Get Fat, Hogs Get Slaughtered

Markets rarely price tomorrow’s risks until tomorrow arrives.

Market Structure — Week at a Glance

Week ending September 20, 2026
Long-End Stress

🧭THE BIG PICTURE

This Week’s Market System

Nothing Broke — But Everything Got More Expensive.

The Fed tightened and produced bear flattening, the BOJ tightened and the yen nevertheless weakened, oil stayed above $100, and equities/carry largely survived. The surface looks remarkably calm relative to what changed underneath it.  The Treasury selloff was front-end-led: over the prior week the 2-year rose 26 bp versus only 11 bp in the 30-year.

The market’s focus remains on bonds globally in the aftermath of the FOMC decision, with yields at multi-year highs. Trading down to 4.60% before the Fed statement and Warsh press conference, two-year yields spiked to 4.74% by Wednesday’s close. Market expectations for the December policy rate rose eight bps to 4.21%, the September 2027 implied rate surging 20 bps to 4.69%.  There is talk of 10s yield curve inversion if the Fed meets the 2-3 further rate hikes priced in.

It was certainly not all clear sailing for this week’s notably bifurcated U.S. stock market.  Banks were hammered down 4.9%, with the Broker/Dealers slumping 3.3% while the MAG7 Index saw all-time highs.

Highlights From Fed Chair Warsh Set the Scene:

• “Last month in Wyoming, I expressed my commitment to a monetary policy discipline, not to a decision. I defined the standard for action: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed.”
• “Too many categories are still posting increases above 3%, on both a 6- and 12-month basis.”
• “Overall commodity prices also bear watching.”
• “I’m not a data point dependent guy.” “Trends matter.”
• “We tend to look at aggregates around here.”
• “There’s no hiding from hot spots around the world.”
• “Credit flows have been robust, particularly for businesses. And as I said at the policy symposium in Jackson Hole, I would be hard-pressed to describe broad financial conditions as restrictive. This view was widely shared by the Committee. So, we removed a dose of accommodation.”
• “We removed a dose of accommodation, so that financial and credit conditions would be more consistent with our ultimate objectives.”

The VIX (equities volatility) Index jumped to a seven-week high of 19.0 during Warsh’s press conference (closed at 17.72).  After rising slightly on the release of the FOMC statement, the Nasdaq100 retreated 1.5% on Warsh’s comments. High yield CDS rose from 308 to 317 bps (314 close). The dollar index jumped three-quarters of a percent to a six-week high (100.25).

Alas, the panic was fleeting. The Nasdaq100 rose 1.7% in Thursday trading, with the Semiconductors surging 3.1%. Intel jumped 7.7%, Micron 5.5%, and AMD 6.4%. The VIX was back down to 15.42 by Thursday’s close. High yield CDS ended on Thursday trading at 306 bps, not far off eight-month lows.

At the speculative end of things bitcoin up 6% to $81K and Ethereum up 7%. Bitcoin withstood the Clarity Act cluster with some thinking it’s not dead. The reaction could also indicate underlying demand that was waiting for the dust to settle. It’s impressive nevertheless as Clarity Act headlines are now an upside risk.

An important note from Warsh:

 “Market participants and reporters, I think generally over the course of the last decade or so, have grown accustomed to waiting somewhat breathlessly on a data point. That isn’t my view. I was not waiting breathlessly on what any particular data was… I’ll just reiterate, trends matter. Data points are noisy. Data point dependence is a dangerous preoccupation. It’s not something that concerns me. Markets over time will come to understand how this Fed makes its decisions, what’s relevant and not, and I wouldn’t want to editorialize that for them beyond it.”

💵Wealth effect vs. affordability/political reality.

• Total money market fund assets (MMFA) dropped $52 billion to $7.921 TN. MMFA were up $638 billion, or 8.8%, y-o-y – having ballooned a historic $3.337 TN, or 73%, since October 26, 2022.
• Total Commercial Paper gained $5.2 billion to $1.442 TN. CP increased $60 billion, or 4.3%, y-o-y.
• Freddie Mac 30-year fixed mortgage rates surged 19 bps to 6.95% (up 69bps y-o-y) – the high back to January 2025. Fifteen-year rates jumped 17 bps to 6.26% (up 85bps). Bankrate’s survey of jumbo mortgage borrowing costs had the 30-year fixed rate up 13 bps to 6.97% (up 44bps).

Crucial Understanding: Carry is a funding ecosystem, not a currency pair.

💵AUDJPY: The Carry Trade survived the BOJ hike

Carry Trade Evolves, It Doesn’t Disappear

• For the week, the U.S. Dollar Index rose 1.1% to 100.214 (up 1.9% y-t-d)
• On the upside, China’s (onshore) renminbi increased 0.14% versus the dollar (up 4.33% y-t-d).
• On the downside, the South Korean won declined 3.2%, the Japanese yen 2.1%, the New Zealand dollar 1.6%, the Mexico peso 1.5%, the Swedish krona 1.3%, the Norwegian krone 1.3%, the euro 1.0%, the British pound 1.0%, the Canadian dollar 0.8%, the Singapore dollar 0.7%, the South African rand 0.7%, the Swiss franc 0.7%, the Australian dollar 0.6%, and the Brazilian real 0.4%

BOJ hikes → yen still weak → AUDJPY higher → carry survives.

The carry trade continued to evolve against the dollar with the Japanese yen down 2.1% with the rise eased by the Australian dollar down only 0.6% and the Swiss franc down 0.7%, meaning the AUDJPY and CHFJPY crosses took much of the carry angst pressure off.

AUDJPY → CHFJPY → USDCHF.

Then CHFJPY provides the inflection. That rejection from the 204.5 2.618 / 8/8 zone after the extraordinary run from roughly 106 is visually one of the strongest charts you have this week. The fact that it is a weekly makes it much more significant than another two-day FX move.

The historically wide rate differential between Japan and the United States has been a central driver of yen weakness and the carry trade, although that cushion is now narrowing. The Federal Reserve’s increasingly hawkish posture has made that divergence still more difficult for Japanese authorities to contain.

The BOJ rose rates to 1.25%, its highest rate in 31 years, yet the yen weakened sharply because the hike was priced and the guidance didn’t promise the next one.  Against the US dollar the yen lost 0.6% despite Friday’s BOJ rate increase, boosting losses for the week to 2.1%. The USDJPY traded 153.40 Monday to above 158 Friday. However, the carry trade is an ecosystem, not USDJPY. AUD holding up while JPY and CHF weakened. This week’s moves continuing to illustrate the carry trade didn’t die — its funding leg is changing.

After the Fed Chair’s comments, the pressure on the short end helped to lift USD/JPY but that ran into trouble at a high of 158.05 when the BOJ did a rate check, according to a Nikkei report. JPY funding is becoming less one-way attractive → CHF becomes increasingly viable as the alternative funding leg → carry itself remains alive creates a fascinating tension:

Higher Australian yields → wider carry attraction → potentially supportive AUDJPY.

• In reality, funding is a matrix: JPY, CHF, sometimes EUR depending on the cycle; against AUD, NZD, EM FX, equities, credit, commodities, rates, vol structures, whatever offers the return. Different books use different legs for different reasons — funding cost, hedgeability, balance-sheet treatment, liquidity, cross-currency basis, central-bank posture.
• The other part people miss is who is doing it. It is not just macro hedge funds borrowing yen and buying Nasdaq. Banks, dealers, corporates, real-money managers, CTAs, RV books, commodity houses, leveraged funds — they all interact with funding currencies differently.
• So the market can quite easily have: USDJPY softening, AUDJPY still elevated, CHFJPY reversing, and global carry still very much alive.

There is no contradiction there at all. The contradiction only exists if your entire model is “JPY = carry.”

AUDJPY: Reflects Active Carry Being Tested

AUDJPY sitting near record highs tells us carry/risk appetite is still very much alive. AUDJPY first establishes that this is not a generic carry unwind. 109.90 held in the recent pennant, consolidating near the highs inside that huge rising channel. If yen-funded carry were simply being liquidated wholesale, you wouldn’t expect AUDJPY to be sitting up here.

Going back to our bond scenario, a limiting influence upon the US Treasury sell off is the yen carry trade. Its attractiveness as trend yen weakness funds interest in the front-end of the US Treasury market continues to evolve, with the recent fear headlines after dollar yen weakness serving to take pressure off. This may be part of why the US 2s sales have moderated since late July. A former Japanese currency diplomat Furusawa on Friday said that the Bank of Japan plans another 50-75 basis points of rate hikes, adding that another U.S. intervention is possible if the yen returns to this year’s low against the dollar.

Recall during the recent US/Japan joint intervention Japan’s Ministry of Finance made a rare English-language post stating that it had a broad range of tools available to address market-liquidity needs. These included access to the Federal Reserve’s repurchase facility, which would allow Japan to raise temporary dollar liquidity without immediately selling U.S. Treasury securities.

“Japan spent $98.7 billion to prop up the yen in the past month in a joint action with the U.S., a record intervention that has had a modest impact so far. The yen has given up many of its initial gains, highlighting the limitations of government efforts to move prices in financial markets. The U.S. has also tried to stem a rise in bond yields, again with limited success.” August 28 – Wall Street Journal (Megumi Fujikawa)

That matters because continued yen-buying intervention could otherwise require Japan to liquidate part of its enormous Treasury portfolio. Such sales could place still more upward pressure on U.S. long-term yields.

Cheap yen funding → higher-yielding/risk assets → commodity currency strength → leverage remains comfortable.

Cheap yen funding supported:

• U.S. Treasuries
• Global credit
• Emerging markets
• Carry trades
• Leveraged macro positioning

EM leverage, yen funding, and commodity-linked currencies all deserve close attention from here.

Risks to the Carry Trade

• Higher Australian yields → wider carry attraction → potentially supportive AUDJPY.
• But: Higher yields → weaker Australian housing/credit → weaker household demand → eventually more pressure on the RBA/economy → potentially negative AUD.

Carry remains alive because the spread still pays. The risk is that the higher yields supporting the carry eventually damage the asset side of the trade.

Higher Australian yields remain supportive for AUDJPY while volatility stays contained, but the longer global bond yields remain elevated, the greater the pressure on Australian housing and credit. If that feeds into weaker domestic growth or forces a change in RBA expectations, the yield advantage supporting AUD can begin to erode. At the same time, rising Japanese yields increase the attractiveness of keeping capital at home. The carry survives while the spread compensates for the risk; the danger is when volatility rises faster than the yield advantage.

With the “carry trade” leverage emerging currency markets are turning increasingly unstable. The MSCI EM Currency Index declined 0.86% this week, the “worst week since May.” The South Korean won dropped 3.2%, the Colombian peso 3.0%, the Chilean peso 1.9%, the Polish zloty 1.9%, the Mexican peso 1.5%, and the Czech koruna 1.3%. This also lends towards major tier currencies like the Aussie and Swiss Franc.

Swiss Franc Carry Trade

Then USDCHF finishes the argument, we may hear more this week from the SNB in their monthly policy meeting. The franc reached the bottom of its long descending channel earlier this year and has started basing/reversing. Put the three together and the message becomes:

AUDJPY: carry/risk appetite remains alive.
CHFJPY: the marginal funding preference is shifting.
USDJPY: only one expression of the global funding trade, not its master switch.

Japan wants a stronger yen; Switzerland would actually welcome a weaker franc because excessive CHF strength has been hurting exporters. SNB has said it is prepared to intervene to weaken the franc if necessary.

 “Carry traders are increasingly turning to the Swiss franc in the near term for their source of funding as the threat of intervention and higher interest rates saps the appeal of borrowing in the yen. Hedge funds boosted their net short position in the franc to near a two-month high in the week through Aug. 11… At the same time, they reduced their yen shorts for a second week. ‘The market has recently added short Swiss franc exposure to fund foreign-exchange carry trades,’ said Tobias Jungmann, head of Americas foreign-exchange options at Bank of America… The ratio of volatility versus carry for franc-funded emerging-market trades also make options an attractive way to gain exposure while limiting risk, he said.” August 18 – Bloomberg (David Finnerty and Ruth Carson)

Structure

FX is expressing both rate differentials and global carry conditions.

📊 Bonds: Fed Hikes, Curve Shape the Response

The question is whether it can keep dancing while the Fed, the long end, and funding markets turn up the volume.

The Fed moved to 3.75%–4.00% and signaled more tightening; 16 of 18 policymakers saw at least one additional hike this year. Yet equities absorbed it surprisingly well and the immediate move was concentrated more toward the front end. Ten-year Treasury yields traded to 5.04% in Tuesday trading – the high since “still dancing” summer of ‘07 – closing the week at 5.00%, which remains the pressure point.

U.S. Treasury yields — Weekly change/ year to date

• Three-month Treasury bill rates ended the week at 3.9763
• 2-year yield: +12 bps to 4.75% (up 127bps y-t-d).
• 5-year yield: + 8 bps to 4.86% (up 113bps).
• 10-year yield: +3 bps to 5.00% (up 83bps)
• 30-year yield: -3 bps to 5.33% (up 48bps).
• Benchmark Fannie Mae MBS yields rose six bps to 6.09% (up 105bps).

High U.S. yields continue to provide the return side of the carry equation. So you potentially have a world where the funding currency changes while the incentive to reach for U.S. yield remains strong.

The long end remains central to our thesis. A market can absorb higher yields for longer than many expect when liquidity is ample, credit spreads are tight, and equity momentum is strong. But when the long end rises at the same time as speculative positioning becomes extended, the system becomes more fragile. Higher yields do not have to matter every day. They only have to matter when the market starts caring again. Crude oil’s climb over $90 added another inflationary input after gaining more than $15 per barrel during July.

US 30-Year Yield: Triple-Top Breakout as it Reaches Near 20-Year High

That distinction fits perfectly with the 30-year chart and the “Bessent Put” area. The 30-year is probably the most important cross-asset risk chart after CHFJPY.

AI is increasingly a power-and-finance story, not just a chip story.

Life is reportedly planning roughly $12.75B for infrastructure financing with U.S. data centers a major target. Meanwhile a bank consortium is providing $22B of debt for the Blackstone/Alphabet Crux AI cloud venture, whose first 500 MW is targeted for 2027. That’s enormous capital formation downstream from the GPU.

Our proxy for AI debt concerns, Oracle (’36) bond yields jumped nine bps this week to 6.97%, up 94 bps since the end of June. CoreWeave (’32) yields surged 44 bps to 11.60%, up over 300 bps from June levels.

 “A group of 10 banks is providing a $22 billion chip loan to support Blackstone Inc. and Alphabet Inc.’s new cloud venture Crux AI, the latest mega-debt deal in the race to finance the expensive processors crucial to artificial intelligence. The debt will be used to purchase tensor processing units, or TPUs, a type of chip made by Google, and will be backed by the value of those chips and Crux AI’s customer contracts…”September 16 – Bloomberg (Paula Seligson, Preeti Singh and Michelle Cheng)

AI power demand has become a political/economic constraint.

Washington is discussing legislation aimed at keeping data-center electricity demand from raising household electricity bills, while Texas and other jurisdictions are already wrestling with grid and water constraints. That’s another reason the next leg of AI isn’t simply “more NVDA”; the bottleneck is becoming megawatts, transmission, water and financing.

 “The world’s banks allocated 15% more capital to the energy sector last year than in 2024, arranging and underwriting deals worth $2.3 trillion, according to… BloombergNEF. Against a backdrop of rising demand spurred by AI data centers, cooling technologies and the proliferation of electric vehicles, banks stepped up low-carbon financing by 16%, with such deals reaching a five-year high, BNEF wrote… Deals backing oil, gas and coal, meanwhile, rose 13% last year, it said.” September 17 – Bloomberg (Alastair Marsh)

The Fed has adopted a tightening bias, but bubble-related constraints suggest it has little appetite for materially tightening financial conditions. It is also contending with the financing of trillions in Treasuries and AI-related debt, along with the risks that come with it. Despite the commentary from Wall Street Journal favorites and self-appointed gurus, tightening monetary policy is no easy task in a rising global yield environment. But that also establishes the tripwire:

• Orderly higher yields = carry fuel.
• Disorderly long-end selloff = risk-asset problem.

 “China’s holdings of US Treasuries have fallen to the lowest since August 2008, underlining a shift in Beijing’s management of its reserves and a deepening rift between the world’s two largest economies. The value of US government debt held by Chinese investors… fell to $618bn in July, according to… the US Treasury. At its peak in November 2013, China held more than $1.3tn in US sovereign debt.” September 17 – Financial Times (Arjun Neil Alim and Haohsiang Ko

US 10-Year Yield: Oil and Inflation Overpower Safe-Haven Demand

The 10-year yield broke above 4.75% as higher oil prices, persistent inflation and rising term premium outweighed conventional safe-haven Treasury demand. A sustained break through 5% would place the 5.20% region back in view.

Fragile bond markets face unrelenting massive supply.

This isn’t 2016 when bond markets didn’t care about inflation and issuance. We now have trade frictions, geopolitical risk, wider deficits, higher bond issuance and unsettling attacks on federal agencies and the Fed. The jolt higher in borrowing costs comes as the US debt pile has swollen past $40tn, pushing the debt-to-GDP ratio towards an all-time high.

That appears consistent with Bessent’s message: address Treasury-market liquidity through Treasury operations, while leaving the Fed to concentrate on inflation and monetary policy.

• “The US’s national debt has hit a record $40tn as borrowing rises at a historic pace, fueling investor concerns about the state of America’s public finances despite Donald Trump’s vow to bring spending under control
• It has grown by $3tn over the past year, its fastest ever pace outside the pandemic era, FT calculations show.
• ‘It’s that gigantic flashing ‘check engine’ light,’ said Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget think-tank America’s national debt has surged over the past two decades, rising from less than $6tn (about $12tn in 2026 dollar terms) at the turn of the century as vast public spending during the financial crisis and Covid pandemic exacerbated yawning budget deficits.” August 19 – Financial Times (Myles McCormick and Kate Duguid)
• Interest expense on Treasury Debt rose to $118 billion last month, second only to the $251 billion of expenditures at the Department of Health and Human Services (i.e., Medicare and Medicaid). Department of Defense expenditures came in at $86 billion. Interest expense was $40 billion in July 2019. Through 10 months of the 2026 fiscal year, debt service of $1.170 TN ran 14.5% ahead of comparable 2025. The full-year deficit is poised to exceed $2.1 TN (6.5% of GDP), which would be 17% ahead of last year.
• The U.S. federal budget deficit for July jumped ‌to $432 billion, a record for the month, as higher outlays and more negative tariff revenues also brought the 2026 fiscal-year-to-date budget gap to $1.799 trillion, topping the full fiscal 2025 deficit with two months left in the fiscal year and was the largest monthly deficit since March 2021, when it hit $660 billion due to COVID-19 relief program spending. There ⁠have been only two other higher monthly deficits: $864 billion in June 2020 and $738 billion in April 2020

“The world’s governments have created a $2tn monster — a debt-servicing burden that gobbles up tax revenues and has the power to overwhelm elected leaders. More money is now spent on servicing the national debt than on defense in the UK, France and the US; the same is true for more than a dozen states in the 38-member OECD rich countries’ club. Their problem is that borrowing costs have climbed to the highest in almost two decades just as governments are taking on record debt. The total owed by the US government reached a record $40tn last month. This year, OECD nations are expected to borrow $18tn between them, another all-time high. In 2025, the group’s total debt-servicing bill exceeded $2tn, or 3% of GDP.” September 7 – Financial Times (Ian Smith, Sam Fleming and Emily Herbert)

Yields are a Global Threat – Europe’s bond cracks

• U.K. 10-year gilt on news of a halt to BOE QT (bond liquidations), UK gilt yields sank from Tuesday’s 5.43% intraday high to 5.21% on Thursday. Yields were back up Friday to close the week at 5.30%. The 10-year yields went to the highest level since July 2007, nearing the high back to February 2000.  (up 82bps y-t-d)
• French 10-year yields jumped another 11 bps this week to 4.57%. They are up almost 100 bps in three months to the high back to September 2008 4.45%, to the high back to August 2008.For context they saw a 3.78% high during the 2011 European debt crisis. 30-year French yields have surpassed 5.00% for the first time since pre-crisis 2008. (up 88bps y-t-d). “France’s minority government has said it aims to reduce the country’s deficit next year by proposing a budget that includes a €54bn savings drive, paving the way for a showdown with parliament that could lead to its collapse. French Prime Minister Sébastien Lecornu said… he will submit a draft budget to lawmakers that would lower the deficit to 5% of GDP in 2027, notably through big cuts to spending on pensions and reductions in the expenditure of government ministries, excluding defense.” September 17 – Financial Times (Leila Abboud)

• German bund yields gained 17 bps to 3.50% (high since August 2009 and vs. 3.49% European debt crisis high. (up 65bps y-t-d)
• French to German 10-year bond spread widened nine bps to 95 bps. (up 105bps y-t-d) France now expects public debt to hit 119.3% of GDP in 2026 and 121.7% in 2027, while its borrowing premium over Germany has pushed above 100 bp, the widest since the euro-area debt crisis. At the same time, the government is trying to find €54 billion savings for the 2027 budget amid political resistance.

• Italian 10-year yields gained eight bps to 4.34%, multi-year highs.(up 88bps y-t-d) “The cost of servicing Italy’s public debt is rising at ‘an alarming rate’ in the wake of geopolitical tensions, Economy Minister Giancarlo Giorgetti ‌said on Friday, as the government prepares to update its budget plans for 2027 ‌onwards. Inflation is bound to rise ‘ineluctably’ if the wars in Ukraine and the Middle East continue, Giorgetti told a conference… Under its most recent budget plan, Italy ⁠sees its public debt peaking at almost 139% of GDP this year, replacing Greece as the euro zone’s most indebted country.” September 18 – Reuters (Giuseppe Fonte)
• Greek 10-year rose nine bps to 4.31%, multi-year highs. (up 87bps y-t-d)
• Spain’s 10-year yields gained 19 bps to 3.96% (up 88bps y-t-d) .

📊 Risk: What is missing so far is the stress transmission.

Global yields are at multi-year or multi-decade extremes, but the credit and EM disorder associated with the 2022 gilt deleveraging has not appeared. That distinction matters. Rising yields are not automatically a crisis; the problem begins when funding stress propagates into credit, FX and forced deleveraging.

Based on the current weekly data:

• US investment-grade CDS (50 Friday close) 54 bps on Sept 18th (ranging from 50 to 54 bps intraday).
• High yield CDS (301 Friday close) 306 bps on Sept 17th, down from an intraday high of 317 bps during the week.
• European Bank (subordinated) CDS (86 Friday close) 102 bps on Sept 18th (ranging from 98 to 105 bps intraday).
• EM CDS (137 Friday close) 168 bps on Sept 18th.
• U.S. bank CDS vanilla, Bank of America CDS (53 Friday close) 64 bps on Sept 18th (ranging from 61 to 67 bps intraday).

Reminder of the Great Gilt 2022 deleveraging

• US investment-grade CDS (50 Friday close) 74 on Aug 12th to 114 bps intraday Sept 30th.
• High yield CDS (301 Friday close) 420 (Aug 19th ’22), to intraday high of 640 bps Sept 30th.
• European Bank (subordinated) CDS (86 Friday close) 179 on August 19th to 289 bps Sept 30th.
• EM CDS (137 Friday close) 331 bps on September 30th, 2022.
• U.S. bank CDS vanilla, Bank of America CDS (53 Friday close) high 119 bps on Sept 30th.

MOVE Stalls at 80 as Global Yield Stress Builds

The MOVE (bond volatility) Index closed the week ending September 18th at 80.64, pulling back from the midweek high of 83.90 and last week’s close of 82.21, remaining well below its 5-year average of 99.

Markets trading with the view that Secretary Bessent and Chair Warsh have the old “PPT” ready to rock and roll?  The Treasury and Fed won’t tolerate bond or repo market instability, a tough ask in times of extreme indebtedness and leverage during acute geopolitical uncertainty.

📊 Risk: Wall Street playing with fire?

Hyperscalers’ bonds underperforming on almost every metric.

Old debt: cheap and locked.
New/refinancing debt: increasingly expensive.
Credit market: demanding more compensation.

As Chuck Prince famously said in July 2007:
“As long as the music is playing, you’ve got to get up and dance.”

Why It Matters

• Term premium continues to rise
• Treasury supply remains persistent
• Global demand is less reliable

The long end is being set by the market — not anchored by policy.

The Bigger Shift

• Meanwhile global rates volatility is no longer isolated to the Fed. The synchronized repricing in Treasuries, Gilts and JGBs suggests sovereign duration itself is becoming the central macro story.
• That is a major shift.

The Tension

• Rates are tightening
• Carry remains loose

Structure

• Higher lows remain intact.
• Yields continue to compress near resistance, reinforcing that pressure is building

📈 EQUITIES —US Stocks Bifurcation Continues

What Happened

The long bond is flashing stress. Carry remains active. Oil is advancing. Semiconductors are correcting from speculative excess. Volatility is still under 15.

Equity resilience is narrower than the index headline suggests. The S&P finished the week roughly flat, Nasdaq gained on semiconductor strength, while the Dow had its worst week since March. Friday also showed negative breadth on both NYSE and Nasdaq despite the index gains.  The market is still relying heavily on technology leadership while rates and oil remain hostile.

Whilst the Nasdaq and S&P 500 were higher this week the bifurcation of the market was clear. The Banks were smashed by 4.9%, along with the Broker/Dealers slumping 3.3%. The Utilities dropped 3.0%, and the Transports fell 2.7%.

Change for the Week/ Year to Date:

• S&P500 was little changed (up 11.8% y-t-d),
• Nasdaq100 added 0.9% (up 17.4%).
• Dow fell 1.7% (up 7.5%).
• S&P 400 Midcaps fell 1.7% (up 10.5%),
• Small cap Russell 2000 lost 1.5% (up 15.2%).
• Utilities slumped 3.0% (down 2.6%).
• Banks sank 4.9% (up 8.9%), Broker/Dealers fell 3.3% (up 18.6%).
• Transports dropped 2.7% (up 15.7%).
• Semiconductors increased 0.8% (up 68.3%).
• Biotechs advanced 2.4% (up 30.5%).
• While bullion recovered $30, the HUI gold index declined 1.0% (up 14.8%).

• The VIX Index closed the week ending September 18th at 14.81 (ranging between 14.80 and 15.63 intraday), easing down from last week’s close of 15.84 and back near the recent trough close of 14.25 from three weeks prior.
• The MOVE (bond volatility) Index closed the week ending September 18th at 80.64, pulling back from the midweek high of 83.90 and last week’s close of 82.21, remaining well below its 5-year average of 99.
• JPMorgan CDS closed the week ending September 18th at 38.03 bps, hovering near last week’s low close of 37.66 bps and remaining near its 52-week low range (37.49 bps).

SMH: AI/speculation has cooled, but the sector has not broken.

Meanwhile the MAG7 index traded intraday Friday above the May 28th all-time high (up 1.1% for the week). The Nasdaq100’s almost 1% rise boosted y-t-d gains to 17.4%. Advances pushed year-to-date gains for the Semiconductors (SOX) and Biotechs (BTK) to 68% and 31%.

Structure

The rally had evolved from recovery into speculative acceleration.

Since that first Fed cut, the broad averages surged, but the real epicenter has been semiconductors, AI infrastructure, memory, and the small group of companies perceived as bottlenecks in the AI buildout. The SMH has become the clearest expression of this historic Bubble impulse. Now we are into rate hikes.

We ask the better question: is AI still lifting the world, or starting to crowd everything else out?

Why It Matters

AI spending remains the dominant narrative, but the credit side is beginning to matter. When Oracle CDS and CoreWeave yields move alongside SMH volatility, the market is no longer only trading earnings momentum — it is starting to price funding risk.

🛢 Commodities; Energy Geometry Deteriorated Materially.

There are at least three geopolitical risks overhanging the world, the Iran US War, the Ukraine/Russia war and China’s South China Sea maritime claims. All can impact energy and commodities prices, often not as the herd expects though. Keep that in mind. The oil price is an excellent expression of that.

The Bloomberg Commodities Index gained 0.2% (up 32.6% y-t-d)

• Energy WTI Crude slipped 53 cents, or 0.5%, to $99.52 (up 73%y-t-d). Gasoline jumped 6.3% (up 105%), and Natural Gas gained 2.5% to $2.901 (down 21%y-t-d).
• Metals: Spot Gold recovered 0.7% to $4,379 (up 1.4% y-t-d). Silver rallied 2.7% to $66.2593 (down 7.5% y-t-d). Copper surged 2.5% (up 18% y-t-d).Gold was supported despite rising yields in a breakdown in the usual correlation and a positive sign.
• Grains: Wheat added 0.9% (up 41% y-t-d), and Corn gained 3.3% (up 20% y-t-d).

The energy geometry is now substantially worse:

Three Saudi East-West Pipeline pumping stations were damaged, yet crude backed off because Saudi Arabia found alternative supply routes and China pressed Iran to restrain Houthi attacks. That’s fascinating: China isn’t merely an oil buyer here; its relationship with Iran has become part of the oil-volatility control mechanism. Brent remained above $100 despite Friday’s decline.

Oil moved from geopolitical premium toward physical-market repricing.

Oil price ≠ energy shock.

This energy shock is transmitted through refined products, LNG, shipping, fertilizer, poorer-country fuel shortages and central-bank policy. This crisis differs from earlier oil shocks because the constraint is increasingly refining/product availability and logistics, not simply crude scarcity.

The mistake is watching the barrel when the shock is increasingly occurring after the barrel leaves the wellhead. Refining, LNG, shipping, fertilizer and electricity are where the second-round effects live.

• Diesel/refined products matter more than the crude headline. Refinery constraints, Russian infrastructure damage and Chinese product-market restrictions mean crude can soften while the real-world energy cost remains elevated.
• LNG remains the nastier global transmission channel. Hormuz disruption hits both crude and LNG, and earlier disruption to Qatar caused Asian spot LNG prices to surge dramatically.
• This is becoming a monetary-policy shock again. The global economy initially absorbed the energy spike better than feared, but renewed inflation pressure is now forcing central banks toward tighter policy — exactly what we’ve just seen with the Fed and BOJ.
• Emerging markets are where physical shortages appear first. Pakistan, Bangladesh, Nepal and Indonesia have already experienced rationing, outages or acute fuel/LPG shortages. That’s considerably more important than whether Brent is $102 or $106 on any particular afternoon.
• Strategic reserves solve time, not infrastructure. You can release crude, but that doesn’t necessarily solve shortages of diesel, LNG, refining capacity or shipping. That’s the subtle but important distinction.

A picture tells the story of – diesel crack spread

The latest escalation reinforced the thesis we have followed throughout the Iran conflict: the important question is not the headline size of an attack, but whether sanctions, shipping disruption and damage to regional energy infrastructure begin removing usable barrels and products from the market. WTI’s surge was accompanied by strong gasoline and extraordinary diesel pricing, suggesting the market is increasingly focused on the downstream consequences rather than crude alone.

Crude > $100

→ refined products disproportionately tighter

→ marine gasoil ~$1,529/t

→ shipping costs surge

→ biodiesel suddenly becomes economically competitive

Meanwhile, container freight from China to the U.S. East Coast has already reached roughly $10,948 per 40-foot container, more than four times the pre-war level and getting close to the pandemic record.

An unexpected beneficiary of the refined-fuel squeeze is marine biodiesel. In Rotterdam it briefly fell below $1,000 a tonne while marine gasoil surged above $1,500. After European carbon costs are included, biodiesel is now cheaper than most conventional shipping fuels. Energy transitions rarely proceed in a straight line; sometimes the quickest catalyst is simply making the incumbent fuel prohibitively expensive.

The length of this oil disruption is already longer than the 1990s.

WTI Crude: Geopolitical Premium Returns After 2.618 Completion

For oil, the nuclear language is rhetoric until policy changes; Hormuz, sanctions enforcement and physical flows remain what matters.

Why It Matters

Warsh says inflation is too high → oil and gasoline prices accelerated higher

Not really a surprise given the powerful impulse runs over the past week. the real drama came in oil prices. The next spot to watch will be the long end of the Treasury curve as yields should fall at some point if the Fed proves it will get inflation back to target and keep it there

Developments in the Middle East suggest that it would be highly premature to declare risks to energy and broader commodity markets to have diminished sustainably. 

The commodity complex is no longer moving as one trade. The market is differentiating between monetary hedges and supply-risk assets. The bigger point is that oil remains the inflation panic switch. Crude weakness can loosen financial conditions quickly, but a failed Iran headline would just as quickly restore the risk premium.

Key line: Copper confirms the buildout. Oil controls the panic. The long bond prices both

Ahead: Trump/Xi, PMI and Oil prices

Chinese President Xi Jinping and US President Trump Summit on Thursday in Washington. In the background is a pending US report on spare capacity and tariff threats. Nvidia (NVDA) CEO Jensen Huang OpenAI (OPENAI) CEO Sam Altman and Qualcomm (QCOM) CEO Cristiano Amon are expected to attend the White House state dinner in the evening.

Central Banks. We get six regional central banks including Banxico and Norges Bank which are particularly important to energy investors.

• Mexico’s central bank Banxico expected to hold at the 6.5% overnight rate with a hawkish tone of intensified inflation warnings from some officials derived from drivers such as oil. Markets are pricing about 100bps of further tightening over the coming year.
• Norway’s Norges Bank may hike its deposit rate again on Thursday. It last raised the rate in May. Markets have about half of a 25bps hike priced. Whereas the prior August statement noted that “inflation has slowed and been lower than projected,” Surging oil prices represent more income for the economy that is likely to stoke further economic activity and inflation risk. Explicit forward rate guidance has generally been hawkish for this oil-sensitive central bank.
• Sweden’s central bank Riksbank is widely expected to stay on hold at 1.75% on Thursday. Markets are priced for a hold but then most have a hike at the November 4th meeting.
• Swiss National Bank SNB is not expected to adjust its policy rate that stands at 0% on Thursday. The steady depreciation of the Swiss franc since February and mostly since June is among the considerations behind why SNB may adopt a gradually more hawkish stance. Markets are pricing 50bps of rate hikes by next June.
• Bank Indonesia BI is expected to leave its policy rate unchanged at 5.75% on Wednesday. Caution though, BI that loves to surprise.
• South African Reserve Bank SARB widely expected to deliver another 25bps rate hike on Wednesday, taking the policy repo rate up to 7.25% and having last hiked in May.

US Markets

• Index rebalancing – (Monday) Bloom Energy (BE), Everpure (P), and Illumina (ILMN) join the S&P 500 Index. Dell Technologies (DELL), Palo Alto Networks (PANW). Arista Networks (ANET). SanDisk (SNDK) will all join the S&P 100 Index. HubSpot (HUBS), AGNC Investment (AGNC). Corcept Therapeutics (CORT), and Brinker International (EAT) will join the S&P Midcap 400 Index. HawkEye (HAWK) will join the Russell 2000.
• US Treasury: Wed 11:00 a.m. The Treasury Department buyback announcement.

US Macro:

• Key economic data includes durable goods orders, new home sales, flash S&P Global PMIs, Chicago Fed National Activity Index,  Richmond Fed and Kansas City Fed indexes, and final Michigan consumer sentiment prices.

Global Macro:

• Global September PMI surveys for clues on third-quarter growth across major economies. Australia will kick off on Tuesday evening, followed by India, the euro area, the UK, the US, and Japan on Wednesday. To date, PMIs have signaled continued resilience in manufacturing, with activity remaining in expansion territory (above 50), supported by front-loaded demand and ongoing AI-related spending. At the same time, services activity has rebounded sharply in July and August after slipping into contraction territory in Q2, providing further support to Q3 growth.
• Aussie jobs due Thursday, will be the last major release before the RBA’s policy meeting the following week.
• Canada will focus on a speech from Bank of Canada Governor Macklem on “economic developments” to be followed by Q&A on Monday and Thursday’s retail sales.

Chips and AI: Financing the Buildout

• AI increasingly has two markets to watch: the equity market celebrating the buildout and the credit market financing it.
• The next phase is becoming less about simply asking how many GPUs can be sold and more about who finances the data centers, chips, power and transmission required to run them — and at what cost. Big Tech is increasingly using special-purpose financing structures and residual-value guarantees to support AI infrastructure without putting the entire commitment directly onto conventional balance sheets.
• That matters with global yields already under pressure. CoreWeave has launched another $3 billion convertible offering, while the Nscale IPO filing illustrated the extraordinary capital intensity of the new AI-cloud model. At the same time, Oracle and CoreWeave bond yields have already been telling us that credit investors are demanding significantly more compensation.
• The AI trade therefore has another important tell alongside NVDA, SOX and SMH:
• AI credit spreads and financing costs.
• Orderly capital formation supports the buildout.
• A disorderly rise in yields or deterioration in AI credit would turn financing itself into the constraint.

Earnings: The Consumer Gets the Microphone

• This is not a major technology earnings week, which makes the reports we do receive potentially more useful as a read on the broader economy.
• Costco, Darden Restaurants, General Mills and AutoZone offer different windows into household spending, food inflation and consumer price sensitivity. KB Home provides another check on housing affordability as mortgage rates push back toward 7%, while Cintas and Paychex offer useful reads on business activity, employment and wage conditions.
• With equities increasingly bifurcated between technology leadership and weakness in banks, transports, utilities and smaller companies, the question is whether corporate results confirm the resilient index-level picture — or the considerably less comfortable message coming from beneath the surface.
• For this week the earnings signal is therefore less about headline EPS beats and more about pricing power, margins, labor costs and the consumer’s willingness to keep paying higher prices..

⚠️RISK RADAR

What Could Break the Melt-Up?

• Credit spreads reacting to duration stress
• U.S. 30-year yields extending toward 5.50%
• Disorderly JGB repricing forcing BOJ intervention
• Gilts Reigniting the 2022 crisis
• Oil spike reigniting inflation expectations
• Failed Treasury auctions / weak foreign demand
• Carry trade unwind in AUDJPY or EM FX
• Commodity divergence widening — crude vulnerable to headlines, metals acting as hedges, energy equities trying to hold.

Any of these could force markets to reprice quickly

🧠 FINAL THOUGHT

Oil/products → inflation expectations → long-end yields → carry/risk threshold

This remains a liquidity-led market. The AI tape has been hit hard but we are seeing rotation from profit taking to other sectors. Financial conditions are loose, but investors are reassessing risk on issuance and AI infrastructure. The second quarter showed how far a market can run when short covering and FOMO overwhelm macro concerns.

But the risk is becoming more specific. It is no longer just “rates are high” or “valuations are stretched.” The real risk is that the AI capex cycle has become self-reinforcing at the same time financing conditions have become easy again.

That can keep the party going. It can also make the eventual adjustment more violent.

For now, the market is still climbing. But semiconductors gave the first serious reminder this fortnight that even the strongest narratives can wobble when investors start asking about payback, capacity, and supply response.

The Cautious Investor view remains the same: respect the momentum, respect the liquidity, but do not confuse a blow-off quarter with a low-risk entry point.

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