Weekly Market Overview

To paraphrase British Prime Minister Harold Wilson, a week is a long time in the financial markets. Currently, the markets are being driven by forces from various directions. The AI debate now centers on regulation and curbing rapid innovation, with monopolists OpenAI and Anthropic on one side, and proponents of competition and open-source models such as Nvidia on the other. The conflicts in Ukraine and the Middle East are intensifying, putting the supply chain and commodity markets on edge. And on the policy front, hawkish central bankers are pitted against politicians who want to keep interest costs on the excessive mountain of debt in check.

The Fed’s 25-basis-point rate hike had already been priced in by the bond markets. In April, the yield curve still priced in a Fed rate that would fall to 3.3% by the end of 2027; today, it projects a peak of 4.73% and no cuts at all through the end of 2028. The cause, according to Fed Chairman Kevin Warsh, is not so much inflation as it is stronger-than-expected growth. The economy is running hot. However, growth—estimated at +5.1% by the Atlanta Fed—is anything but evenly distributed. On the one hand, there is the boom in AI infrastructure, which is spreading through the industrial and commodities sectors, alongside stronger-than-expected consumer spending. On the other hand, the traditional economy and the construction sector, in particular, are increasingly being hampered by higher financing costs.

The stock markets continued their now-familiar pattern: relatively calm at the index level, volatile below that, with sharp and rapidly successive rotations between and within sectors. This is most evident in the technology sector. On Monday, the market interpreted Amodei’s argument for curbing innovation as meaning fewer chips, ordered later. Semiconductor stocks corrected by 4.75%, and suppliers and energy infrastructure were hit even harder. At the same time, software and, in particular, cybersecurity stocks surged. By the end of the week, more than half of this correction had already been recouped, with the focus once again on pricing power, supply/demand imbalances, and visibility in the sector. Outside the technology sector, energy, logistics, and shipping were on the rise, while the rest of the market was rather weak. Geographically, Europe underperformed again due to a threefold headwind: low growth, high energy prices, and a lack of AI leadership.

The Saudi East-West Pipeline, which transports 4 to 5 million barrels per day and is intended as a bypass around the Strait of Hormuz, has been shut down since last week following a drone attack. Riyadh canceled European shipments, and WTI rose to $105.83. After an interest-rate-driven dip, buyers returned to gold and Bitcoin. And in the FX market, the USD rose thanks to a combination of higher growth and higher interest rates.

These days, investors are expected—much like the White Queen in Lewis Carroll’s *Alice in Wonderland*—to believe six impossible things before breakfast. The index investor, however, who watches all this unfold from his hammock, won’t notice much of it.