Oil reached its highest since May as attacks spread and talks stalled. On 11 October a Houthi missile struck Riyadh’s King Khalid International Airport, killing at least 12 people, and a second projectile hit the airport the next day. On 12 October Mohsen Rezaei, secretary of Iran’s Supreme National Security Council, called the U.S. reply to Tehran’s conditions “inadequate” and said Iran would not reopen the Strait of Hormuz to American vessels or resume negotiations until they are met.¹² Ukraine’s pledge to strike Russian refineries and an 8.6 million-barrel fall in U.S. crude inventories added to the move.¹¹ December Brent settled at $109.86 on Friday, its highest since 19 May, and November WTI at $101.41, its highest close since 17 September; over the week Brent rose 4.9% and WTI 10.4%.¹¹¹ Last week’s pledge of no U.S. strike before the midterms reduced the risk of escalation by Washington, not the risk to supply. This week that supply risk materialised, and it is already in the inflation data the Fed watches.

Inflation surprised on the upside, and the Fed chair declined to commit. September CPI rose 0.6% on the month and 3.7% on the year, against 3.6% expected, with gasoline up 9.1% accounting for about half of the increase; core prices rose 0.3%, against 0.2% expected, for an annual rate of 2.6%. TD Economics said the core reading strengthens the case for a further near-term hike.⁵ Speaking in Bangkok on Friday, Fed Chair Kevin Warsh said he would not prejudge the October or December meetings, noted that the Fed had removed “a dose of accommodation” in September, and described AI as a potential “shock” to the economy.⁶ Polymarket prices a 13.5% chance of an October hike, down 2pp, against 74.5% for a 25 bp hike in December.¹⁸ The energy shock is now visible in the headline and is reaching core prices, while the chair avoids pre-committing; with October priced as a hold, December remains the live meeting.

The AI selloff moved from valuations to financing. Doubts about whether heavy AI infrastructure spending will earn adequate returns, and about the debt of “neocloud” providers that borrow to build data centres, drove the week’s decline.⁷ CoreWeave fell 15.5% on Wednesday and about a quarter over the week, with yields on some of its bonds near 15–16%; Forbes estimates about $4 billion of its debt trades below 80 cents on the dollar.⁷¹⁰ The semiconductor ETF SMH fell about 10%, its largest weekly decline since April 2025, and the Nasdaq Composite had its worst week since June.⁷⁸ Korea was hit hardest: on Thursday the KOSPI fell 7.57%, triggering a 20-minute trading halt, as Samsung fell 9.48% and SK hynix 11.06%; foreign investors sold ₩3.62 trillion, and reports also cited concern about expanded memory output from China’s CXMT.¹⁰ Two weeks ago Micron confirmed demand; last week the question was revenue at the model developers; this week it is how the build-out is financed. For our Asian hardware exposure, the risk is concentrated in memory, where a supply response from China adds to the financing question.

Treasuries rallied on the equity selloff despite hot inflation; credit widened again, led by CCC. In the week to Thursday the 10-year yield fell 12 bp to 5.10% and the 30-year 17 bp to 5.43%, while the 2-year rose 2 bp; Thursday’s decline was reported as the largest daily fall since February. Reporting attributes the move to a flight to safety from the technology selloff.³⁹ The 2s30s curve flattened 19 bp to 66 bp, reversing most of the steepening of late September. Credit moved the other way: high-yield spreads widened 8 bp to 323 bp, IG 2 bp, and CCC 26 bp to 1,278 bp, again the widest in FRED’s three-year window.⁴ Forbes notes that data-centre developers and neoclouds have raised $37 billion in junk bonds this year to finance U.S. data centres.⁷ Last week we described the CCC stress as issuer-specific; this week a large, identifiable group of borrowers — AI-infrastructure issuers — came under pressure. For income sleeves, duration worked as a hedge; for high-yield and private-credit sleeves, exposure to AI-infrastructure financing is the item to check.

Investors rotated out of the AI trade and into Europe. European shares had their biggest weekly outperformance against the S&P 500 since March, which Bloomberg attributes to investors moving out of the AI trade: the STOXX Europe 600 rose 2.09%, the SMI 4.38% and the FTSE 100 3.13%.¹³¹ In the U.S. the Dow rose 0.67% for a second weekly gain, while the S&P 500 fell 1.95% and the Russell 2000 3.05%; the VIX rose 35% to 19.99.¹⁸ The Nikkei fell 5.37% and the TAIEX 4.47%; the broader TOPIX, tracked through an ETF, fell about 1% (est.).¹ In Brazil the Bovespa gave back 1.74% as a Quaest poll showed the runoff within the margin of error (Bolsonaro 46%, Lula 44%); Polymarket’s odds on a Bolsonaro win slipped to about 77% from 85%.¹⁴ The week’s dividing line was exposure to AI hardware rather than region: chip-heavy markets — Korea, Taiwan, Japan and the Nasdaq — fell, while Europe and the Dow rose.

Israel rebounded, with inflation below forecast and the election odds shifting. The TA-125 rose 4.22%, the TA-35 4.01%, the TA-90 5.06% and the SME-60 5.25%, more than recovering the previous week’s losses; no single cause was reported, and Tuesday’s 1.67% gain in the TA-35 was led by insurance, oil-and-gas and financial shares.¹⁹¹⁶ September CPI fell 0.5% on the month, taking annual inflation to 1.6%, below the 1.8% expected.¹⁵ The shekel weakened to 3.09 per dollar from 3.06.¹⁹ On Polymarket, Eizenkot’s odds of being the next prime minister rose 13.1pp to 54.4% and Netanyahu’s fell 7pp to 27.5%; the polls are less decisive — a Maariv poll on 14–15 October had Eisenkot preferred 48% to 41% but the blocs tied at 51 seats, and a Kan poll gave Netanyahu’s bloc 53 to 50.¹⁸¹⁷ The Bank of Israel decides on Wednesday: Citi expects a hold, with markets pricing about 5 bp of cuts, and sees November, after the 27 October election, as the window for the next cut.²⁰ Polymarket prices a 92.8% chance of no change.¹⁸