Market brief
AI Boom, Soft-Landing Hopes Keep Risk Appetite Strong Despite Oil and Bond Selloff
Credit Agricole said refined products remain scarce because Middle East refining capacity is still constrained by the US-Iran war, making US-Iran talks and core PCE data the key near-term tests for sentiment.
Key points
- Risk appetite remains resilient despite higher oil prices and a global bond selloff, supported by the AI investment boom and soft-landing expectations.
- Middle East oil flows are approaching pre-war levels even with the Strait of Hormuz closed, but refined product supplies remain tight because refining capacity is constrained by the US-Iran war.
- Core PCE inflation data due later is a key input for rate-hike expectations, while rising volatility, private credit spreads and defensive rotation are pressuring a closely watched Risk Index.
Investor risk-seeking behavior is holding up despite higher oil prices and a global bond selloff, with the AI investment boom and expectations of central bank soft landings outweighing those headwinds, Credit Agricole said in a note. The bank said oil flows from the Middle East are approaching pre-war levels even with the Strait of Hormuz closed, though refined products remain in short supply.
Credit Agricole said the resumption of US-Iran hostilities would likely significantly damage sentiment, while a deal—which President Donald Trump has said will be done after the US mid-term elections—has essentially been deferred. Investors will therefore continue watching headlines for any progress in the US-Iran talks, the bank said.
Core PCE inflation data due later today will condition investors' expectations for further rate hikes, the bank said.
The bank said rising equity and FX market volatility and private credit spreads, as well as the outperformance of cyclical stocks by defensive stocks, put upward pressure on its Risk Index over the past week. Capping the rise in the Index were falling gold prices and EM-Sovereign spreads.
Among G10 currencies, only the CHF, CAD and SEK have significant positive correlations with the bank's Risk Index, while the GBP, USD and NOK have significant negative correlations, the bank said.
