The Cost of Everything

Friday Closing Price-

S&P 500 7,623 (-0.52%) Nasdaq 28,957 (-0.01%)
Gold $3,995 (-0.71%) Brent Crude Oil $116.83 (+3.57%)

Political instability, persistent inflation concerns, and growing unease over debt-funded AI investment weighed on global risk appetite last week. Bond markets were once again at the centre of the action, with sovereign debt and credit spreads reflecting the increasingly difficult macroeconomic backdrop.
France was the main source of concern in Europe, where violent protests and deteriorating fiscal confidence drove a sharp repricing in government debt. The 10-year OAT-Bund spread widened 29bps to approximately 170bps, marking its second-largest weekly increase since 1990. French assets and the euro came under pressure, while weaker eurozone PMI figures compounded concerns over the region’s economic outlook.
In the US, Treasury yields briefly climbed back towards 5% after October’s flash PMI indicated the strongest increase in selling prices since 2022. However, yields reversed course towards the end of the week, leaving the 10-year 12bps lower at 4.99%. Credit markets also showed signs of strain, as concerns surrounding AI-related borrowing and sustained energy price pressures pushed the cost of default protection higher.
Elsewhere, Japanese equities struggled following reports that the Bank of Japan (BoJ) remains committed to its tightening path. China, meanwhile, introduced further modest stimulus measures after seven consecutive months of declining fiscal expenditure.
Equity markets ended the week in negative territory, with the Nasdaq 100 down 1.8%, the S&P 500 losing 1.2%, and the Nikkei declining 2.2%. The dollar was broadly unchanged, while gold retreated 3.1% to $3,995. Brent crude continued to advance, keeping the inflationary implications of elevated energy prices firmly on investors’ radar.

Great Expectations, Greater Expenditure

As highlighted in the introduction, last week’s corporate earnings brought renewed attention to the sustainability of the AI investment cycle. Investors are becoming increasingly focused on whether the revenue opportunities presented by artificial intelligence can ultimately support the enormous capital commitments being made.
Meta delivered 26% revenue growth to $64.6 billion, benefiting from continued strength in its advertising business. However, capital expenditure climbed to $34.9 billion for the quarter, while free cash flow slipped into negative territory. The figures added to existing concerns over the financial demands of the AI buildout.
Tesla generated $28.1 billion in revenue, with adjusted earnings coming in ahead of expectations. Improving vehicle deliveries offered some encouragement, although continued investment in autonomous driving and robotics remained a drag on profitability. Netflix, meanwhile, exceeded earnings expectations but failed to impress investors with its forward guidance.
The focus now turns to another important week for megacap tech shares. Microsoft and Alphabet are scheduled to report on Wednesday, followed by Amazon on Thursday. Cloud revenue growth, AI monetisation, and capital expenditure plans will likely be the key areas of scrutiny. Outside technology, results from Visa, Boeing, and UPS may offer further insight into consumer and business activity, while Eli Lilly provides an update on pharmaceutical demand.
Energy majors ExxonMobil and Chevron round out the week on Friday, with attention directed towards the impact of higher oil prices on profitability and cash generation. Given the recent deterioration in credit sentiment surrounding AI financing, the upcoming earnings releases could play an important role in determining the near-term direction of equity markets.

A Busy Week For Central Banks

Monetary policy moves back into focus next week, with five major central bank meetings taking place between Wednesday and Friday. Against a backdrop of elevated energy costs and stubborn inflation, policymakers face an increasingly uncomfortable trade-off between containing price pressures and avoiding unnecessary damage to economic growth.
Wednesday will see decisions from the Reserve Bank of New Zealand (RBNZ), Bank of Canada (BoC), and the US Federal Reserve. Another rate increase is expected in New Zealand, while Canadian policymakers must weigh signs of labour market weakness against persistent inflation risks. In the US, the Fed is widely expected to leave rates unchanged, shifting attention towards Chair Warsh’s assessment of whether further tightening will be required and, importantly, when.
The European Central Bank (ECB) follows on Thursday, with its decision arriving amid escalating political uncertainty in France and softer regional economic indicators. Although rates are expected to remain on hold, policymakers may need to address the continued threat posed by elevated inflation.
Japan concludes the week’s major policy meetings on Friday. With the BoJ reportedly maintaining its preference for further tightening, investors are likely to be listening closely for indications that another rate increase could arrive in December.
Across the five meetings, the policy announcements themselves may ultimately matter less than the guidance accompanying them, particularly as markets attempt to establish how much additional tightening remains ahead.

A Budget Under Pressure

Wednesday’s UK Budget is another key event for markets, with Chancellor John Healey tasked with preserving fiscal credibility amid elevated borrowing costs and persistent inflationary pressures.
Rising debt-servicing costs have further tightened the government’s fiscal headroom, making investors particularly sensitive to changes in taxation and public spending. Potential adjustments to capital gains, inheritance, and pension taxation have attracted attention, while the possibility of additional household support to offset higher energy bills remains an important political consideration.
The Office for Budget Responsibility’s (OBR) updated economic projections will also receive considerable scrutiny. Revisions to growth, inflation, government borrowing, and remaining fiscal headroom will help determine whether the Chancellor’s plans can satisfy the existing fiscal framework.
Ultimately, gilt and sterling markets are likely to provide the most immediate assessment of the Budget’s credibility. With government borrowing costs already elevated, any suggestion that new spending commitments lack sufficient funding could place renewed upward pressure on long-dated gilt yields.

Sources – Bloomberg | PMI Releases | Yahoo Finance | Reuters | Central Bank Rates | House of Commons Library | Tesla

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