Air Strikes, Bots, Bad Credit - Pick Your Poison

0:00Hello and welcome back to Economic Insights, your weekly deep dive into global financial markets. I'm Alex and with me as always is Market Veteran and show producer Salim. And Salim, I don't think we've ever opened a show quite like this. Before we even get to what was already a wild week, Saturday happened. Saturday indeed happened. The United States and Israel launched strikes on Iran. Iran confirmed that Ayatollah Khamenei has been killed. And critically, Iran is retaliating. Not just against American bases, but across the broader region. Previous safe havens like Dubai are being targeted as well. This is a massive escalation that completely reshapes the risk landscape going into next week. And this came after a week where the Geneva talk seemed to be making progress. That's the bitter irony. The week actually started with tensions running very high.

1:03Reports of a massive US military aircraft build up in the Middle East. Threats have targeted strikes if Iran refused to yield on the nuclear issue. Oil spiked to multi-month highs early in the week on that. Then midweek, during the State of the Union, the President expressed a strong preference for diplomacy and energy markets calmed down. By Friday, mediators were even reporting significant progress in Geneva. And then Saturday obliterated all of that. The $9 to $10 per barrel risk premium that was already priced into Brent Crude is now looking like a floor, not a ceiling. We should also mention, and this is specific to the region, the source material flags that aluminum markets are exposed here too, right? Correct. The Strait of Hormuz handles roughly 5 million metric tons of aluminum exports annually. If this conflict disrupts shipping lanes, that's a direct bullish shock to aluminum prices on top of the oil impact, and gold, which was already on a tear before Saturday is going

2:05to get another wave of safe haven demand. Central banks were already expected to purchase over 400 tons this year as part of the broader de-dollarization trend. This just accelerates that. Alright, let's rewind to the rest of the week. Because even without Saturday, this was extraordinary. The Satrini blog kicked things off on Monday. It did. The Satrini Research Report went viral early in the week, hypothesizing that artificial intelligence could cause double-digit unemployment in the coming years. It triggered a severe sell-off in software, payment processors, and intermediation businesses. Basically anything investors feared AI could entirely displace. And here I am, a financial market professional doing a podcast with an AI host, discussing whether AI will put everyone out of work, at least I am contributing to the evidence base. I'll try to be offended and gracefully not to take that personally. The panic did ease midweek, didn't it? Temporarily, AI developers pushed back, emphasizing their tools were designed to integrate with

3:10existing corporate systems rather than replace them entirely. Tech stocks bounced, but then, late in the week, Nvidia reported earnings. Revenue beat expectations, but forward guidance didn't meet the sky-high bar investors had set, and semiconductor stocks sold off hard. Then came the news of a $110 billion funding round for OpenAI, which instead of inspiring confidence actually amplified fears of an overheated AI bubble. And all of this fed into what became the third major theme of the week. Credit This is the one that should keep people up at night. A major alternative asset manager halted withdrawals from a retail-focused private credit fund. Then a major private debt fund cut its dividend, another marked down asset values, and creditors of a failed UK mortgage firm warned of a massive collateral shortfall. Current-grade bond yield premiums widened globally by the most since November, and the

4:14connection between the AI theme and credit is direct? Very direct. Market strategists are now warning that private credit default rates could spike to a worst-case 15% if AI causes aggressive economic disruptions among corporate borrowers. Financial, legal, and insurance sectors are facing acute pressure from new AI applications. Locking, cut nearly half its staff, openly citing AI replacement as the reason. The fears that companies funded through private credit, which is largely unregulated shadow banking, are exactly the ones most vulnerable to AI displacement. So you have the AI disruption narrative feeding directly into credit deterioration. That's not a comfortable feedback loop. Let's shift to developed markets, the US macro picture. The broader backdrop is still supportive. Industrial production started strong, retail sales re-accelerating. But inflation is sticky, core PCE January estimates tracking 0.43% to 0.44%, which would

5:20push the 12-month rate to around 3.1%. The Fed is firmly on hold, officials tilting hawkish. And with Kevin Worsh coming in as new Fed Chair, expect less granular forward guidance, potential dot plot reforms, and more emphasis on narrative views like an impending productivity boom. In the tariff situation shifted dramatically. After the Supreme Court struck down Trump's tariffs, the administration pivoted to section 122 of the Trade Act. This actually lowers the weighted average rate to roughly 11%. Countries that face the highest tariffs, China, Brazil, India, Indonesia, get the largest near-term relief. That section 122 expires after 150 days without congressional approval. So expect the administration to re-platform these into more durable tools. Temporary reprieve, not a de-escalation. Treasury yields have been interesting too. We had said it wasn't going lower in a hurry, but it did.

6:21Intermediate yields dropped below four. The decline is driven by safe haven flows and expectations that AI will cause structural disinflation. Meanwhile, foreign demand for U.S. fixed income hit a record $1.7 trillion in net purchases in 2025, driven almost entirely by European private investors. Across the Atlantic, how's Europe holding up? Sentiment surveys actually beat expectations, with manufacturing expanding faster than services. The ECB is expected to hold rates at 2.0%, but core inflation remains sticky at 2.2%. Germany is the interesting story. 2.4 GDP expanded 1.2% annualized, but it was driven by a 266% surge in public sector defense spending, which masked a 19% slump in private sector capex, so the German economy is essentially being kept alive by guns and ammo. Domestic orders have surged, but it's concentrated in weapons, ammunition, and transport equipment,

7:23while autos and chemicals are languishing. The UK has the spring statement coming up on Tuesday. It's expected to be a low-drama technocratic update. Fiscal headroom narrows. Guilt issuance drops materially to around £247 billion. The Bank of England is expected to cut by 25 basis points in March. Politically, labor finished third in a bi-election, and consumer confidence fell to minus 19%. The medium-term risks are real, a £28 billion defense spending shortfall and potential immigration downgrades that could hit fiscal headroom by up to £9 billion. In Japan, the Dovish appointments made headlines. The Takachi administration nominated two reflationist academics to the BOJ board, a clear signal of preference for easy monetary policy. This reignited the Takachi trades, strong equities, weak bonds, weaker yen.

8:24But Governor Wade has stated the BOJ will still examine wage-price data carefully, and a rate hike in April remains the base case. Retail sales rebounded 4.1% month over month in January, and underlying services inflation remains firm at 2.1%. It's at FX and commodities, beyond what we've already covered on gold and oil. Starting with the dollar, strategists are genuinely split. One camp sees US economic outperformance, and the fed staying on hold, as keeping the dollar resilient. The other camp sees capital rotating out of US equities into the rest of the world, peaking US dollar skepticism and declining marginal foreign demand. What's undeniable is that the US goods trade deficit hit a new annual record in 2025, despite all those tariffs, driven largely by massive imports of capital goods tied to the AI buildout. So tariffs are not fixing the trade deficit. If anything, AI is widening it.

9:26The WAN move was notable this week, very notable. CNH broke below 7.0, which prompted the PBOC to cut its FX forward sales reserve ratio from 20% to 0%. Essentially, removing the break on UN selling. The gap between the fixing and the spot rate has widened exceptionally, reflecting clear official resistance to further rapid appreciation. Analysts are taking near-term profits on long CNH positions, but the medium-term outlook remains bullish on RMB undervaluation, strong export flows, and expected dollar weakness. In the end, the yen is a tug of war. Near-term weakness is being driven by PM Takaiichi's administration, favoring low rates and a weaker currency, plus those dovish bank of Japan board nominations. But downside is capped by intervention risk. Another yen approaching 160 is considered the red line, with reports of potential coordinated

10:28rate checks from both Japanese and US authorities. There's a wild card. Japan's $2.25 trillion in global equity holdings. Any meaningful repatriation of that would be a significant catalyst for yen strength. Euro in sterling? The Euro is strong in both nominal and real terms, which is actually becoming a problem. It could weigh on regional growth and inflation, potentially opening the door for additional ECB cuts. The Euro's own portfolio investment balance swung to its highest surplus since late 2022, because European investor demand for foreign assets dropped sharply in Q4. Sterling faces mounting pressure from a sluggish economy, and expectations the BOE will cut in the coming meetings. Rising political risk ahead of the May local elections isn't helping either. And the Swiss franc is at all time highs in nominal effective terms, extremely overvalued,

11:30but the SNB at 0% has virtually no conventional tools to push it lower without going negative again, which nobody expects. Commodities? Silver is the standout. Silver is defying historical templates. Typically you see silver outperform gold and then retrace, but this time sentiment is at 20 year highs in risk reversals, sustained backwardation in Shanghai, and year end forecasts are at $100 per ounce. Copper is interesting. Fundamentals have actually deteriorated, swinging from an anticipated deficit to a surplus with visible stocks at their highest since 2018. That prices remain elevated, supported by appetite for pro cyclical hard assets, and the risk of dislocation, if both the US and China pull on the market simultaneously. Emerging markets, and I notice we're skipping Turkey and Egypt this week? Not much material there this week. Let's start with South Africa, which delivered a genuinely impressive budget.

12:34The main deficit is projected at 4.5% of GDP, narrowing to 3.6% next year. Primary surplus on track at 0.9. Crucially, no populists spending ahead of municipal elections, and they cut weekly bond issuance by 15%. The treasury took a conservative approach, deliberately excluding commodity windfalls until they materialize. Revenue could overshoot by 10 to 35 billion rand. This is how you do a budget. India's numbers were strong too. India posted 7.8% GDP growth for the October to December quarter, with manufacturing surging 13.3%. The big story is the recently concluded trade deals with the EU and US, slashing tariff rates on Indian exports from 50% down to 18%. Full-year growth is estimated at 7.6%, and the RBI is expected to hold rates at 5.25%.

13:37Thailand surprised markets this week. The Bank of Thailand delivered an unexpected 25 basis point cut to 1.0%, earlier than anyone anticipated. The trigger was reduced political uncertainty following a clear election outcome, which gave them the window to act, but here's the important part. The BOT signaled, this is likely the end of the cutting cycle. They want to preserve what limited monetary policy space they have left. Growth is expected to remain below potential through 2027. So they're essentially saying, this is all we've got. Latin America, Brazil and Mexico? Brazil's mid-month inflation surged 0.84% month over month in February. The largest upside-surprise in a decade, driven by education costs and transportation, but annual inflation actually eased to 4.1% on favorable base effects. Q4, GDP, grew just 0.1% quarter over quarter, reflecting a clear second half slowdown.

14:42The central bank is expected to start cutting by 50 basis points in March, which makes sense given how high real rates are. And Mexico is a complex picture right now. Mexico is fascinating if not scary. I will get to that. I think I know what you mean. Mexico avoided recession. Full year 2025 GDP was revised up, and 2026 forecasts have been raised as well, partly supported by the World Cup consumer boost. On the tariff front, the direct impact is muted, but the USMCA review negotiations ahead will be intense. And as a wild card, the recent death of the cartel leader El Mencho signals a tougher security stance from the Mexican government, which could actually help their negotiating position with the US. The flip side is it raises the risk of domestic violence as cartels reorganize. Quick word on South Korea? Bank of Korea held at 2.50% unanimous decision.

15:45The new dot plot leans dovish with most dots pointing to an extended hold and slight bias toward a cut. Foreign inflows tied to the upcoming Fetsi World Government bond index inclusion should support the one. Looking ahead next week, beyond the obvious geopolitical monitoring, a very busy week awaits us. The US jobs report on Friday is the headline, estimates range from 25,000 to 65,000 non-farm payrolls, unemployment expected at 4.3%. ISM manufacturing Monday, services Wednesday, the beige book Wednesday. In Europe, flash inflation Tuesday, UK Spring Statement Tuesday, and Poland expected to cut 25 basis points. But honestly, all of this takes a back seat to what happens in the Middle East over the next 48 hours. Heavy week. Selim, as always, thank you for walking us through it. Don't forget folks, we do not give investment advice. For that, please consult a professional.

16:47Our only advice, stay safe. See you next week.