The market is currently facing the dual pressure of a strengthening US dollar and elevated long-end US Treasury yields, and deleveraging and selling sentiment in risk assets are unlikely to fade in the short term. Energy inflation and geopolitical risks continue to support long-end yields, while the expansion of the AI computing power industrial chain must withstand the dual test of financing conditions and valuation discount pressure. Investors need to closely monitor signals of a peak in the US dollar, signs of a pullback in US Treasury yields, and the performance of banks and small- and mid-cap stocks. These indicators will determine whether risk assets can escape their current predicament and whether the AI investment boom can continue.
A research report released by a team led by senior strategist Michael Hartnett of Bank of America (BAC) said that investors will continue to avoid riskier trades until the recent sharp rise in the US dollar shows signs of peaking. The Bloomberg Dollar Index has rebounded about 3% from its September low, reflecting that investors are reducing holdings of risk assets such as stocks and cryptocurrencies and rebuilding cash positions. At the same time, the yield on the US 10-year Treasury note, known as the “anchor of global asset pricing,” briefly touched 5.34% on October 1, the highest since 2002, before subsequently pulling back.
Hartnett advised investors to begin buying bonds that have recently suffered major selloffs, especially long-dated US Treasury assets. He also proposed a policy-level support expectation: if yields continue to climb and threaten the AI investment boom before the November midterm elections, the US government may increase Treasury buybacks. He stressed that if small- and mid-cap stocks also join bank stocks in sharp declines, it would significantly indicate that market optimism about strong economic growth has peaked and would ultimately drag down technology stocks.
The Middle East energy inflation situation that has caused a surge in yields on US Treasuries with maturities of 10 years and longer presents a pattern of “diplomatic and military pressure proceeding in parallel, with oil prices pulling back but the geopolitical war premium still present.” Qatar continues to mediate the US-Iran “seven-day mutual trust plan,” and the two sides differ on the sequence of actions; the United States is deploying more troops to the Middle East, and Iran is also preparing to respond to a possible resumption of large-scale US attacks. As of October 2, Brent crude oil futures were quoted at $99.48 per barrel, and WTI crude oil futures were quoted at $89.52 per barrel. Although both were down on the day, based on settlement prices before the war broke out on February 27, the two benchmarks were still up about 37.3% and 33.6%, respectively.
Against the backdrop of energy inflation driving 10-year US Treasury yields to a more than two-decade high, the surge in the US dollar index has pushed up safe-haven demand while risk appetite remains persistently weak, bringing the “financing kill line” for the AI investment frenzy seemingly closer. As benchmark financing costs begin to constrain financing progress critical to AI capital expenditures and the returns on AI infrastructure projects, the market is increasingly questioning whether the expected returns of many large AI data center projects can continue to cover rising capital costs.
For investors, the trajectory of the US dollar, yields on long-dated US Treasuries of 10 years and longer, and the market performance of banks and small- and mid-cap stocks are becoming important signals for testing whether the AI computing power super bull market can continue to spread to broader stock market sectors.
