OpenAI, the owner of artificial intelligence (AI) ‘chatbot’ ChatGPT recently entered into talks for a major new round of funding, which is critical to a network of financial arrangements and hardware deals it has built up as it seeks to secure computing power. Technology heavyweights from Nvidia to Oracle rely on contracts with OpenAI for their future revenues. To support growth, OpenAI needs to invest in data centres and computing power to train and run its AI models.

OpenAI is reported to be seeking a valuation of $1.2 trillion, up from $850 billion in March 2026. To support this valuation, it has been forecast in presentations to investors that revenue could grow from $36 billion this year to $840 billion by 2030. However, this will require massive up-front investment and as a result, OpenAI expects negative free cash flow of $278bn over the next five years.

OpenAI is not alone in its ambitious growth and spending plans, and more AI giants are seeking fresh ways to fund growth.

This has led to the growth of residual value guarantee funding by banks, under which the AI giants guarantee a minimum future value for chips or data centres. Bankers describe the guarantees as ‘balance sheet efficient’ or hidden off-balance sheet exposure. This is because the debt is issued by special purpose vehicles that own the infrastructure, rather than the AI companies themselves. This allows them to lend their financial muscle to deals without needing to fully book the liabilities. However, they have to cover specified shortfalls if these AI assets have to be sold one day or fetch less than a guaranteed minimum value.

There has been a significant expansion in off-balance sheet exposure over the past year and $300bn is thought to have been raised by AI companies via residual guarantee funding. Some analysts estimate that off-balance-sheet commitments and credit support by major AI hyper-scalers and chip makers is now in excess of $3 trillion. This has added a very high degree of complexity to the credit risk profiles of these AI businesses. Credit rating agencies and bond investors are warning that this structure could result in substantial losses if AI hardware values were to decline.

AI companies are currently involved in a global race for supremacy. OpenAI has already reduced its prices as it seeks to take market share from US rival Anthropic and has reacted to the threat of cheaper ‘open weight’ AI models from China.

Only time will tell if the use of residual guarantee funding was a wise decision.

What have we been watching?

US government bond yields are hitting their highest level since 2007 on expectations of higher inflation and interest rates. However, US equities were supported by positive economic data, leaving the S&P 500 index within 1% of its record high. Hopes were also raised by the prospect of US-Iran talks, but this enthusiasm has been dented over the weekend.

Last week saw the summit between Presidents Trump and Xi Jinping. The main news from a market standpoint was that the trade truce is to be extended by a further two months, which will now keep tariffs at a lower level until 10^th January. This is shorter than had been signalled by US officials beforehand but does offer more time to potentially reach a longer deal. The two leaders also discussed AI, although it’s unclear whether they agreed to any safeguards.

Iran reiterated that it would not soften the conditions for reopening the Strait of Hormuz. Iran’s foreign minister insisted that it would not back down from demands including sanctions relief, access to its frozen assets and an end to US blockade measures. President Trump rejected Iran’s latest proposal as inadequate but said he expected negotiations to continue. Lines of communication remain open, but that is the only positive, otherwise the US and Iran appear to be in stalemate. This morning, Brent oil has climbed over 2% to almost $107. Iran appears to be holding out in the hope that by prolonging the uncertainty, it can damage Trump in the US mid-term elections on November 3^rd.  The US administration is reported to be considering a diesel export ban to lower domestic fuel prices ahead of the midterm elections.

The AI debate continues to impact global equity markets. Over the weekend, OpenAI announced that it was pausing development of certain advanced AI models after agents have been reported to have gone rogue across a number of recent incidents. OpenAI acknowledged that it alerted ‘dozens’ of global institutions after their websites had been meddled with by its AI bots acting improperly. This disclosure comes days after Australia’s PM announced that OpenAI agents had breached non-public files on the website of its government-run health scheme.

The UK ‘flash’ PMI business activity indicator dropped to 51.7 from 52.5 last month, with the manufacturing expanding slightly but the service sector contracting ahead of the budget on 28^th October. Energy costs, higher borrowing costs and continuing geopolitical uncertainty were cited as adversely impacting company confidence. Meanwhile, government borrowing in August was higher than expected at £18.3 billion taking the year-to-date deficit up to £77.3bn compared with the OBR forecast of £69.3bn!

The Eurozone ‘flash’ PMI business activity indicator climbed to a 3 year high of 53.1. However, higher inflation and interest rate worries saw the German 10-year Bund yield rise to a post-2009 high of 3.6%.

The US ‘flash’ PMI business activity indicator hit a 5-year high of 58.4. Following this data release, the chances of a US interest rate hike by the Federal Reserve in October have climbed from 53% to 64%, according to futures traders. Reflecting these developments and events in the Gulf region, the US 10-year Treasury yield climbed to 5.16%, the highest level since 2007. Meanwhile, the 30-year US Treasury yield almost hit 5.5%, the highest level since 2004. This is having an impact on the US housing market, with the US 30-year mortgage rate now above 7%.

The Japanese 10-year bond yield hits its highest level since 1996 moving above 3%.

Finally, Nvidia Chief Executive Jensen Huang has described warnings that AI could lead to humanity’s extinction by the next decade as ‘doomsday narratives.’ He said ‘2030 is not going to be the end of the world.’ Given the amount of money AI hyper-scalers and chip makers are currently spending, let’s hope not, as what a waste of money that would prove to be!

The post AI – complex credit risk first appeared on Alpha Portfolio Management.

BRICS is an international organisation, currently comprising eleven countries: Brazil, China, Egypt, Ethiopia, India, Indonesia, Iran, Russia, Saudi Arabia, South Africa and the United Arab Emirates.

The founding members were Brazil, Russia, India and China, hence the original acronym BRIC. The inclusion of the latter two countries means that BRICS comprises more than a quarter of the global economy and nearly half the world’s population. As such, it has grown in stature and has become a major political power.

Russian inspired in 2009, but these days it is driven by China. BRICS was formed to counter the influence of Western powers and has sought to reshape the world order, reduce US influence and establish its leadership in technology, such as AI. It has also sought to reduce the dominance of the US dollar, by promoting greater trade settlement in national currencies.

The leaders of the BRICS nations recently met at their latest summit in New Delhi and, not surprisingly, were united in their opposition to ‘Trumpism’. This reflects their growing frustration with Trump’s protectionist policies from tariffs to sanctions. The summit provided an important opportunity for China’s President Xi Jinping to discuss issues such as the Gulf war ahead of his meeting with Trump later this week.

Is the latest BRICS summit likely to be a game changer?

No, but the image of XI, Modi and Putin smiling broadly and holding hands at the summit contrasts with political disarray in the West. Trump has made America more isolationist and he has questioned the NATO alliance. Trump has also riled key allies such as Canada, the UK and Europe. Meanwhile, within Europe, many governments are preoccupied with domestic problems such as immigration, the rise of populist parties and high levels of debt. Putin also remains a threat to Europe and his close ties to Xi Jinping are a concern.

What have we been watching?   

The football season is well underway and last week it was a story of two halves for global equities. The first half saw a fresh spike in energy prices, renewed stagflation fears and the US 10-year Treasury yield closing above 5% for the first time since 2007. The second half saw the US Federal Reserve (Fed) deliver the first interest rate hike since 2023, which, together with some easing in energy prices, reversed the spike in global bond yields. This left risk assets broadly unchanged over the course of the week. Markets were also supported by optimism from US-China trade talks, ahead of the much-anticipated meeting between Trump and Xi Jinping later this week.

Brent oil surged to $109 earlier in the week as Houthi attacks on Saudi Arabian energy infrastructure intensified. However, Saudi Arabia said that the damaged East-West pipeline was expected to be back at half capacity within days and in full within six weeks. As we write this morning, Brent oil is 2% lower to just under $102.      

Over the weekend, Trump announced that the US, Denmark and Greenland had reached an agreement that would allow a significant expansion of the US military presence on the island, with Trump describing the deal as giving the US ‘permanent control over security’ in Greenland. The deal recognises Greenland’s right to self-determination and Danish sovereignty. It falls well short of Trump’s earlier ambitions to acquire Greenland, but if the agreement holds, it removes a political hot potato for the US and NATO.

In the UK, the Bank of England (BoE) left interest rates on hold at 3.75% but said that policy ‘may need to tighten’ amid rising inflation forecasts. This appears to be preparing the ground for a 0.25% hike on the 5^th of November, unless energy prices drop.  Separately, and more significantly, the BoE announced it is pausing all government bond sales for six months. It has a new strategy regarding QT (Quantitative Tightening), which, allowing for the value of gilts to mature over the next year, will see the BoE reduce its gilt holdings by an average of £46bn a year until 2034, when it will have fully reversed QE (Quantitative Easing). This news, together with global bond yields receding slightly from their peak, saw the cost of UK government borrowing ease very slightly.

There were heavy defeats for the ruling CDU government in two German state elections with a surge in support for the far-right AfD in one and far-left Die Linke in the other. Chancellor Friedrich Merz called the results a ‘disaster’. The shock was that the CDU government didn’t even make the 5% threshold to enter parliament for the first time in the country’s post-World War II history. This will create huge amounts of pressure on the German Chancellor and raise questions about the reform agenda.

The Federal Reserve (Fed) delivered its first interest rate hike since 2023, whilst also signalling that it had started a modest tightening cycle. The Fed increased interest rates by 0.25% to 3.75%-4%, as expected, with the unanimous decision accompanied by a more-than- expected ‘hawkish’ shift in the Fed’s future interest rate ‘dot plot’ guidance. Comments by new Fed Chair Kevin Warsh described the hike as removing ‘a dose of accommodation’, whereas previously committee members had viewed policy stance as ‘mildly restrictive’.  This left a clear sense that the Fed is at the start of a moderate tightening cycle rather than delivering a one-off hike. Markets therefore moved to fully price in another three possible rate hikes from the Fed by next summer.      

The Japanese yen weakened 2% against the US Dollar last week. This followed a 0.25% interest rate hike by the Bank of Japan. However, this had been expected and the fact that two members of the committee voted against the hike was interpreted by markets in a ‘dovish’ light.

Finally, Brexit rumbles on! A summit between the UK and the EU has been delayed again as the two sides clash over Brussels’ new ‘Made in Europe’ policies. A meeting to reset post Brexit relations at the end of July was postponed and has now been further delayed until the end of November. Meanwhile, the UK has pushed back against EU demands for a ‘Farage clause’ requiring any future government that walked away from the reset deal to pay financial compensation to Brussels. Some EU diplomats are suggesting it may even pay the EU to delay any summit until after the next British election, which may not be until 2029!

The post Just another BRIC in the wall first appeared on Alpha Portfolio Management.

President Trump’s envoys Steve Witkoff and Jared Kushner recently held talks with both Putin and President Zelensky, hoping to resume trilateral negotiations between Russia, Ukraine and the US, which stalled following the Gulf conflict. A central issue is the remaining Ukrainian-held territory in the Donbas. Putin has repeatedly insisted that any peace agreement would need to recognise the realities on the ground and that he is opposed to a ceasefire as a prelude to peace talks. In the latest discussions, there was general acknowledgment that the war was unlikely to end before the winter.   

In the meantime, Putin appears to have become emboldened, judging by the increasing hybrid warfare he is undertaking against NATO in Europe. Last month, the authorities foiled an attack on Leipzig/Halle airport, using a drone laden with military-grade explosives. This should be a wake-up call and it has exposed NATO’s failings to deter Russia from staging attacks below the threshold that triggers the alliance’s Article 5 mutual defence clause.

Russian proxies and intelligence agencies have been undertaking hybrid warfare against Europe for some time now, sowing disinformation, launching cyberattacks, fire-bombing warehouses, targeting politicians’ homes and cars and damaging undersea fibre optic cables. European intelligence agencies are bracing themselves for an increase in Russia’s reckless activity to coincide with a run of key European elections next year, including in France, Italy and Poland.

NATO’s Article 5 has a ‘fuzzy boundary’ which Russia keeps on exploiting. Complicating NATO’s position is the perceived shift in US policy towards Russia, with Trump playing down the threat from Putin.

The UK is also squarely in Putin’s crosshairs for its robust support of Ukraine, including missile technology. Over the weekend, a Russian drone hit a train near the Ukraine-Poland border, shortly after former PM Boris Johnson and top European security officials had passed through. A coincidence or the latest reckless act by Putin?

Be prepared for more hybrid warfare by Putin, whether it be more cyberattacks or attempts to damage our undersea energy and communications.

What have we been watching?

A huge sell-off in government bonds, which pushed yields up to multi-year highs around the world as global stagflation fears resurfaced. This was driven by a fresh surge in energy prices as the situation in the Gulf deteriorated. Markets are concerned that central banks may need to hike interest rates more aggressively.

Meanwhile, over the weekend there was a rare show of agreement amongst several of the most important AI leaders who are concerned that AI development is now moving so quickly that safety, oversight and our ability to fully understand the systems need more time to catch up. For investors, the key question is whether this is the first sign that the extraordinary AI investment cycle might eventually moderate. This seems unlikely, as it is hard to see China slowing its AI development activity, which is something President Trump said over the weekend, who didn’t seem to favour any kind of pause.

Brent crude oil rose by almost 9% last week to just over $104 while European natural gas prices jumped by over 10%. This morning, Brent oil has climbed a further 3% to $107. The increase followed further attacks on tankers in the Gulf and the precautionary closure of a major Saudi Arabian oil pipeline by drones that had been fired from Iraq. The pipeline has been exporting between 4 to 5 million barrels of oil a day and has been Saudi’s primary workaround since Iran closed the Strait of Hormuz. The key issue now is how quickly the pipeline can be restored. To add to Saudi Arabian and market woes, the Houthi rebels have captured Perim Island, threatening its Red Sea oil exports. About 12% of global trade passes through the Red Sea, so its closure, alongside that of the Strait of Hormuz, is a major concern. Crown Prince Mohammed Bin Salman has reportedly requested direct US military assistance against the Houthis, though Trump has apparently declined direct strikes against the Houthis. Trump has said that he does not think the Iran war will end until after November’s mid-term elections, adding that oil prices will not come down until then.

Last week, the European Central Bank increased interest rates by 0.25%, commenting that ‘inflation is expected to remain well above target for an extended period.’ Looking to the week ahead, it is a bumper week for central bank interest rate decision making. The Bank of England is expected to keep rates on hold at 3.75% while the Bank of Japan is expected to announce a 0.25% hike with the decision driven by currency stability considerations as well as inflation.

In the US, futures suggest an 87% probability that the Federal Reserve (Fed) will hike interest rates by 0.25%.  Focus will fall upon new Fed Chair Kevin Warsh’s press conference and how he deals with his dislike of forward guidance on interest rate policy but the need to calm markets which are calling for greater forward visibility.

Finally, a modern-day Poldark? The UK’s National Wealth Fund has invested £71m in the Tungsten West mine in Cornwall. It is one of the world’s largest tungsten resources, which is critical in defence, aerospace, next-generation energy and electronics. The company is targeting a ramp-up of full-scale production in Q1 2027. Government backing for the development of key rare earth and metals projects is vital.

The post Putin’s hybrid war against Europe first appeared on Alpha Portfolio Management.

The track record of successive UK governments when it comes to delivering massive infrastructure projects on time and within budget is not great, with HS2 being a prime example. HS2 is even more disappointing in that it looks as if it will fail to deliver anywhere near the original ambitions to connect the North of England with London.

New PM Andy Burnham is seeking to redress the North-South imbalance by devolving more power to the regions, with some reports of up to 90,000 jobs eventually moving from London to the North. However, could the Thames Barrier throw a spanner in the works given government finances?

The Thames Barrier, which protects London from flooding, may need to be replaced up to two decades earlier than planned and could cost in excess of £20bn!

When it was built in the 1980s, it was expected to last until 2030, but subsequently, it has been hoped that it might offer protection until 2070. However, due to climate change and rising sea levels, government officials now believe it may need to be replaced between 2050 and 2060. An increase in extreme weather has caused degradation to the infrastructure and prevented maintenance from being carried out.

It is thought that including planning, it could take up to 30 years to build a replacement Thames Barrier. Options for a replacement include building a new barrier with locks on the existing site at Woolwich Reach in east London to improve resilience or building a new barrier further downstream. These could also be supported by the creation of flood storage areas such as reservoirs and marshlands to store excess water.

London’s importance as a global financial centre cannot be ignored, neither can over £300bn of residential property or key infrastructure such as the London Underground, not forgetting the many sites of historical importance.  Somebody is going to have to take a decision about the Thames Barrier in the not-too-distant future and it’s going to be a key one given the current North-South political and economic debate.

What have we been watching?             

Government bond yields and the conflict in the Gulf continue to overshadow markets.

Over the weekend, there was a tit-for-tat escalation targeting commercial shipping around the Gulf. There were reports of several tanker incidents and maritime attacks which have, once again, heightened concerns about the security of energy supplies moving through the Strait of Hormuz. Both the US and Iran have accused each other of responsibility for the attacks! Brent oil, which increased by over 7% last week, has continued to climb this morning and has hit $97. Meanwhile, European natural gas futures recorded the fourth successive weekly gain, rising by over 7%.

Rising energy prices are leading investors to price in a growing probability of a greater inflationary shock, particularly in Europe, which, unlike the US, is not a major oil and gas producer. This has pushed government bond yields to multi-year highs around the world. For example, at one point last week, the German 10-year bond yield climbed to a post-2011 high of 3.37%, while the US 10-year Treasury yield briefly hit 4.78%. The UK was not immune from this trend, with the UK 10-year gilt yield hitting 5.29% before edging back slightly to 5.16%.

In the UK, the new Chancellor John Healey is set to give his view of the UK economy ahead of his budget on the 28^th of October. It comes as Jaguar Land Rover announced 4,000 voluntary redundancies over the weekend. This should not come as a surprise, as we highlighted in last week’s Alpha Bites, Europe’s car industry is facing numerous challenges, particularly from Chinese imports. The new Chancellor’s tasks will be made more challenging by the rise in global bond yields.

In Europe, the main headline over the weekend is Germany’s political landscape shifting further to the right, after the AfD secured around 44% of the vote in the Saxony-Anhalt state election. It is the AfD’s strongest result in any German election to date and more than double its support from 2021. Chancellor Friedrich Merz’s CDU party slumped to 17% of the vote as voters expressed growing frustration over economic stagnation, energy costs and migration policy. The regional election result underlines how anti-establishment and populist parties continue to gain traction across Europe.       

In the US, last week saw a very strong jobs report with payrolls up by over 162,000 in August, while there were upward revisions to the previous two months’ figures. This has increased the likelihood that the Federal Reserve (Fed) will increase US interest rates at its next meeting in September. Futures are currently pricing in a 62% chance of a Fed hike.

Finally, a topical example of inflation! The Thames Barrier took eight years to build and on completion in 1982, cost £535m. Any idea what that is in today’s money? Well, it’s £2.6bn! So even adjusting for inflation, the cost of the new Thames Barrier could be ten times that of the original.

The post The Thames Barrier to the North-South divide first appeared on Alpha Portfolio Management.

Germany’s export-orientated economy is now in its seventh year of economic stagnation. This is due to a combination of COVID, high energy costs due to the war in Ukraine, US tariffs and Chinese competition in key industrial markets.

The answer to these challenges by the German government is a €500bn stimulus programme – the Special Fund for Infrastructure and Climate Neutrality – to boost the economy over a 12-year period. The programme is designed to bypass the country’s constitutional “debt brake” or Schuldenbremse.

The German car industry has been the backbone of Europe’s largest economy and is facing significant headwinds. The automotive sector is one of the largest employers in the country and has been significantly impacted by Chinese competition. Following rapid growth, Chinese car brands now account for more than 10% of vehicles sold across Europe.

As a result, Germany’s carmakers are embarking upon their most extensive restructuring ever to combat the scale of the growing pressure from Chinese EV imports. BMW is to incur €1bn in restructuring costs, which could see up to 10,000 job losses and car production cut by 15%. Volkswagen is reported to be considering as many as 100,000 job losses from its 625,000 workforce over the coming years. The knock-on effect to the employees  in the supply chains of these car manufacturers is still unclear.

The uncomfortable truth is that the shift from combustion engine to EV has levelled the playing field. For over a century, Germany’s mastery of the fiendishly complicated combustion engine was its moat. The shift to electric vehicles removed that moat, swapping that engine for a battery, some software and a much simpler drivetrain, resetting the game on terrain where China could compete.

On this new terrain the Chinese haven’t just caught up, they’ve lapped the competition. It’s estimated that a European manufacturer takes 40 to 80 months to bring a new model to market, where Chinese firms manage it in under 24 and the global consultancy McKinsey pegs China’s EV cost advantage at 20-50%, or north of €6,000 on a €30,000 car. Volkswagen’s once-in-90-years redundancy programme, by contrast, aims to save roughly €1,000 per vehicle — which is like fighting a house fire with a well-aimed water pistol…

Pressure on German car manufacturers has been building as they struggle to sell in China and face US tariffs. Chinese cars are gaining market share in Europe at a much faster pace than expected. The restructuring programme underway risks permanently shrinking one of the most important industries in Europe’s largest economy. One hope must be that German automotive workers made redundant can be re-employed in the defence sector, where Germany is ramping up investment given the threat from Putin.

What have we been watching?

Long-term US government bond yields kept climbing last week, then the Treasury caught investors off guard by saying it would at least double its buyback operations for longer-dated Treasuries as US debt reached a monumental $40 trillion — pushing debt-to-GDP to its highest since WW2!

The aim is to prop up demand at the long end and stop yields spiralling higher — borrowing costs that feed through to mortgages, business loans and the government’s own interest bill. It’s a small amount relative to the total stock of Treasuries, but the signal was enough to flatten the curve and pull the 30-year yield down from its post-2007 high of 5.31% on Monday. The relief didn’t last though, as the yield drifted back up to close just shy of its earlier peak.

With no sign of US-Iran talks over the week, Brent crude climbed +6.6% to c.$94/bbl, which reignited inflation fears.

This, in part, contributed to a risk-off tone across the markets, with equities down across the board: S&P 500 -1.43%, STOXX 600 -0.56%, and the Nikkei -3.93%.

Gold hit a 3 month high of c.$4,600, supported by previously described US bond intervention and reignited inflation fears.

US–Canada trade talks collapsed over the weekend. PM Mark Carney said Canada was “walking away from a bad deal” and would match Washington’s tariffs dollar for dollar — 50% tariffs on around $20bn of goods, with retaliation starting September 8. Trump hit back online, and the Canadian dollar fell against every G10 currency this morning.

Unemployment was expected to fall, it remained at 4.9%, while CPI inflation came in higher at 2.9%, as expected. PMIs were healthy and a notch better than analysts had expected.

One bright spot was better than expected flash manufacturing PMI, which came in at 52.8.

Finally, another challenge for new PM Andy Burnham. Against a background of UK drought and wildfires, a decision is looming over the future of the Rosebank oil field and Jackdaw gas projects in the North Sea. Supporters argue that domestic production is better than imports for meeting domestic demand, as it means fewer emissions from shipping gas, better regulation, and taxes and jobs for Britain. Will the war in the Gulf shift government thinking?

The post Is all well in Germany? first appeared on Alpha Portfolio Management.

Over the weekend, Ukraine launched one of its largest drone attacks on Russia since the start of the war, hitting Moscow. It is reported that drones made in the UK were involved.

It demonstrates how much warfare has changed in five years and should be a wake-up call to European NATO governments.

The new methods of warfare are also seeing significant changes within the defence industry. This is reflected in the growth in defence ‘unicorns.’ A ‘unicorn’ is a start-up business venture which rapidly achieves a value of over $1bn. The US has seen an explosion in unicorns in recent years driven by the AI boom. However, the UK is now seeing the growth of its own unicorns in the defence sector as European governments seek to boost defence spending and learn from the drone warfare in Ukraine and the Middle East.

Cambridge Aerospace, a UK defence contractor founded only two years ago, has recently achieved a valuation of £2.5bn following its latest round of funding to support growth. Cambridge Aerospace develops and manufactures interceptor systems for use against drones and missiles. It currently provides interceptors for the UK’s Armed Forces.

The other two UK defence unicorns are UFORCE and Kraken Technology. UFORCE aims to unify Ukrainian defence technology developers and manufacturers into a single platform to deliver proven aerial, maritime and ground unmanned platforms. Kraken Technology specialises in technically advanced littoral, surface and subsurface capabilities. These have been another feature of the war but offshore Ukraine.

Growing defence budgets, increased geopolitical tensions, strong government support and demand for drones, AI and cyber capabilities have led to a record level of defence start-ups so far in the UK. The UK stock market also comprises a number of quoted defence contractors as well as manufacturers who produce high-tech military components for weapon platforms.

This is all a far cry from just a few years ago when, as we highlighted in Alpha Bites, how new ethical investing rules imposed on the financial sector were preventing defence companies from accessing funding from banks or pension funds from investing in the sector!

The defence unicorns and start-ups will be looking to sell their products and capabilities to defence forces globally. However, supplying the UK’s Armed Forces is an important factor in securing orders from the UK’s allies, so the government needs to be as supportive as possible. We wait to see whether new Defence Minister Wes Streeting has any more luck than his predecessor John Healy in convincing new PM Andy Burnham to step up defence spending. Currently, the new PM seems to be focusing his attention on the UK’s cost-of-living.

What have we been watching?

Global equity indices are close to all-time highs but more challenging crosswinds in bond markets. Expectations for a US interest rate hike by the Federal Reserve (Fed) were dialled back last week but have been accompanied by a significant steepening in the US Treasury yield curve. This suggests the longer-term outlook for US interest rates is less positive. Concerns about higher oil prices, elevated government fiscal deficits and the growing demand in the US for capital to fund the massive AI investment boom have been putting upward pressure on bond yields. For example, the US government issued $25bn of 30-year Treasury bonds last week with a yield of 5.2%, marking the highest yield since 2001.

Brent oil moved higher last week, and this morning is steady at $88, reflecting the fact that a further military escalation appears unlikely, at least in the short term. This follows comments from US Treasury Secretary Scott Bessent, who confirmed that the latest phase of the Iranian conflict has shifted towards an economic and physical blockade, describing the measures as a ‘combination of economic isolation like the world has never seen before.’ However, the Gulf region remains volatile and Iran’s Revolutionary Guard are still claiming that no ship can safely transit the Strait of Hormuz without approval. There were also unconfirmed media reports that Iran’s allies in Yemen, the Houthi rebels, had targeted a Saudi Arbian oil refinery.

In the US, the market dialled back its expectations for an imminent interest rate hike by the Fed. Core inflation (CPI) in July slowed to 2.5%, while producer price inflation (PPI) was also lower than expected, holding steady, which meant that the year-on-year reading fell back to 4.7%. US retail sales in July were also weaker than expected, supporting the case to postpone any interest rate hike.

Finally, an AI headache for the government? UK households are increasingly turning to AI to file objections and appeals and seek compensation. The resulting deluge of complaints known as ‘agentic flooding’ risks overwhelming government departments. These range from tax appeals to welfare claims to parking ticket objections. For example, the backlog in employment tribunals is reported to have risen by 55% so far this year!

The post UK Defence Unicorns first appeared on Alpha Portfolio Management.

Despite an air of domestic political and economic gloom, foreign buyers are hoovering up UK quoted businesses at an alarming rate.

In recent weeks, amongst bigger names, Segro, EasyJet, Intertek, Beazley, Rotork, MITIE, Bodycote and DCC have all received bid approaches. This follows the US takeover of Schroders earlier this year.

While, for shareholders, a bid approach is usually a welcome development, for long-term investors, it can also leave a challenge. Can you find a replacement investment of equal quality? Unfortunately, the scale of UK takeovers is shrinking the size and importance of the UK stock market and sadly the hopper is not being re-filled with comparable size new issues.

Where foreign companies are buying UK PLCs, the bid premiums have tended to be very significant, as they are able to derive economies of scale. For example, Rotork received an initial unsolicited bid from Swiss company ABB at 430p, before three further proposals leading to a final offer of 506p – a premium of 70% to the pre-offer share price!

However, some of the current bidders are private equity firms and bids have tended to be opportunistic ‘bear hug’ offers. These are typically at a significant but less generous premium to the share price, which seeks to persuade the board of a target company into recommending acceptance to its shareholders. UK companies have received £44bn of so-called ‘bear hug’ unsolicited offers so far in 2026.

The Stock Exchange’s junior market – AIM – has an even greater challenge partly due to Rachel Reeves’ earlier budget inheritance tax rule change. From a peak of 1,700 companies in 2007, the number of AIM quoted companies has recently fallen to below 600. Unfortunately, besides takeovers, the bigger AIM companies have tended to move up to a full listing. The London Stock Exchange is now attempting to address the decline by streamlining AIM rules to reduce costs and make capital-raising easier.

The London Stock Exchange also faces competition for fund raising from the venture capital sector, which is estimated to have raised $92bn in the last ten years, almost five times that of the previous decade! This allows companies to stay private and is not a UK only phenomenon. According to the Economist, the number of publicly listed US companies peaked at 8,000 in 1996 but stood at around 3,900 last year.

Another reason the London stock market has shrunk is that the UK has failed to attract mega-cap AI listings. However, this might not be a bad thing were the AI bubble ever to really burst as UK PLC, with its typically lower valuations, might be a safer port in a storm.

What have we been watching?

Hopes that the Strait of Hormuz would re-open pushed energy prices lower helping propel European and US equities to fresh highs with the latter also helped by a re-bound in AI companies after a difficult July. Soft US jobs data also saw markets dial back prospects of a US interest rate increase.

However, over the weekend, optimism has waned about an agreement to re-open the Strait of Hormuz and Brent oil has risen modestly to $84.

Last week, markets were more hopeful of de-escalation in Middle East tensions as negotiations between Iran and Oman progressed over the Strait of Hormuz. However, optimism faded as details of a potential agreement raised questions over whether the US would accept the deal and just how free-flowing shipping through the Strait would be. Internal divisions within Iran also appear to be complicating efforts to reach a final agreement. The appointment of former Revolutionary Guard commander Moshen Rezaee to head the Supreme National Security Council has reinforced hard-line influence at the centre of decision-making. A deal to re-open the Strait of Hormuz looks unlikely in the short-term after Iran added six additional conditions to the Iran-Oman agreement that were inevitably unacceptable to the US.

Media reports suggest Iran continues to tie any lasting agreement over the Strait of Hormuz to wider demands on the US, including sanctions relief, compensation for war damage and security guarantees. President Trump said, ‘we are now low keying it’ and not rushing to make a deal or resume military action, preferring instead to continue economic pressure on the regime. Meanwhile, Iran was reported to have attacked an oil tanker attempting to use the Omani shipping route.

US headline payrolls fell unexpectedly in July, leading investors to dial back prospects of an interest rate hike by the Federal Reserve (Fed). The chances of a Fed rate hike in September fell from 72% to 44%. Meanwhile, President Trump is under mounting pressure over the Middle East, but internal opposition appears to be growing ahead of the midterm elections. Some 25 Democrat-led states are suing the Trump administration over his latest 10%-12.5% tariffs. Meanwhile, the Trump administration is reported to have repaid $100bn of the $165bn Liberation Day tariffs collected!

The Japanese yen remained in focus although it was only marginally weaker. Stronger Japanese wage growth and more ‘hawkish’ signals from the Bank of Japan reinforced expectations for additional policy tightening.

Finally, petrol station owners just can’t win. Already taking flak from drivers for profiteering from the war in the Gulf, they are now the victims of fraud. UK drivers are reported to have stolen almost £200,000 of fuel on average every day since the outbreak of the war in Iran. Some people are simply driving off without paying!

The post UK PLC – Year of the Bear Hug first appeared on Alpha Portfolio Management.

The Trump administration recently signed a landmark nuclear agreement with Saudi Arabia, reversing a years-long stance towards a key American ally in the Middle East. Labelled a ‘peaceful nuclear co-operation agreement’ this sits alongside a ‘bilateral safeguards agreement.’

However, has it kicked off a Middle East nuclear arms race?  

It comes in the wake of joint American and Israeli attacks on Iran’s nuclear facilities and Trump’s insistence that Iran can never develop a nuclear capability. This remains one of the many stumbling blocks as the US and Iran seek to end the current conflict in the Gulf.

Signing a nuclear pact in the Middle East will no doubt further raise tensions in a volatile region. Since 2018, Saudi Arabia has demanded that it be allowed to develop nuclear weapons if Iran is allowed to. The details of the nuclear agreement have not been disclosed but are believed not to include strict enforcement measures to block Saudi Arabia from developing a military nuclear programme in the future.

So why a deal now?

The deal would seem to send a signal that the US wants to keep regional allies ‘in the fold’ even if it means angering Israel in the process, as China seeks greater influence in the region. Iran has supported the Yemen-based Houthi rebels, which have attacked Saudi Arabian oil tankers and infrastructure in the Red Sea as it seeks to broaden the conflict in the region. Saudi Arabia has undertaken retaliatory attacks on the Houthi rebels as well as against Iranian proxies in Iraq, so it is another key ally for Trump in the region.

It will take a decade, if not longer, for Saudi Arabia to build nuclear power plants, but the agreement lays the foundations – one day, for a military nuclear capability.

Trump has not only reversed America’s years-long stance towards the Middle East, but he may also have started a nuclear arms race. As if the Middle East was not already dangerous enough!

What have we been watching?

Government bond yields are rising on renewed global stagflation fears due to events in the Middle East, with long-dated yields reaching multi-year highs. Meanwhile, rising concerns about global warming and drought contributed to a further rise in agricultural prices, with wheat climbing by 10% by the end of the month.

Despite this, it was another good week for global equities, although AI companies saw continued volatility. Markets also continued to be dominated by the performance of the mega-caps, a topic we recently covered in Alpha Bites: The rise and rise of mega-cap US technology stocks. For example, last week, the US ‘Mag 7’ jumped by over 4%, as Microsoft and Amazon soared in value by over 21% and 17% respectively, while Apple and Meta fell by 7% and 6%.

Over the weekend, President Trump said he had cancelled the potentially largest American attack on Iran since World War II, following appeals from Gulf states, particularly Saudi Arabia, and announced that fresh US-Iran talks would begin today. At the same time, Iran indicated that negotiations with Oman over arrangements relating to the passage of shipping through the Strait of Hormuz are in their final stages. Hopes of a diplomatic off-ramp to the conflict have seen Brent oil fall this morning by 5% to $83. We have been here numerous times in the past few months, but will a lasting ceasefire be forthcoming this time and will the Strait of Hormuz reopen? Control of the Strait and Iran’s nuclear programme remain key stumbling blocks to any deal.

Some of the recent volatility in AI stocks was partly attributed to the unwinding of a hedge fund, ‘Situational Awareness’, which was reported to be 4-5x leveraged and had taken the wrong view. The value of its funds under management was said to have fallen from $45bn to $10bn over the month. Ouch! Fund manager Citadel was reported to have bought some of its assets at a discount.      

The outcome of events in the Middle East remains vital for the global economy, but particularly the UK. Over the weekend, the EY Club warned that the UK risks sliding into recession in 2027 if the Strait of Hormuz remains closed to shipping while inflation could rise to 6.4%. This comes as the UK farming industry warns the decline in crop yields due to drought and heat could increase wholesale prices for vegetables. Last week, the Bank of England (BoE) kept UK interest rates on hold, and the decision was accompanied by rhetoric that it was not edging towards an interest rate hike. The chances of a UK interest rate increase in September have currently fallen from 60% to 30%. The UK 10-year gilt yield remained just above 5%.

The European Central Bank (ECB) also kept interest rates on hold but signalled that an increase in September was probable. The German 10-year bund yield climbed to a post-2011 high of 3.2% following the ECB meeting.

In the US, the Federal Reserve (Fed) also kept interest rates on hold, but new Fed Chair Kevin Warsh offered little guidance behind this decision. Markets dialled back expectations slightly for a US interest rate increase by the end of 2026. However, concerns about events in the Middle East saw the US 10-year Treasury yield climb above 4.7%.

Co-ordinated intervention by the US and Japanese authorities saw the Japanese yen rally strongly, with its biggest weekly gain against the US dollar in almost two years. This followed comments from US Treasury Secretary Steve Bessent, who said that the yen seemed ‘very undervalued’ and reported that the Federal Reserve had undertaken a rate check on the yen against the euro. Meanwhile, the Bank of Japan left interest rates unchanged at 1% but raised its inflation guidance and indicated further discussions on interest rate policy will be taken in September.

Finally, a glut of power from the UK’s wind farms has added nearly £1bn to energy bills according to researchers. Compensation is paid to wind farm operators for unsold power generated. The problem seems to stem from the construction of wind farms in remote locations in Scotland with inadequate grid connections. Six terawatts of power are estimated to have been wasted in the first half of 2026 alone. Energy bills are a hot potato and a key element in the cost-of-living crisis, so will these compensation payments prove to be an embarrassment for our new PM?

The post Middle East Nuclear Powder Keg first appeared on Alpha Portfolio Management.

In Chinese, Moonshot AI translates to ‘Dark Side of the Moon’, and the company is one of China’s six AI ‘tigers’.

Less than 18 months ago in Alpha Bites’ DeepSeek-AI’s Sputnik moment, we highlighted the shock for America’s AI (artificial intelligence) industry dominance, which was being challenged by China’s DeepSeek-R1.

Now, America’s AI industry has received a further ‘Sputnik’ shock as Chinese AI start-up Moonshot AI has released a large language model with capabilities approaching the likes of US AI pioneer Anthropic.

Chinese AI disruptors are gaining ground in the US. Their AI models appear to be cheaper, open and intelligent.

Chinese AI companies such as DeepSeek and Moonshot are pricing their AI models significantly cheaper yet with performance approaches that of higher-end systems, implying a materially lower cost-to-intelligence ratio. Furthermore, the Chinese AI models are being increasingly released as open-weight systems, allowing developers and enterprises to download, modify and run them locally, whereas US AI companies have largely pursued closed, proprietary models. Moonshot’s K2.6 AI model is reported to be about a third of the cost of Anthropic’s Opus 4.8 model.

Meanwhile, Anthropic has accused the Chinese AI companies of ‘industrial distillation attacks’ on its models whereby Chinese AI labs are training smaller AI models on the outputs of its more advanced systems.

The Moonshot news comes as markets have grown increasingly concerned by the vast sums that some US tech businesses are investing in AI datacentres and AI model development – but without proven returns on capital. The risk is that the new Chinese AI models erode the scarcity premium embedded in proprietary models, accelerating a shift towards commoditisation, leading to tighter profit margins but faster global adoption as open-weight systems lower barriers to entry.

The importance of the Moonshot news should not be underestimated and is a fascinating development to watch. It will no doubt be causing a few sleepless nights for US AI tech owners and investors!

What have we been watching?

Brent oil surged above $100 as fighting in the Gulf escalated into the Red Sea and government bond yields rose on inflationary fears. Fortunately, global equities remained resilient, helped by hopes of rekindled US/Iran peace talks, US earnings, a modest recovery in US AI stocks and UK takeovers. President Trump also announced a new series of global trade tariffs!

After 13 consecutive days and nights of US and Iran tit-for-tat attacks, the US and Iran appear to be holding fire. Trump’s UN envoy said the president was ‘giving talks some space’ while Iran said it had halted retaliatory attacks against the US and its allies in the Middle East. Over the weekend Omani-mediated talks focused on navigation through the Strait of Hormuz. However, US ambassador to the UN Mike Waltz said that US forces remain ‘locked and loaded’ and that Trump is simply giving negotiations more space. Meanwhile, Trump has dismissed US media reports that the pause may reflect pressure on US stockpiles of Patriot missile interceptors, other weapons and a debate by the administration about the cost and effectiveness of further strikes. The situation remains fragile with Trump due to meet Israel’s PM this week and Iran warning it could widen the Middle East war if the US resumes attacks.

This morning Brent oil has fallen 6% to under $91 on hopes that the current pause in attacks, while falling short of a formal ceasefire, at least offers a path for further diplomacy. The main risk for markets remains energy security, both gas and oil, and the fact that shipping through the Strait of Hormuz remains severely disrupted.

Fears remain that the conflict could broaden into the Red Sea. The surge in oil and gas prices last week followed Iran-backed Yemen Houthi attacks on Saudi Arabian oil tankers and energy infrastructure in the Red Sea, which prompted retaliatory strikes by the Saudis. Iran will also no doubt be watching Israeli action in Lebanon as well as the increasing disturbances in the West Bank between Palestinians and Israeli settlers.

While energy prices have fallen this morning, last week’s escalation in attacks in the Middle East saw global stagflation fears resurface once again. Government bond yields move higher on fears that the world could be facing a prolonged inflation shock. This led markets to expect central banks to have to hike interest rates more aggressively. Indeed, market expectations for an interest rate increase by the US Federal Reserve (Fed) moved up from 14% to 38% last week. As a result, there were some big milestones for government bond yields. For example, the US 30-year Treasury real yield, which is adjusted for inflation, hit a post-2008 high of just under 3%. (The 10-year US Treasury yield is trading above 5%). The German 10-year bond yield, at one point, hit a post-2011 high of 3.2%.

In the US, Trump announced a new series of global trade tariffs to replace the temporary six-month ones that expired last week. The new tariffs range between 10%-12.5% and are broadly in line with the previous tariffs. The justification for the new tariffs is that 50 countries are guilty of using forced labour! Another crazy excuse to avoid a legal loophole. Interestingly, some of Trump’s original Liberation Day tariffs are reported to have been refunded with interest at 7%. Some $85bn has been repaid so far, with some estimates suggesting that up to $166bn may need to be repaid. The Liberation Day refunds contributed to a $120bn federal deficit in June compared with a $27bn surplus in the same month last year.

Finally, with more heatwaves predicted, demand for air conditioning is on the increase, but this will require more electricity. However, recent events in France show this may not be as easy as hoped. France derives 70% of its energy from nuclear power, but its ageing nuclear plants rely on water cooling. Rising water temperatures in French rivers have forced EDF to take multiple reactors offline. This led to a surge in day-ahead electricity prices and forced some energy-intensive industries to curtail production.

The post Moonshot AI first appeared on Alpha Portfolio Management.

Events in the Gulf have tended to overshadow the ongoing war of attrition in Ukraine. However, the conflict, now in its fourth year is being felt closer to home for many across Russia.

It is harder for the authorities to ignore the increasing number of Ukrainian drone and missile strikes deep into Russian territory, targeting oil refineries, darkening the skies over Moscow and St Petersburg. Russia, one of the world’s biggest oil producers, is struggling to refine enough fuel to meet domestic demand, leading to big queues at petrol stations.

Ukraine claims to have disabled 43% of Russia’s oil refining capacity. A significant number of Russian regions are experiencing fuel restrictions. It is thought to be affecting 50 million people – c. 35% of the population. This is leading to growing public discontent.

Ukraine has already attacked Russia’s ten largest refineries, but now Ukrainian drones have struck Russia’s biggest oil refinery in Omsk, which is 2,500km from the border. It has also attacked Russia’s shadow fleet, forcing Putin to suspend shipping in the Sea of Azov.

Putin has responded by attacking civilian targets in Ukraine, as its American supplied air defence capability is running low. America is believed to have used half of its Patriot interceptor missiles in Iran and is reluctant to supply more. However, Trump has offered to give Ukraine the right to produce Patriot interceptor missiles under licence to help defend Kyiv, but how easy this will be to do remains to be seen. At least it marks a shift by Trump away from Putin and towards Zelensky.

Tump continues to vent his frustration at his European NATO allies, many of whom, including the UK, are not ramping up defence spending as fast as he would like. At the recent NATO leaders’ conference, he warned that the US ‘could remove all our soldiers from Europe.’ He also continues to hope for a possible meeting between Putin and Zelensky to end the war in Ukraine. With so little trust between Ukraine and Russia, a lasting peace deal still looks like a long stretch.

Meanwhile, Trump continues to struggle to bring Iran to heel and is facing further US armed personnel fatalities. The escalation in the Gulf once again elevates the risks of global stagflation and nobody wants that!

What have we been watching?

The escalating conflict in the Gulf which has reignited fears about global stagflation together with fresh concerns around the US AI trade given the competitive threat from Chinese AI business models. The Philadelphia Semiconductor Index fell by almost 10% last week, marking the biggest weekly decline since Trump’s Liberation Day tariff announcement last year.

The conflict in the Gulf has intensified markedly over the weekend as the series of tit-for-tat attacks between the US and Iran continued. Three US service personnel were killed in separate Iranian missile attacks in Jordan and Iraq, while US strikes hit targets in multiple locations, including Iran’s main oil export facility on Qeshm Island. At the same time, Iran has broadened its retaliatory attacks beyond military sites, targeting critical infrastructure across the Gulf, including power and desalination facilities in Kuwait. More alarmingly, tensions have also escalated in the Strait of Hormuz, with Iran signalling a more assertive stance over shipping flows and claiming to have intercepted or attacked shipping attempting to transit the waterway. Prospects for any diplomatic breakthrough remain dim with Iran’s foreign minister suggesting that some nuclear issues ‘remain unresolvable.’  Iran has also asked Yemen’s Houthis to stand ready to close the Red Sea to oil shipments if the US hits Iranian power facilities.       

Following 9 days of US attacks on Iran and retaliatory strikes, Brent oil saw its largest weekly increase since April, rising by over 15%. This morning, following the further escalation over the weekend, Brent oil has climbed a further 3% to over $90. European gas prices have also started to rise again as concerns grow about gas production facilities in the Gulf region.   

In the UK, Andy Burnham takes office as Prime Minister today, with ministers to be appointed and policy plans starting to take shape. Markets are expecting the government to move further to the left, so the question is how far? The new PM is expected to take a more pragmatic approach to North Sea oil and gas given events in the Gulf. Meanwhile, the UK economy was a touch firmer than expected in May as GDP ticked up 0.1%, helped by a bounce in activity in the service sector.

In the US, softer than expected inflation data, with the CPI increasing by 3.5% in June, saw markets dial back the prospect of an imminent interest rate hike by the Federal Reserve.

China’s economy grew by 4.3% in the second quarter, which was down from the 5% growth seen in Q1. Domestic demand remains a major area of concern for the authorities, albeit exports remain strong, helped as China continues to flood markets with cheap EVs.

Finally, Elon Musk’s SpaceX recently became the largest ever initial public offering and its shares shot up from $135 to an intraday high of $225 in a very short time. Many US investors saw SpaceX as an AI play, as earlier this year it acquired Musk’s start-up xAI, best known for the chatbot Grok. However, its main business is the manufacture and launch of rockets and communications satellites called Starlink. At the beginning of this month, Starlink announced it was cutting the price of its services in Memphis, Tennessee, amid local concerns over a massive data centre project. This, together with volatility in AI stocks, has seen SpaceX shares fall by 45% from their peak. SpaceX currently operates at a loss on $18bn of revenue, but Musk is targeting $1trillion of revenue by 2030 – a fifty plus fold increase. Now that is shooting for the stars!

The post Russia’s Fuel Crisis first appeared on Alpha Portfolio Management.