Global Financial Markets

The stock markets and the economy have been running on credit: companies are borrowing heavily to invest in AI, while investors increasingly buy shares with borrowed money, driving prices even higher. The resulting rise in share values then serves as collateral for loans used throughout the economy. As long as oil prices and inflation keep rising and central banks are forced to raise interest rates, this self-reinforcing mechanism becomes increasingly vulnerable, at a time when monetary and fiscal policy have little room left to intervene.

The tightness in the market for oil products (diesel, petrol) is greater than the prices of Brent and WTI would suggest. This also means that the inflationary risks associated with a closure of the Strait of Hormuz are greater, and this, in turn, will play a major role in central banks’ interest rate policy. In this report, we explain why this is the case and what it means for key interest rates, exchange rates and equity prices. 

It is striking how differently economists and analysts view the implications of the Iran deal and the rise of AI for economic growth and inflation. If we look at the charts for gold, the yield curve, the S&P 500 and the dollar index, the markets’ expectations are quite clear. In this report, we examine what these market expectations are, how we view them, what role China’s rise plays in this context, and what this means for key interest rates and exchange rates.