by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with a look at the White House’s efforts to resolve global conflicts. We then turn to AI, examining why SpaceX’s earnings have lifted sentiment around the AI trade. Next, we briefly discuss Germany’s debate over nationalizing landlord assets and explain why US-Mexico trade talks broke down. We conclude, as always, with a review of the latest domestic and international economic data.

Easing Tensions: There are growing signs that the White House will push to end active conflicts in the coming weeks. Unconfirmed reports on Thursday hinted at an impending US-Iran truce, though those claims were quickly dismissed. Meanwhile, Ukraine appears to have softened its stance on US-led peace negotiations following accusations that SpaceX restricted its access to Starlink satellite internet. These diplomatic pressures come as the White House seeks to stabilize global energy markets ahead of the midterm elections.

• Washington remains skeptical about whether Iran is willing to hold talks before the midterm elections. While Iranian representatives maintain that negotiations will not resume unless the US lifts sanctions and ends its threats, White House officials claim Tehran is intentionally stalling to see whether the November outcome provides greater leverage. Also, a prominent Iranian official stated that Iran is still unwilling to relinquish any of its enriched uranium reserves.
• Meanwhile, Ukrainian President Volodymyr Zelenskyy met with European and US officials to discuss a potential framework to end the war in Ukraine. Following negotiations, which Finnish representatives described as “genuine progress” toward peace, Zelenskyy confirmed that full access to Starlink services was being restored. These diplomatic developments coincide with expectations that President Trump may meet with his Russian and Chinese counterparts on the sidelines of next month’s APEC summit.
• The ongoing conflicts involving Ukraine and Iran continue to disrupt two of the world’s most critical oil chokepoints. Before the disruptions, the Strait of Hormuz and the Black Sea export routes together carried roughly 23 million barrels per day. Constrained flows through these waterways have been a key driver of the inflation shocks of 2022 and, more recently, 2026. Resolving these conflicts is, therefore, central to easing price pressures.
• There is a strong possibility that the conflicts in both Ukraine and Iran could be resolved by 2027. If so, this would likely provide a powerful tailwind for markets by not only lowering inflation but also reducing the need for tighter monetary policy. However, the path forward continues to be uncertain, given questions about how many concessions the US is willing to make to secure a deal. While we remain cautiously optimistic, we advise investors against rushing to take on excessive risk.

AI Sustained: Recent earnings have helped sustain optimism that the AI trade is still alive. On Tuesday, SpaceX reported stronger-than-expected earnings, helped by a sharp increase in demand for its AI business. This revenue surge has eased fears that the infrastructure buildout is happening too fast, worries that have been heightened by concerns over companies’ ability to service debt amid rising input and borrowing costs. Earnings growth remains a barometer of AI momentum as the technology continues to account for a larger share of the economy.

• SpaceX, which went public in June, provided further evidence that AI companies can maintain strong business growth. In the third quarter, the company reported revenue of $14.6 billion, a 161% increase year-over-year that easily topped market expectations. While much of this growth was driven by recurring revenue from its satellite internet service, Starlink, SpaceX also experienced a major boost in demand for its Super Intelligence business.
• The earnings arrive as AI debt has become a gauge of the buildout’s sustainability. Alongside Oracle and CoreWeave, SpaceX has come under heavy fire over its leverage. Earlier this month, its five-year credit default swap spread rose to a record 194 basis points as it was reported to be in talks to raise $40 billion to buy Nvidia chips. As the AI infrastructure buildout grows increasingly expensive, these companies’ debt burdens are still a key focus for investors assessing whether the AI boom is entering a bubble.
• The AI buildout remains one of the primary drivers of US economic growth as the nation stakes its future on the technology. According to the Brookings Institution, if tech companies follow through on their projected $10.3 trillion in AI spending through 2032, the sector could contribute an average of 3.63% of GDP each year. By comparison, the infrastructure expansion is expected to account for a larger share of economic growth than historical milestones such as canals, railroads, electrification, and the internet.
• SpaceX’s earnings are likely to boost market sentiment regarding the sustainability of the AI boom, especially as Anthropic and OpenAI prepare to go public. The primary concern for investors continues to be whether demand for these products can keep pace with rising costs, particularly as demand pressures drive up inflation and heavy debt issuance lifts yields. So far, however, there are no signs of an imminent bust.

Nationalizing Property: German Chancellor Friedrich Merz has warned against efforts to nationalize assets owned by landlords. During a speech, he stated that protecting property rights and maintaining trust in a functioning market form the basis of a market economy. His remarks appear to address a push by Berlin politicians, including members of the Social Democratic Party (SPD), Greens, and Die Linke, to resolve the city’s housing crisis while fending off political challenges from the far right and far left.

Mexico Trade Talks: Trade talks between the US and Mexico broke down following pushback over steel tariffs. The negotiations appeared to be approaching an agreement, with Mexico working out an arrangement to lower US-imposed tariffs on metal derivatives. However, those talks stalled after White House officials raised objections regarding proposed concessions. While a deal is still likely, it is now not expected until after the midterm elections.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Today’s Comment opens with our analysis of Friedrich Merz’s warning regarding Russia. We then turn to AI, examining what the weak IPO of a South Korean cloud computing company reveals about the current AI boom. Next, we discuss post-midterm concerns surrounding defense spending, the outcome of the Alberta referendum, and the ongoing energy investment surge across the Americas. As always, we conclude with a review of recent domestic and international economic data.

EU Isolated? The European Union is increasingly concerned about Russia’s growing influence as Moscow builds closer ties with Washington. On Monday, German Chancellor Friedrich Merz warned that Moscow is seeking to disrupt democratic institutions within the EU. His warning comes amid signs of a deepening relationship between Russian President Vladimir Putin and the White House following a deal to supply diesel in order to lower US domestic prices. These worries are expected to further intensify calls for the EU to become more self-reliant.

• Merz believes the European Union has grown overly complacent about protecting itself against Russian threats. He explained that Putin feels threatened by European integration and liberal democracy, which has led Moscow to attempt to destabilize the region. His remarks come amid deteriorating relations between Germany and Russia; in September, Berlin accused Moscow of orchestrating a failed drone attack on Leipzig Airport in August.
• Merz’s comments appear to respond to a growing consensus that the White House is preparing to side with Russia in its war against Ukraine. On Monday, President Trump expressed openness to a trilateral meeting with Putin and Chinese President Xi Jinping at the upcoming Asia-Pacific Economic Cooperation (APEC) summit, provided the talks focus on nuclear weapons. His remarks suggest he may be willing to use Ukraine as a bargaining chip to secure a broader nuclear deal.
• As Europe becomes more isolated, it is seeking to become more self-sufficient. The region is exploring measures to lessen its dependence on foreign critical technology and appears to be moving toward developing its own independent military capabilities. This shift has already sparked friction with both the US and China, particularly as the EU moves to reserve portions of its satellite spectrum for European companies and restrict imports of Chinese hybrid vehicles.
• Despite the importance of unity, the EU often divides under pressure. Most notably, in 2025, the bloc failed to coordinate a decisive response to US tariffs after threatening action. As the US potentially shifts away from its traditional allies, maintaining cohesion will be a crucial test. Should the EU unite to forge a common strategy, its push for self-reliance may succeed. However, if member states prioritize national self-interest, the bloc risks unraveling, threatening the future of the euro.

Data Center Concerns: Fresh concerns about the sustainability of the AI boom have been raised following a disappointing IPO. On Monday, South Korean firm Elice saw its shares plunge as much as 38% during its debut. Its weak performance comes as investors reassess the value of AI companies amid fears that the rising cost of infrastructure will hurt their long-term profitability. Fears of an AI bust are likely to weigh on sentiment as several US companies prepare to go public in the coming months.

• Despite the weak performance, Elice still managed to raise $150 million in its IPO. The AI company plans to use the proceeds to purchase portable, modular data centers and related infrastructure to increase its overall capacity. Although retail shares were 400 times oversubscribed leading up to the launch, high initial demand quickly gave way to a selloff as investors grew more and more wary of stock valuations. This marked the worst opening day ever for a Korean IPO of this scale.
• Market sentiment surrounding AI has shifted following mounting debt concerns at cloud provider CoreWeave. Last week, the company saw its borrowing costs surge as investors began pricing in the risk that it might default on its debt within the next five years. Although these fears have eased slightly in recent days, lingering anxiety continues to weigh heavily on companies tied to the AI buildout, particularly South Korean chipmakers.
• While a drop in share prices following an IPO is not unusual, Elice’s weakness appears to reflect a broader trend. Over the past week, investors have questioned whether companies can service their debt given rising borrowing costs and input prices. These worries coincide with growing fears that intensifying competition among data center operators is depressing cloud computing rates, threatening future profitability.
• Elice’s weak debut raises the stakes for upcoming AI offerings, most notably Anthropic’s reportedly planned November listing. A strong showing from the Claude developer could reassure investors that AI momentum remains intact; a stumble, however, could amplify fears of a broader sector retrenchment. If the AI bubble bursts, value is likely to emerge in established enterprise software names.

Defense Cuts? Growing expectations of a Democratic sweep have started to weigh on defense stocks. Investors increasingly believe that if Democrats win control of both chambers of Congress, they could push for defense spending cuts to help narrow the deficit. That view rests largely on the expected winding down of conflicts abroad, including in Iran and Ukraine. While polls currently favor Democrats, we think an upset for them in the Senate is more likely than markets suggest. If we are correct, defense companies could rally after the midterms.

Alberta Stays: Alberta voters overwhelmingly chose to remain part of Canada in Monday’s referendum, with roughly 76% backing the remain option. The decisive result should ease concerns that the province was moving toward independence. The vote followed a push by separatists for a referendum, amid pressure from the US for Canada to become the 51^st state. This vote is unlikely to be the last separatist push, but the result suggests the risk of a successful independence bid remains low.

OPEC Dominance to End? Escalating conflict in the Middle East has triggered a surge in energy investment across the Americas. Capital is increasingly flowing into North and South America as the confrontation involving Iran and Saudi Arabia accelerates global efforts to diversify supply lines. While energy prices are likely to remain elevated in the near term, this expanding capacity in the Western Hemisphere should drive down global oil prices over the next decade, ultimately weakening the Middle East’s historic dominance over global energy flows.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with the latest on the war in Iran, as Iran-backed Houthi rebels in Yemen have again staged missile attacks on Saudi Arabian energy facilities. We next review several other international and US developments that could affect the financial markets today, including massive French demonstrations and rioting over the weekend and a new effort by artificial intelligence firms to use their own stock to counter negative public perceptions of AI.

United States-Israel-Iran: Saudi Arabia said over the weekend that it intercepted and destroyed ballistic missiles heading for some of its key energy facilities. The missiles were launched by either Iran or its regional proxies, just as reports over the last week have said Iran has found a way to increase its attacks on shipping through the Strait of Hormuz again. In response to the renewed threats to Middle Eastern energy supplies, global oil prices surged after the attacks, but they are down so far today. Near Brent futures are currently down about 1.3% to $108.42 per barrel.

United States-European Union: In an interview with the Financial Times, the US ambassador to the EU has warned that Washington might retaliate in a “devastating” way if the bloc goes forward with its proposal to reserve some of its electromagnetic spectrum for European telecom firms. Sources say the proposal would leave US and Chinese telecom firms with less spectrum for connecting European cellphones to satellites. The proposal is part of the EU’s effort to reduce its dependence on US technology.

Russia-United States-China-Ukraine: According to The Wall Street Journal, Russian President Putin proposed during an early October call with President Trump that he, Trump, and Chinese General Secretary Xi meet trilaterally to find a solution to the war in Ukraine. The summit could reportedly take place on the sidelines of the Asia-Pacific Economic Cooperation summit in Shenzhen, China, in mid-November. Importantly, Putin’s plan would exclude Ukraine itself. President Trump is reportedly mulling the idea but hasn’t committed to it yet.

• Now that US-Ukrainian relations have been strained by Ukraine’s attacks on Russia’s energy facilities, which have helped to spike global diesel fuel prices, it seems clear that Putin sees an opportunity for the major powers to gang up on Kyiv and force it into a peace deal consistent with Putin’s goals.
• As expected, European governments and supporters of Ukraine in the US are aghast at the prospect and have already started pushing back against the idea. If the White House ultimately accepts the proposal, US-European relations will likely deteriorate further, leading to new economic and financial tensions.

 US Artificial Intelligence Industry: AI startup Anthropic over the weekend pledged to create a “public benefit fund” into which it will deposit 5% of its shares. According to Anthropic, the fund, which would be worth about $48 billion at the firm’s current valuation, would be able to pursue “bolder approaches” to problems such as job losses from AI and “might explore large donations to traditional non-profits or direct distributions to specific populations.” SpaceX founder Elon Musk later pledged to give one share of his company to each child in the US.

• The pledges to directly or indirectly set aside AI stock to benefit the public appear to be a gambit to counter the growing public backlash against AI and its associated data centers.
• It’s not clear that such efforts will sway many opinions. Nevertheless, if implemented, the programs could broaden stock ownership and help build a stronger investment culture in the US.

US Fiscal Policy: In an interview, Elon Musk said the Department of Government Efficiency (DOGE) that he led last year failed to cut the federal budget deficit because the appetite to reduce spending “is not there at the presidency, the House, the Senate, or the judiciary. …If you try to solve the deficit and stop wasteful spending, you make a lot of enemies.” The statement illustrates the political obstacles to cutting outlays, even as powerful interests oppose hiking taxes — all of which underscores the current investor concern about rising federal debt.

France: On Saturday, at least 500,000 protesters across the nation took part in mass demonstrations against high living costs and poor education services, resulting in thousands of arrests and significant damage from rioting. The demonstrations underscore the rising social pushback in France against further public spending cuts, despite bond investors’ demand for austerity to rein in the budget deficit and reduce government debt, a situation similar to that in the US.

• Indeed, French bonds are selling off today as the protests suggest politicians won’t be able to cut spending nearly enough to bring the government budget into balance.
• The yield on France’s benchmark 10-year government bond has risen to 4.883% so far today.

China: Excluding price changes, third-quarter gross domestic product was up 4.5% from the same period one year earlier, slightly beating expectations and accelerating from the unusually weak annual rise of 4.3% in the second quarter. GDP from January through September was up 4.6% on the year, barely in line with the government’s full-year target of 4.5% to 5.0%. While Chinese GDP statistics don’t necessarily reflect actual performance, the recent weak trends and slight improvement during the summer seem consistent with anecdotal reports.

• The government’s industrial policies continue to encourage excess production that can’t be absorbed so long as consumer spending growth remains weak.
• As a result, Chinese producers still have a strong incentive to try to export their way to profitability. In turn, that has led to a surge in Chinese exports, producing trade tensions with major economies.

India: The Cockroach Janta Party (CJP) and other youthful protesters staged more demonstrations on Saturday to demand the resignation of the nation’s top electoral official for a controversial mass purging of names from election rolls. For the second time this month, police briefly detained CJP leader Abhijeet Dipke, but that wasn’t enough to stop the protests. The continuing demonstrations threaten to undermine Prime Minister Modi and could prompt investors to flee Indian assets.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our thoughts on rising concerns about the AI buildout. We then turn to geopolitics, examining the US’s potential decision to relax sanctions in response to growing voter pushback. Next, we briefly cover a bill to tax data centers, the possibility of another US strike on Iran, and an update to the debt outlook for an AI developer. As always, we conclude with a review of recent domestic and international economic data.

AI Slowdown: Concerns about speculative AI debt have fueled optimism that the Fed may not need to tighten monetary policy as aggressively. This shift in sentiment stems from a potential slowdown in the AI buildout, driven by doubts over whether certain data center operators can service their debt. The market reaction highlights the significant impact this expansion is expected to have on US Treasurys and provides Fed officials with additional factors to consider when making their rate decision later this month.

• Debt sustainability became a major concern for investors following a surge in credit default swap (CDS) prices for CoreWeave. Because CDS contracts function as insurance against default, their prices serve as a proxy for credit risk. On Thursday, the rising cost of these contracts implied a roughly 60% probability that the company would default on its debt within five years.
• Much of this worry comes from CoreWeave’s rising debt load and its perceived reliance on circular financing. Nvidia — acting simultaneously as a primary supplier, equity holder, and key financier — has funded much of the capital CoreWeave uses to purchase its graphics processing units (GPUs). Seeking to calm investors, Nvidia’s CEO noted that despite market fears over debt quality, CoreWeave does not require an additional backstop and its cost of capital is actually decreasing.
• Following the recent turmoil surrounding CoreWeave, investors rushed to safe-haven assets, driving up demand for sovereign debt. Yields on the 10-year US Treasury fell to their lowest level in nearly a month, while German government bonds also saw increased demand. This shift reflects growing investor expectations that debt concerns could slow the AI buildout, which has been a major source of demand-side price pressures across the economy.
• As the Federal Reserve prepares for its next meeting, officials are likely to weigh recent AI-related market turmoil when setting interest rates. Minutes from the September FOMC meeting reveal deepening concern among Fed leadership over AI’s impact on prices and the risk of broader economic contagion. Consequently, a potential slowdown in the AI buildout could alleviate some of these worries and reduce the need for a rate hike before December.

Sanctions Relief? The White House is seeking to ease energy market stress by relaxing some of its restrictions. On Thursday, it was reported that the Trump administration may allow shadow fleets from Russia and Iran to sell their fuel, in an effort to ease the strain on oil prices. The change is due to the weight that the president’s foreign policy has on voter sentiment going into the midterms. While the US plans to maintain pressure on its rivals after the midterms, the shift does represent another example of its lack of commitment to its hegemonic role.

• A proposed rollback of maritime restrictions would allow blacklisted vessels to be sold to legitimate operators and return to normal service. While not yet finalized, the move comes as the US loosens restrictions on Russian diesel and urges the EU to tap strategic energy reserves to relieve global market pressure. If enacted, these measures should help increase shipping capacity and lower freight rates over the coming weeks.
• The changing US stance has not gone unnoticed by its allies. European Union leaders have pushed back against Washington’s efforts to ease pressure on Moscow, growing suspicious of the White House’s foreign policy direction. Brussels has already signaled to the Trump administration that it will not unfreeze Russian assets unless Moscow halts the war. Furthermore, the EU is accelerating plans to develop an alternative to Starlink following disruptions in satellite support for Ukraine.
• A growing preference for domestic priorities over foreign commitments is driving a noticeable shift in US policy. Over the past five years, public approval across successive administrations has suffered under the weight of foreign entanglements. Geopolitical friction with Iran and Russia has proven particularly costly, as the resulting energy supply shocks inflicted direct economic pain on US consumers in the form of elevated inflation.
• A retreat from the US’s global hegemonic role will likely have profound implications for commodity markets. Historically, US leadership has provided systemic stability for global commerce by securing sea lanes and promoting open trade. A withdrawal of this support could accelerate market regionalization, as rising transportation and insurance costs make long-distance commodity trade increasingly expensive.

Data Center Pushback: Senators Bernie Moreno (R-OH) and Josh Hawley (R-MO) have introduced joint legislation aimed at taxing data center construction. Under the proposed bill, any state incentives — including loans and grants used to attract data centers — would face a 100% federal tax. While the bill’s chances of passage remain slim, the initiative underscores how lawmakers are taking an increasingly hardline stance on data centers to address voter anxiety surrounding the AI buildout.

New Iran Attack? The White House continues to hint at the possibility of resuming military operations against Iran after the midterm elections. On Thursday, the president stated he would not drop a nuclear bomb but refused to rule out using the “Mother of All Bombs,” a weapon powerful enough to rupture the lungs of those nearby. His remarks come amid widespread expectations that the US could resume military action post-election as part of an effort to eliminate Iran’s nuclear capabilities.

Anthropic Debt: While data center developers have come under scrutiny over debt quality, one leading AI lab is seeing a more favorable credit outlook. On Friday, Kroll Bond Rating Agency (KBRA) assigned Anthropic a credit rating just one notch below investment grade. Although the rating was based on selective disclosures that omitted core financial metrics such as free cash flow and EBITDA, the move is expected to bolster market perception of its debt and potentially pave the way for lower future borrowing costs.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with our thoughts on speculative AI debt. Next, we discuss growing signs that inflationary pressure is building in the economy. We then briefly cover the new ways that hyperscalers are getting communities to sign off on data centers, as well as the push by the White House to restart peace talks between Russia and Ukraine. As always, we conclude with a roundup of key domestic and international economic data.

AI Concerns: The market is beginning to show uneasiness regarding debt quality for companies tied to the AI infrastructure buildout. CoreWeave has become the latest to face scrutiny, with its debt falling into distressed territory. These rising fears over AI-related debt have triggered a rotation out of speculative bonds and into government debt as investors seek safer alternatives. Though this sentiment shift currently appears limited to a handful of companies, it could indicate a broader market trend ahead.

• CoreWeave’s weakness stems from concerns over its balance sheet as investors begin to price in a potential AI slowdown. As a specialized cloud provider, CoreWeave generates revenue by equipping data centers with Nvidia GPUs (Nvidia is also an investor) and renting out compute power to AI labs. Although demand for its services has surged, the company has taken on substantial debt alongside rising operational costs, raising questions about the sustainability of its rapid expansion.
• While CoreWeave remains the focal point, credit risk is spreading across the AI space. In recent weeks, credit default swap (CDS) spreads have widened for Oracle and SpaceX as investors gauge potential friction in the AI expansion. Five-year default probabilities derived from current CDS pricing sit at nearly 50% for CoreWeave, 20% for Oracle, and 16.5% for SpaceX, far above the 3% historical average for speculative-grade debt.

• The weakness in the AI trade comes as companies grapple with the rising costs of AI hardware, elevated borrowing rates, and declining compute prices. Following years of steady decline, semiconductor equipment costs have spiked to levels not seen since the dot com bubble. At the same time, higher government debt yields have pushed up corporate borrowing costs, making debt loads increasingly unsustainable, while cloud providers face growing pressure to cut prices to stay competitive.
• Beyond AI itself, credit markets are still our primary focus. If a moderation in AI investment results merely in a reduction of capital expenditure, the broader economy should remain resilient. However, if rising credit stress triggers a tighter lending environment across other sectors, the fallout could extend well beyond technology. So far, the evidence points to the former. If that holds true, it could even benefit AI labs, as excess capacity would likely push down compute prices.

Inflation Worries: Signs of mounting price pressures have fueled speculation that the Federal Reserve could raise rates again this month. The latest Beige Book reported a pickup in inflation across several districts, while September’s CPI report showed prices rising faster than expected. Together, the data has raised concerns that the Fed may be falling behind the curve on inflation heading into its October 27-28 meeting. Fed officials, however, continue to send mixed signals about their next policy decision.

• Half of the Federal Reserve’s 12 districts reported robust or intensifying price pressures in recent weeks. Some contacts across the districts cited higher oil and diesel prices, whereas others pointed to rising costs for other commodities, as well as tariffs and insurance. Firms also said higher input costs were squeezing margins, and some indicated a willingness to pass those costs on to consumers as they navigate heightened uncertainty.
• September’s CPI reflected similar inflation pressures. Headline CPI accelerated to 0.6% month-over-month from 0.4% in August, while the core index rose 0.3% for a second straight month. Both readings came in slightly above market expectations, and both were well above their pre-pandemic norms. In fact, on a non-seasonally adjusted basis, core CPI posted its highest September reading in over four years.

• While inflation continues to be a problem, a Fed hike is far from certain. For one, even though growth has been robust, there are indications that it isn’t being felt across the entire country. According to the Beige Book, seven of the 12 districts reported only slight or no growth in economic activity since the last report. Additionally, job gains, while better than last year, are still relatively sluggish, suggesting that firms may be feeling the effects of previous tightening.
• As the Fed heads into the blackout period this weekend, it continues to be unclear which way policymakers will lean. While most Fed officials appear to back at least one more rate hike this year, whether it comes in October or December remains up in the air. Markets now price roughly even odds of a hike this month after the September CPI report sharply raised expectations. Further Fed tightening would likely weigh on bond prices.

Tech Pays Up: Data center developers are evaluating direct cash incentives for local residents to ease community opposition. In Kansas, a real estate firm has partnered with major technology companies to offer households $1,000 annually over a 10-year period in exchange for supporting local development. The initiative comes as developers seek innovative strategies to overcome mounting public pushback against large-scale infrastructure projects.

Russia-Ukraine: The US is making renewed diplomatic efforts to bring Russia and Ukraine to the negotiating table. Recently, the White House floated to European allies the idea of unfreezing Russian assets to help restart talks. However, the proposal was met with minimal support from the European Union, which remained skeptical of its effectiveness. The initiative has raised fresh concerns about the long-term US commitment to Ukraine, particularly as both Russia and Ukraine continue to target each other’s energy infrastructure amid already elevated prices.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with an update on the escalating conflict in the Middle East, particularly as Saudi Arabia becomes more deeply involved. Next, we discuss how Fed officials continue to keep forward guidance alive even as the Fed chair tries to do away with it. We then briefly cover Fed Governor Lisa Cook’s decision not to attend a hearing, as well as the global pressure on Putin to join an energy truce. As always, we conclude with a roundup of key domestic and international economic data.

Broadening Conflict: The war in Iran continues to show signs of spreading across the Middle East. This week, the Houthis stepped up their attacks on Saudi Arabia, while Iran intensified its attacks on ships transiting the surrounding waterways. The escalation marks a sharp rise in regional tensions that has continued to push energy prices higher worldwide. However, while the conflict has added to price pressures, it is important to remember that not all regions will necessarily be affected equally.

• Saudi Arabia is being drawn deeper into the conflict as Houthi attacks target major cities, including Riyadh, hitting both civilian areas and critical energy infrastructure. To counter these threats, the kingdom has relied on a coalition of member states to help repel incoming strikes. This escalation comes as Saudi Arabia actively seeks alternative export routes to ship oil and relieve global supply strains caused by the conflict with Iran.
• Simultaneously, Iran has escalated its maritime operations. To sustain pressure on the Strait of Hormuz despite having its primary radar infrastructure destroyed by US strikes, Tehran adapted its strategy by relying on unarmed spotters to maintain surveillance and target identification for the Islamic Revolutionary Guard Corps. This tactical pivot has driven the sharpest increase in commercial tanker attacks since the war began in February.

• Iran and its partners are escalating attacks, adding to upward pressure on oil prices and weighing on US voter sentiment. However, the US oil market has been relatively sheltered from the disruption. WTI is trading at a substantial discount to its competitors, reflecting domestic supplies’ lower direct exposure to shipping risks in the Middle East. Meanwhile, US exporters still face soaring freight costs, making their crude more expensive to deliver overseas and helping sustain that discount.
• The recent escalation in the Middle East may reflect Iran’s desire to pressure the White House ahead of the midterm elections. Tensions could ease after the vote, when Tehran has a clearer sense of its negotiating leverage. Such an outcome would likely support US equities, but foreign markets, particularly those more exposed to higher energy costs, could offer greater upside if oil prices retreat.

Forward Guidance? While Fed Chair Kevin Warsh has been reluctant to offer insights into the central bank’s next moves, other FOMC members have been more vocal. On Tuesday, New York Fed President John Williams stated that he does not see a need for a rate hike in 2027. His remarks suggest that the rate-hiking cycle may be significantly shorter than markets currently price in. If so, this could provide much-needed relief for bond markets, which are presently under pressure on multiple fronts.

• Williams explained that while he has not ruled out another rate hike this year, he sees a path for inflation to decline next year. He noted that inflation could ease significantly toward the Fed’s 2% target as the effects of tariffs and energy shocks begin to roll off. This cooling, along with easing stress in other areas, should help offset price increases driven by the ongoing AI buildout.
• Williams’ commentary on the rate path follows similar remarks from other Fed officials. Cleveland Fed President Elizabeth Hammack, a voting member this year, advocated for returning interest rates to restrictive territory to contain inflation. Meanwhile, Richmond Fed President Tom Barkin, an alternate voter this year who becomes a full voting member next year, also maintained that monetary tightening could occur before the end of the year.

• Expectations surrounding Federal Reserve policy remain a primary driver of rising long-duration bond yields. The Fed’s more hawkish posture has significantly influenced long-term rates, helping push the 10-year Treasury yield to its highest level since 2002. Since the Fed’s September FOMC meeting, at which officials raised rates for the first time since 2023 and the dot plot signaled at least one further hike this year, the 10-year yield has risen roughly 30 bps.
• Although Chair Warsh has been reluctant to offer forward guidance, markets have been able to read signals from the rest of the committee. This increased communication could reduce some of the volatility in the bond market. That said, recent remarks from Fed officials suggest they still favor at least one more hike, while the path in 2027 remains uncertain. Signs of dovishness could weigh on bond yields over the coming months.

Fed Pressure: Fed Governor Lisa Cook will not attend a November 5 White House hearing on allegations of mortgage fraud. Her attorney said that Cook will be in Europe that day on official business at financial and monetary policy meetings, and any hearing would need to take place no earlier than the conclusion of the December 8-9 FOMC meeting in order to allow time to prepare. The inquiry is the White House’s latest attempt to remove Cook from the Federal Reserve Board; so far, she has not been charged with a crime.

Ukraine Ceasefire: German Chancellor Friedrich Merz and Ukrainian President Volodymyr Zelenskyy have requested that Russia agree to an energy truce. The move follows US President Donald Trump’s announcement of a diesel deal with Russian President Vladimir Putin, which included an agreement that Russia and Ukraine would refrain from attacking each other’s energy infrastructure. However, the deal quickly collapsed when neither side formally acknowledged the arrangement, leading Russia to strike a Ukrainian oil refinery and prompting Ukraine to retaliate in kind.

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