Perspectives Financial Markets

Key findings

• Interest rates/bonds: Credit spreads across the TMT sectors (technology, media, telecommunication) are widening
• Equities: European high-dividend stocks offer attractive buying opportunities
• Currencies: Near term, we expect no further EUR weakness versus the USD or CHF

Triggered by higher interest rates and elevated bond supply, credit spreads in the telecom, media and technology (TMT) sector widened in October. This drove higher spread volatility across the AI infrastructure ecosystem, including AI cloud providers, firms linked to leading AI developers, and BBB/BB-rated data centre project finance bonds. As a result, the debate over AI capex versus AI revenues and circular AI financing intensified.

Combined with elevated AI-related equity valuations, market expectations became increasingly optimistic, leaving little room for weaker-than-expected earnings. This triggered a broader rotation away from highly valued and rate-sensitive AI credit exposure. Expectations of lower AI capital spending would imply weaker data centre construction activity, reduced corporate borrowing needs, softer commodity demand, and a diminished growth and inflation impulse. Hence, an unwinding of the “AI trade” would be supportive for government bonds.

In credit, fundamentals remain solid, although risks such as geopolitical tensions, volatile energy prices and higher rates persist. We therefore remain neutral on USD IG and HY spreads. We view the widening in French sovereign and EUR IG spreads as overdone and adopt a positive stance on EUR IG. Given elevated uncertainty, we are neutral on 2-year and 10-year government bond yields across the US, eurozone and Switzerland over a 1-month horizon.