Blog doce magia

A Reuters Open Interest newsletter

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

Upbeat tech earnings pushed the Nasdaq, S&P 500 and MSCI All Country indices to within a whisker of their all-time highs on Wednesday, while stocks and bonds also welcomed U.S. inflation figures that appeared to reduce the chances of the Federal Reserve raising interest rates next month.    

In my column today, I look at the recent surge in U.S. hyperscalers' CDS spreads, which reflect concern that these companies' increased borrowings and deteriorating free cash flows could trigger default or a 'credit event'. The CDS moves are eye-catching, but overstate the risks.

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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*Steepness and light

The latest U.S. inflation figures were bang in line with expectations. Coming on the heels of a soft employment report, the outlook for September's Fed meeting is tilting more towards rates being kept on hold. Before the CPI data, traders were split 50-50 on rates being kept unchanged or raised by 25 bps. Now, that's 60-40 in favor of no change. Relief for Fed Chair Warsh, perhaps, although the center of gravity on the FOMC is shifting towards hiking.

One clear market consequence of these two key data releases and Warsh's poorly-received press conference last month has been steeper yield curves. The 2s/10s curve has steepened by around 20 basis points, mostly a 'bull steepening' led by the short end. The 2s/30s curve is almost 30 bps steeper, driven by both short end buying and long end selling. Both curves on Wednesday hit their steepest since May. Policymakers won't be too worried, providing the long end remains well-contained.

* Record deficit

Which brings us onto the U.S. budget deficit. Last month, it soared to $432 billion, a record for July and almost 50% wider than July last year. It was the biggest deficit for any month since early 2021 when the government was spending trillions in pandemic-relief programs. This brings the deficit in the first 10 months of fiscal year 2026 to $1.8 trillion, already more than the full-year 2025 total. The gross national debt is about to hit $40 trillion.  

The figures will reinvigorate cries for Washington to - belatedly - rein the deficit in somewhere closer to 3% of GDP from more than 6% currently. But war, election promises, polarized politics and a desire to let the economy run hot mean that is wishful thinking. It is a factor behind the Treasury moving more of its funding into bills, and is a source of pressure on the long end of the bond market. 

* Norway to go!

Norway's $2.3 trillion ‌sovereign wealth fund, the world's largest, posted a record profit of 1.75 trillion Norwegian crowns ($184.3 billion) in the first half of the year. The fund, which invests state oil and gas revenues, owns on average 1.5% of all listed companies globally, making it the world's largest single investor. 

Putting 'stock vs flow' arguments aside for a second, that six-month profit is more than the nominal annual GDP of around 130 countries, and vindicates Oslo's prudence and long-term planning in setting the fund up over 30 years ago. Other energy-rich countries run similar SWFs, of course, but not all. With public finances strained and governments under pressure like never before to fund national security, infrastructure and public service needs, many probably wish they did. Like Britain.

Investor hedging against the risk of U.S. hyperscalers' defaulting on their mushrooming debt is surging, reflecting deepening concern over how the AI buildout is being funded. But the chances of a "credit event" are still remote.

The explosion in many of these AI giants' credit default swap (CDS) spreads makes for striking charts and juicy headlines. They have borrowed too much, free cash flows are evaporating, and a financial reckoning of some sort is looming. And given how much spending, economic growth and stock market gains these multi-trillion-dollar behemoths have generated in recent years, failure to meet their mounting debt obligations would be potentially catastrophic.

These are the worst-case scenarios some observers say CDS markets are flagging. But while it's true many of these companies' balance sheets and future income prospects are looking shakier than they were only a few quarters ago, a sense of perspective is required.