Global Markets Balance AI Optimism Against Oil Shock and Rate Hike Risks
Market Volatility Amid AI Growth and Geopolitical Tensions
By Naomi Rovnick
LONDON, June 9 (Reuters) - Tumult on world markets in the past week shows the economic outlook is now on a knife edge, investors said, with equal odds of an AI boom lifting growth or oil shocks from the U.S.-Iran war pushing stocks and bonds into a tailspin.
Global equities hit an all-time peak on June 3, suffered their worst day since October two days later, and have spent this week reversing course constantly in line with U.S. President Donald Trump's volatile rhetoric about Iran and rapidly shifting bets about when the Strait of Hormuz shipping route might reopen.
Investor Sentiment and Market Expectations
"Most investors have been running with the assumption that within less than three months we reach a reopening of the strait," Lombard Odier Investment Managers' head of macro and multi-asset portfolio manager Florian Ielpo said.
"If we move to expecting oil prices of $95 or more for many more months, that would be a complete change of view and a stagflation outlook," he added. "The market is walking a narrow line."
Correlated Asset Movements
ALL TOGETHER
As interest rate and inflation markets, the oil outlook and tech investment bets have become more correlated, many assets that are not obviously linked have moved together in recent months.
AI-driven optimism has buoyed Wall Street stocks and U.S. household wealth, boosted official growth forecasts for years to come, driven breakneck expansion for Asian exporters and lifted sentiment towards assets across the globe from global bank shares to Greek debt.
Taiwan expects the best economic growth in 16 years for 2026 thanks to blockbuster semiconductor exports, while global tech spending has sent imports and exports surging in China, the world's biggest consumer of commodities.
That's one reason why Britain's FTSE 100 index, which is stacked with energy producers and miners, has halted its usual habit of moving inversely to so-called growth stocks in the tech industry and begun rising alongside them instead.
Risks of Inflation and Rate Hikes
The Flipside of Tech-Driven Growth
THE FLIPSIDE
These tech-driven correlations will also make it much harder to find places to hide if fears about inflation and rate hikes denting AI spending start driving world markets, investors warned.
After markets moved to pricing 70% odds of a U.S. rate hike on Friday, South Korea's won hit 17-year lows and the nation's tech-heavy share Kospi index hurtled almost 9% lower within hours.
Alessia Berardi, global head of macro-economics and emerging markets at the research arm of Amundi, Europe's largest asset manager, said she still favoured equities, and that markets were not pricing a long-term Hormuz shutdown.
"But a repricing of (interest rate) policy along with higher oil prices and shortages will mean stagflationary risks, and some countries are already getting into a recessionary outlook," she cautioned.
Energy supply scares are already biting into economies that are not twinned with tech like Germany and India.
Investment Strategies in Uncertain Times
Buy the Dip?
BUY THE DIP?
Professional asset managers have become accustomed to short-term geopolitical shocks causing rapid sentiment switches since Trump's so-called Liberation Day tariff blitz in April 2025 bruised U.S. stocks before retail investors piled into a stunning recovery trade.
"If you think that the Strait stays closed for a long period of time and that we will get demand destruction and inflation, that’s the time for stagflation positioning in your portfolio," Invesco's global head of research Ben Jones said.
"History has taught us that these geopolitical risks shall pass and when they do, you tend to get markets rallying very quickly," he said.
In the days after Trump's tariff announcements sent shockwaves through world markets, Wall Street's S&P 500 share index dropped sharply, then executed a fast and ferocious rebound. Equity and bond prices also swung by the most since the COVID-19 pandemic.
Hedging Against Volatility
Derivative Strategies and Safe Havens
HEDGING
Michael Nizard, head of multi-asset at Edmond de Rothschild Asset Management, said he was topping up on derivatives that profited from stock market volatility.
Other asset managers widely said they were now buying more insurance products instead of more equities.
Carmignac investment committee member Kevin Thozet said he was increasing holdings of U.S. inflation-linked debt because market forecasts for U.S. consumer prices were complacent. Data centre construction would be capital intensive and drive up energy prices, he said.
Lombard Odier's Ielpo said he was hedging market bets by holding onto stocks while cutting back on government debt, which can be a safe haven but also moves in line with inflation forecasts.
Bond Market Volatility
German Bund yields are close to 15-year highs as the price of the debt has fallen during the Iran war, while 10-year Japanese yields are touching three-decade highs.
A measure of bond market volatility is around 5% above its level prior to the start of the war. Stock market volatility is close to its long-run average, but 35% higher year-to-date.
(Reporting by Naomi Rovnick; Editing by Jan Harvey)
