12 tail risks, from AI spending to France and oil, threaten markets

Mettis Global reported that Gavekal Research sees financial markets and major economies coping with an abnormally high number of tail risks, alongside rising bond yields, dearer energy and wider spreads on junk bonds. In its report, Heads, Or Tails?, the research firm said it cannot recall a period since its 1999 launch when markets faced so many such threats. The paper identifies twelve risks, looks at ways to protect portfolios, and highlights investments that might limit losses regardless of how events unfold.

According to the report, markets are pricing in three rate hikes apiece from the Federal Reserve and the ECB, though it sees those moves as unlikely. It warned that a retreat from tightening expectations could accelerate if spending on artificial intelligence disappoints. The paper also flagged France, where some investors regard French assets as too risky for their careers to own.

Turning to energy, the paper notes that China is reportedly buying oil delivered to Shanghai at about US$120 to 150 per barrel, freight included, a move the report describes as the first of its kind in over ten years. It sketched three oil scenarios tied to events after the US midterms, ranging from about US$60 to US$200 per barrel, and noted that American defence shares have lagged the MSCI US gauge by 35 pc since the conflict with Iran began.