2026-09-01 Tuesday

US tech giants are increasingly funding AI-driven capital expenditure through euro-denominated bonds, with their share of gross new euro non-financial corporate issuance now just shy of 10%. Their share in reverse Yankee issuance almost doubled between 2025 and 2026, and they account for 15% of the increase in domestic euro corporate bond holdings in the year to March 2026. This brings diversification but also risks of crowding-out and spillovers to sovereigns, as the euro now accounts for close to 10% of their outstanding bonds, and their projected capex needs exceed $1trn by 2028. The weight of the tech sector in euro benchmarks remains around three times lower than in US indices, so their presence could grow further, potentially compressing spreads and altering the risk profile of the euro corporate bond market.

The global financial system has absorbed the supply shock from the Middle East conflict, but vulnerabilities remain elevated, according to the FSB Chair’s letter to G20 Finance Ministers and Central Bank Governors. Markets remain vulnerable to a potentially disorderly correction that could spread across borders, particularly given fragilities in sovereign debt markets, including elevated issuance, shortening maturities, and the increased use of leverage by some market participants. The letter stresses that the issue is not simply that investors are borrowing more, but that leverage is interacting with high valuations and market concentration, in particular the increasing cross-investment between AI companies and hyperscalers, in a way that could amplify a future market correction.

Energy and other commodity prices have fallen back from their initial peaks, but remain sensitive to news on the conflict. While leverage can reinforce rising markets, it can also intensify declines when sentiment turns. Frontier AI models introduce new cyber risks that could spread across borders, requiring enhanced resilience and international cooperation. Frontier AI may have the ability materially to alter the speed, scale and economics of cyber risk, which could undermine market confidence system-wide, especially due to highly concentrated third-party service providers.

The letter highlights elevated sovereign debt vulnerabilities and rising market interest rates, which directly affect government bond markets and fiscal financing costs. Hedge funds exposed to sovereign debt increase contagion risk, relevant for bond market stability. For investors, the mechanism is clear: as leverage and concentration amplify a potential correction, sovereign bond markets could face sudden repricing, raising funding costs for governments and triggering broader risk-off moves across asset classes.

Indian bank credit growth accelerated to 16.5% year-on-year in June 2026, nearly doubling from a year ago, with private corporate sector borrowing jumping to 21.1%. Deposit growth lagged at 11.5%, widening the credit-deposit gap and pressuring banks' funding costs. The surge in credit, broad-based across sectors, signals robust demand but also raises the stakes for the RBI's liquidity management as it balances growth against inflation.

The current account surplus is set to shrink from $39bn in 2025 to $48bn in 2026 and to roughly a tenth of its 2025 level by 2029, reflecting lower oil prices and rising imports.

The key rate path implies a cumulative easing of over ten percentage points from 2025 to 2029, a gradual normalization after the tight policy of 2025.

For investors, the projected rate decline reduces borrowing costs for the government and corporates, potentially lowering yields on OFZ bonds. The shrinking current account surplus implies reduced foreign exchange inflows, which could pressure the ruble and influence the central bank's reserve management and intervention decisions. The forecast carries uncertainty, as export and import data for 2025 have not yet been published by Rosstat, and the 2026 key rate range is wide at 14.5%.

Indonesia's June 2026 economic indicators reveal a moderate inflation of 0.44% month-on-month, a trade deficit including oil and gas of under half a billion US dollars, and GDP growth of 5.29% year-on-year in Q2 2026. This combination signals potential external pressures on the rupiah and fiscal balances, influencing Bank Indonesia's monetary policy stance and the attractiveness of IDR-denominated bonds.

The GDP at constant 2010 prices reached IDR 3,576.21trn in Q2 2026, with a quarter-on-quarter growth of 3.73%. Domestic direct investment (PMDN) totaled IDR 248.84trn in Q1 2026, while foreign direct investment (PMA) reached $15.15bn. The Farmers' Terms of Trade varied widely, with the highest in Bengkulu at 196.87 and the lowest in Maluku at 92.68. These figures underscore the uneven economic recovery across sectors and regions.

The market effect: the trade deficit and money supply contraction may pressure the rupiah, prompting Bank Indonesia to consider rate adjustments, which would affect bond yields and investor returns.

Bank Indonesia and the Monetary Authority of Singapore operationalised the Local Currency Transaction (LCT) Framework on 31 August 2026, allowing settlement of bilateral trade and direct investment in Indonesian Rupiah and Singapore Dollar. This follows a 2022 MoU and 2026 operational guidelines, with appointed Cross Currency Dealers in both countries. The framework reduces reliance on third currencies, lowering transaction costs and supporting ASEAN financial integration. It was announced in a joint statement from the two central banks, which had been largely unreported. The next step is the first settlement under the framework, which would confirm operational readiness.

A Finance and Economics Discussion Series paper by Hie Joo Ahn and Jeremy Rudd estimates state-level trend unemployment rates (trend U-star) based on trend components of unemployment inflows and outflows across durations. The estimates vary substantially across states, with long-term unemployment contributing relatively little in agricultural states but more in Rust Belt and Sun Belt states. Higher education and aging lower trend U-star, while industrial structure and labor-market rigidities have mixed effects. The paper was released on the Fed's website, hidden among routine publications. To gauge its impact, watch whether the Fed's Summary of Economic Projections begins citing state-level dispersion in its policy discussions.

An International Finance Discussion Paper studies how increased uncertainty about U.S. asset returns affects global asset prices and exchange rates in a two-country model with intermediary balance-sheet constraints. Empirically, uncertainty shocks widen global credit spreads, appreciate the dollar, and increase currency risk premia. In the model, higher uncertainty tightens intermediary constraints, amplifying these effects. The paper was published on the Fed's website, a routine release that escaped broader attention. The key figure to watch is the response of the dollar index to a one-standard-deviation uncertainty shock, which would quantify the channel's magnitude.