27/08/26

A Brief Summary Of The Current State Of Global Financial Markets

This is going to be a brief bird's-eye view of what's currently going on in the markets. There won't be much in-depth analysis or many data figures quoted, just a look at the market conditions the world is currently enduring. 

There are 2 main drivers of the markets today: AI capital expenditure and Modern Mercantilism. 

AI Capital expenditure has been a driving force in equity markets since 2024 and has only accelerated since then. If we were to look at only US equities, the 2 largest drivers of US economic growth have been financial services and spending on AI infrastructure. Much of the expense on AI right now is on data centers, rather than the accumulation of data to better train these models. Much of the data pipelines these big tech companies need are already in place, so my prediction is that we won't be seeing major growth in the stocks of data & analytics companies. Many of the bigger private ones will likely be acquired or have been acquired; a good example is Scale AI being acquired by Meta in June 2025 for $14.3 billion (for a 49% stake). The industries and companies that benefit from data center construction itself would be those related to Construction & Engineering, Power & Cooling equipment, Hardware & Chip manufacturers, and Developers & Real Estate. You might be asking why I haven't listed software and technology companies themselves. Data center construction is actually not poised to make any of these companies receive profit, let alone sustainable, consistent profit, anytime soon. Why is that? It's because the relationship between spending on AI data center infrastructure and the magnitude of improvement in these AI models is not such that, eventually, if these companies spend enough, they lower future research and development costs of models they want to create in the future. Why are technology companies so valuable? It's because a company like Microsoft can create a product like Word or Excel, then ship it with no further inventory, logistics, or production costs. All they need to spend is on brief marketing, and if the product is good, much of the customer acquisition costs will be further reduced due to accelerated word-of-mouth recommendations, which is extremely prevalent in software products. This is why technology companies, especially those focused on purely software and services like Microsoft, Meta, and Google, have always enjoyed huge profit margins and high market capitalizations. The same cannot be said about AI companies, or the AI sectors within these larger technology companies. When a company spends a lot of money on data centers, it may get a model that performs better than most of its competitors. However, the work doesn't stop there. When they realise they need an even better model in a couple of months as they see competitors catching up, they'll spend even more money on data centers and other AI infrastructure. AI is not a product where you invest in R&D once and enjoy the dividends of the initial investment into the foreseeable future. It is a constant commitment of capital. You can't expect a company to become profitable if it has to spend billions developing a new model 3 months after it launched its old one. It's a never-ending doom cycle of more and more spending with little return to see. This is precisely why such large hundred-billion-dollar figures are quoted by these AI companies as the money they need to spend on AI development. They may reach AGI, but in a few months they'll need even better AGI because their equally large competitors will catch up. This is why one should look into which companies benefit from this insane expense on research & development infrastructure for AI, rather than the AI companies themselves (who won't see profit for a long time, if ever).

Secondly, we have Modern Mercantilism driving global markets everywhere. Modern mercantilism is an economic system where governments actively manage trade and industries to build national power. Nations use high tariffs, state subsidies, and export controls to protect domestic manufacturing, secure critical supply chains, and reduce trade deficits instead of relying on open, free-market globalization. Now we can talk all day long about how tariffs are bad for the economy and how they'll cause consumer-related expenses to go up, etc. However, something much more interesting is that this modern mercantilism is also having a negative effect on US bond markets. The US deficit is currently at around $40 trillion. The spending by the US government to secure critical supply chains (with the political branding of bringing jobs back home), as well as fight foreign nations for resources (mostly oil), power, and influence (to prove to the world that the US can still influence global markets) is proving too much of a cost to a nation that already has huge (increasingly growing!) non-negotiable spending costs on social welfare and debt service payments (interest in the $40 trillion). Modern mercantilism has also threatened the US's privilege of having the world's reserve currency, which resulted from the world losing faith in US treasuries and selling them off slowly but continuously. As we saw recently, usually when the Federal Reserve lowers short-term interest rates on short-term Treasury notes, the long-term yields on the 20- and 30-year Treasury bonds are not automatically following and going down.  Rather, the market is actually demanding even higher yields on these bonds. The disconnect between short- and long term interest rates is a clear indication that the world no longer automatically trusts US bonds as a safe-haven asset, thus demanding higher yields. It's also the reason why central banks around the world have been selling U.S. Treasuries and instead stacking up on gold. Japan was recently about to sell large quantities of U.S. Treasuries when the United States intervened in foreign exchange markets to buy Japanese yen, which helped reduce the pressure on Japan to sell off its holdings of U.S. Treasury bonds. For context, the Japanese yen had hit a 40-year low against the US dollar, and the Japanese government wanted to raise cash to support its currency. The US could not afford to have another seller of its bonds when its bond markets are already bad due to a lack of trust that the government can pay its debt. Beyond that, the US has also been doing huge quantitative easing and buying back long-term US treasuries. The U.S. government wants to shift debt from long-term to short-term by using cash from newly issued short-term bills to buy back older, long-term bonds from the open market. When debt is in short-term bonds, they can control the interest rate on it, thus reducing debt service payments on their deficit. Another way they're trying to reduce debt burdens is through the use of stablecoins, which are backed by US Treasury securities. The hope is that even though the world doesn't wanna buy US treasuries anymore, people from developing nations that suffered hyperinflation will use stablecoins backed by US treasuries to transact in US dollars in order to be able to get around using the insanely worthless currencies of their nations. Essentially, the goal is to push the debt onto these people instead of the bondholders. 

Anyways, that's a summary of what's happening right now. Didn't include many pictures of data charts in this one, but for future in-depth stock/industry/nation specific analysis, I shall try my best to do so. Catch ya' later, mate!