Geopolitics and debt divide markets as AI pushes Wall Street to record highs

Between October 3rd and 6th, financial markets experienced a seemingly contradictory phase. On the one hand, the war in the Middle East and tensions in the Black Sea continued to threaten energy and international trade; on the other, several military developments reduced the risk of immediate disruptions to major shipping routes. At the same time, Europe returned to grappling with its public debt problem, while Wall Street continued to look beyond: artificial intelligence pushed the Nasdaq and S&P 500 to new records.

Middle East: Tensions are high, but oil prices are falling.

The weekend began with a new sign of the fragility of the Middle East situation. The Houthis claimed attacks on a Saudi Aramco facility in Riyadh, while Saudi-backed Yemeni forces intensified operations against rebel positions in Sanaa and Saada.

The turning point for the markets, however, came at the Bab el-Mandeb front, a strategic passage between the Red Sea and the Gulf of Aden. The advance of Yemeni government forces along the coast reduced the immediate risk of a blockade of the strait, mitigating part of the geopolitical premium embedded in energy prices.

The result was a seemingly counterintuitive move: even with the conflict still ongoing, oil prices fell. Brent crude approached $101-$102 a barrel , while WTI returned to $90-$91 . Improving oil flows from the Gulf and the release of strategic reserves by G7 countries also contributed. Crude oil fell about 2% on Tuesday, offering initial relief from global inflation fears.

However, the situation remains extremely sensitive: new attacks on Saudi infrastructure or sea routes could quickly reverse the movement.

Black Sea and raw materials: logistics risk remains

The Middle East wasn't the only geopolitical front investors were watching. A Russian attack on a cargo ship in a port in the Odessa region served as a reminder of how vulnerable Ukrainian exports remain.

The Black Sea remains a vital hub for grain, fertilizer, steel, and other raw materials. Each new disruption increases the risk of pressure on agricultural and industrial commodity prices, just as central banks seek to bring inflation back under control.

Against this backdrop, copper nevertheless recovered about 0.8% , supported primarily by the diminishing likelihood of another immediate US rate hike. However, the metal remains caught between two opposing forces: structural demand linked to electrification, networks, and data centers, and Chinese growth that continues to show uneven signs.

Europe: Sovereign risk returns

While oil has offered a respite, the European bond market has continued to send out warning signals. The epicenter remains France, where uncertainty over future budget measures and the government's ability to stabilize the debt has increased the premium demanded by investors.

The CAC 40 lost about 0.8% on Monday, hitting a six-month low, as investors favored German Bunds over French bonds. The problem isn't unique to France: when spreads begin to widen, the market inevitably begins to question the fiscal sustainability of the eurozone as a whole.

The tensions were immediately reflected in the currency. The euro fell to around $1.116 , a 17-month low, before recovering to $1.125 as French yields partially retreated.

Further complicating the situation was Spanish Prime Minister Pedro Sánchez's decision to call early elections for November 29. The combination of France and Spain thus brings political risk back to the center of the Eurozone, just as interest rates and energy costs remain high.

Japan and global bonds: yields increasingly difficult to ignore

Pressure on government bonds isn't limited to Europe. In Japan, the 30-year yield has hit a record 4.235% , raising concerns about the management of one of the world's largest public debts.

The movement in Japanese yields is particularly important because it could encourage the repatriation of capital held abroad by Japanese investors, with potential consequences for Treasuries and European bonds as well. Long-term US yields remain at their highest levels since 2002, making the stock market increasingly dependent on companies' ability to generate sufficient earnings growth to justify high valuations.

Wall Street Ignores Rates: AI Remains the Big Driver

And this is precisely where the main divergence of the week emerges. Despite extremely high bond yields, the Nasdaq gained more than 1% on Monday, closing at a new all-time high. Nvidia, Microsoft, and other AI-related companies continued to support the entire technology sector.

The move extended to the S&P 500 on Tuesday: the index reached around 7,841 points , while the Nasdaq surpassed 27,700 . Nvidia rose another 1.1% , bringing its market capitalization close to the symbolic $6 trillion threshold.

The market therefore continues to bet that investments in AI can generate earnings growth strong enough to offset a structurally higher cost of capital.

Brazil: Politics sparks a rally

The most dramatic reaction, however, came from Latin America. The result of the first round of the Brazilian elections, with Flávio Bolsonaro winning 47% of the vote against Lula's 45% , was interpreted by investors as a potential shift toward a more market-friendly fiscal policy.

The Bovespa responded with a 7.7% jump and new all-time highs, while the Brazilian real also recorded one of its strongest daily gains in recent years.

The message from these sessions is therefore twofold. Geopolitical risk remains elevated, but it doesn't always automatically translate into higher oil prices and inflation. At the same time, the market is becoming increasingly selective: it penalizes countries with fragile public finances, rewards those with opportunities for reform, and continues to focus enormous capital flows on companies capable of capturing the growth of artificial intelligence. This divergence, more than individual daily movements, could define the final phase of 2026.