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

October 15, 2026 (MLN):Financial markets and major economies are facing an unusually large number of tail risks amid rising bond yields, rising energy prices and widening junk bond spreads, while long positions in the Hungarian forint, Icelandic króna and Norwegian krone against the euro have been suggested as hedges.

In a report titled “Heads, Or Tails?”, Gavekal Research said it cannot recall a period since it was launched in 1999 when markets and major economies faced so many such risks. The paper sets out to list the most obvious tail risks, look at ways to protect portfolios, and identify asset classes that could limit losses whichever way outcomes fall.

The report said markets currently price three rate hikes each from the US Federal Reserve and the European Central Bank (ECB), but the odds are that these will not happen. It added that a scaling-back of tightening expectations could go into overdrive if AI capital spending disappoints.

The 12 tail risks

AI spending and rate expectations

The report said companies in the wider AI ecosystem may struggle to keep borrowing ever larger amounts in the face of rapidly rising yields. It noted that new Microsoft and Apple products could let many small businesses host their own AI needs for less than US$10,000, leaving only the most advanced users needing data centres.

It also pointed to pulled initial public offerings of marginal players, a looming IPO of Anthropic and a likely Oracle debt downgrade as added uncertainties, and said a scenario in which AI spending disappoints and the Fed cuts rates much earlier than expected no longer seems outlandish.

France and the euro

The report said the ECB, French and European insurers, pension funds and banks would end up as the bag holders of French debt. It said it would be hard for the euro to rise much while uncertainty over France persists, and also hard for the ECB to deliver the roughly 85bp of hikes expected.

If the ECB cut rates and bought French bonds, the paper said the euro was somewhat more likely to rise than fall, though it called this counterintuitive.

Shorting French debt against German Bunds carries negative carry of about 150bp, the report said. It instead recommended going long the currencies of the European periphery against the euro.

The Hungarian forint offers about 300bp of positive carry and is seen as supported by the loss of Viktor Orbán at the polls, which frees European funds for Hungary.

The Icelandic króna offers about 500bp of carry, with Iceland almost energy independent thanks to thermal energy. The Norwegian krone offers about 200bp of carry and is seen as a hedge against both a European face plant and higher energy prices.

Energy, petrodollar and politics

On energy, the report said China is buying oil shipped into Shanghai at about US$120-150 per barrel including shipping costs, for the first time in over a decade, and that the US is threatening bans on exports of refined products such as diesel. It said Gulf producers may be paying Iran a toll for passage of ships, which could explain bitcoin’s recent jump from US$70,000 to US$85,000.

The paper set out three options for President Donald Trump after the midterms. Keeping the status quo would probably see oil at US$80-100 per barrel.

Ordering Gulf states to stop paying the tolls would send oil jumping to about US$150, while resuming strikes on Iran could take it to US$200. It added that a collapse of the Iranian regime could take oil back to about US$60, though not necessarily for long as stockpiles would need rebuilding.

US defence stocks have underperformed the MSCI US index by 35 pc since the start of the Iran war, which the report linked to less Gulf money being recycled into US assets and weapons.

Suggested hedges

For energy risk, the report said buying energy stocks is the simplest hedge, noting that energy companies keep buying back shares and that the sector’s share of the S&P 500 market cap stands near 3.6 pc against about 49 pc for technology and communication services. It also listed railroads, coal, shipping, soft commodities and metals as possible hedges.

For risks to the global financial architecture, it pointed to currencies of countries running twin surpluses, and gold. For the insurance illiquidity risk, it said going long US banks against US insurers was perhaps the simplest way, though hedging remains hard without paying away a lot of premium.

On concentration, it said relative-return investors have few easy solutions, apart from perhaps buying equity index volatility when it is low enough, while absolute-return investors should look for opportunities in less crowded parts of the market.

The report said the list is not exhaustive and that uncertainty is sky high. It said equity markets brushing off these threats could be a typical case of climbing the wall of worry. It also cited the view that policymakers will ultimately turn to the printing press whenever a problem materialises, in which case investors should keep buying equities and selling bonds.

Going by momentum, the report said Asian currencies have held up well, emerging market bonds have outperformed developed market bonds, emerging market financials seem to have stopped lagging, and energy stocks and renminbi bonds have delivered positive returns. It also expects continued investment in electricity grids and Canadian infrastructure, and sustained demand for capital and commodities.

Copyright Mettis Link News