AI Credit Risk, Saudi Attacks and the US Midterms: Global Asset Repricing Under High Rates

Introduction

The recent global financial storyline is woven from interest rates, geopolitical conflict, and the credit risk embedded in AI capital spending. Jefferies and Bank of America have successively issued warnings about bubbles and bond pricing, Saudi Arabia and the Russia-Ukraine situation are disrupting energy supply, and the US midterm elections have turned gasoline prices into a core variable; meanwhile, Korean stocks are seeing foreign outflows as the AI trade recedes, and global capital is rechoosing direction. ^{[1][2][3][4][5][6]}

The Credit Test of the AI Boom

Jefferies global equity strategist Chris Wood compares the current AI boom to the 2008 subprime crisis, warning that the US may face 'capital destruction on a massive scale', with market share flowing to cheaper Chinese open-source large language models, and the AI story 'will at some point in the not-too-distant future face a major reset'. Data from OpenRouter, which he tracks, shows that in the week ended September 27, top Chinese models processed 76.12 trillion tokens, up from only 4.37 trillion at the end of April this year; in the same period top US models processed 14.2 trillion tokens. On quality, Wood notes that Moonshot's Kimi K3 is estimated to reach 95% of Anthropic Claude Fable 5's performance, while the average price in the AI token market has fallen 52% from its May peak to a record low of $0.98 per million tokens. ^[1]

The risk of credit concentration is equally prominent. As of the end of the second quarter of 2026, the four major platforms Microsoft, Google, Amazon, and Oracle had combined remaining performance obligations of $2.34 trillion, up 186% from a year earlier, an increase of about $1.52 trillion, about half of which is owed by two unprofitable labs, OpenAI and Anthropic. Wood likens hyperscalers providing concentrated unsecured credit to tenants that are still burning cash to the 2008 real estate credit crisis. On off-balance-sheet liabilities, Moody's counted $662 billion in data center lease commitments not yet started by the five largest hyperscalers in February this year, compared with $152 billion at the end of 2023; Nikkei research estimates the five companies' 'hidden debt' at $1.65 trillion as of the end of the second quarter of 2026. ^[1]

Profit quality is also questioned. In the four quarters ended the second quarter of 2026, the four major hyperscalers' annualized profit rose by $222 billion to $581 billion, but over the same period 'other non-operating income/loss' increased by $224 billion, which Wood believes mainly captures unrealized gains on equity investments in unlisted companies. Capital spending has not slowed: free cash flow plunged from $60 billion in the fourth quarter of 2025 to $7 billion in the second quarter of 2026, and is expected to turn to negative $13 billion in the third quarter, while market consensus forecasts the four cloud giants' capital expenditure will rise from $723 billion this year to $993 billion in 2027. Wood stresses that it will be the credit market, not the stock market, that determines when all this ends. ^[1]

Attacks on Riyadh Airport and Escalation of the Saudi War

According to Xinhua on October 11, Yemen's Houthi armed forces launched four military operations against airports and energy facilities inside Saudi Arabia in the past 24 hours. Riyadh's King Khalid International Airport was attacked on October 10, killing 12 people and injuring 309; on October 11, the airport was again hit by an unidentified projectile at Terminal 4, air defense systems intercepted and destroyed a missile near the airport, the attack caused a fire, and Saudi Arabia's civil aviation authority confirmed the attack again caused injuries. ^[2]

The attacks quickly hit Saudi Arabia's economy and foreign investor confidence. Executives from top oil companies including BP and Shell announced they would withdraw from the World Petroleum Congress scheduled to open in Riyadh on October 11, and several institutions in Riyadh's financial district switched to remote work. For Saudi Arabia, which is advancing Vision 2030 economic transformation and urgently needs to attract foreign investment, this situation is particularly costly. Saudi Arabia raised its budget deficit forecast this month and expects the economy to shrink 3.6% this year, making foreign investment attraction and financing needs even more urgent. ^[2]

Public opinion holds that three factors have plunged Saudi Arabia into a crisis of escalation in the Yemen war: the breakdown of its alliance with the UAE led the latter to hastily withdraw troops from Yemen; affected by the Iran conflict, it failed to prepare for the Houthis restarting their offensive; and it over-relied on cooperation with the United States. Saudi Arabia did not promptly fill the 'power vacuum' left by the UAE withdrawal, the Yemeni government's 'Yemen Dawn' operation launched on October 5 has progressed slowly, and the Houthis have formed an encirclement of Taiz. Trump said the United States is considering joining Saudi Arabia's strikes against the Houthis and will make a decision as soon as possible. ^[2]

The Game Over the Russia-Ukraine 'Energy Ceasefire'

According to Xinhua, US President Trump posted on social media on October 11 that 'from now on, the Russia-Ukraine conflict has entered an energy ceasefire, and both sides have agreed.' However, Ukrainian President Zelensky initially knew nothing about it that day, saying the announcement was a 'surprise' to him. Russia did not immediately respond, and the Kremlin did not confirm any agreement existed. Zelensky quickly adjusted his position, clearly stating that Ukraine 'supports practical and reliable ceasefire and ways to end the war', and that Ukraine 'is willing not to strike Russian energy facilities and expects Russia to take the same action'; the Ukrainian armed forces have received relevant orders. ^[3]

But Russia's actual actions diverged from the ceasefire promise. According to reports, Russian President Putin has so far rejected the energy ceasefire proposal, and Russia continued bombing Ukraine's energy grid and other targets in Kyiv on October 11, with explosions heard throughout the day and power outages continuing. This is not the first time Trump has announced a similar ceasefire; he previously announced an energy ceasefire on September 14, but both Russia and Ukraine subsequently continued strikes on each other's targets. Zelensky said that over the past week Russia launched 196 attacks on Ukraine's power system and 20 attacks on oil and gas infrastructure, and missile and drone attacks on cities killed 153 people in total. ^[3]

Behind Trump's push for a ceasefire is pressure to lower oil prices. With the US midterm elections only weeks away, high gasoline and diesel prices have become an important source of voter dissatisfaction with Republicans; on October 9 Trump announced that US and Russian leaders had agreed on Russia supplying diesel to the United States and global markets. But a bipartisan group of senators issued a joint statement on October 11 saying Trump's plan to allow Russia to export oil to the United States violates the 2022 law banning Russian energy imports, and noted that the administration neither consulted Congress nor submitted the necessary explanatory documents required by law. ^[3]

US Midterms: Gasoline Prices and the Probability of a 'Sweep'

With only 26 days left before the US midterm elections, an October 8 update from Goldman Sachs's Washington political team shows prediction markets currently give Democrats a 65% probability of sweeping both chambers of Congress, while the probability Republicans keep their House majority is less than 10%; a month earlier, the sweep probability was 52%. Goldman directly links the Democratic lead to the path of US retail gasoline prices: gasoline surged from about $3 per gallon in early 2026 to nearly $5 in spring, then fell back to about $4 in summer before rising again, and Democrats' lead in the generic ballot also widened from about 5 percentage points to nearly 9 points. ^[4]

The House outcome looks almost settled in prediction markets. Prediction markets give Democrats more than a 90% probability of netting at least 3 seats and retaking the House majority; Democrats currently lead Republicans by 8.9 percentage points in the generic ballot, which Goldman notes means a swing of about 12 percentage points from Republicans' 2.6-point advantage in winning the House in 2024. The Senate situation is more complex: Democrats currently hold 47 seats and need a net gain of 4 to win a majority; prediction markets give a 65% probability, and the 'marginal seat' deciding the 51st seat is Ohio. ^[4]

BofA Merrill Lynch strategist Michael Hartnett warns that a Democratic sweep would trigger 'major risk aversion', causing stocks to fall more than 10%, the dollar to weaken, and bond yields to decline. Republicans are increasing spending in the final stretch: over the past two weeks Republicans spent $240 million and Democrats spent $130 million, with Republican spending about 1.85 times that of Democrats. Goldman also offers a historical warning: the challenging party's sweep probability declines by an average of about 5 percentage points before Election Day; based on the current 63% probability of a Democratic sweep, historical patterns suggest a final probability of about 58%. Goldman's conclusion points to a clear logic: over the next 26 days, energy market moves are more worth watching than any polling data. ^[4]

Korean Stocks: From Global Strongest to Global Weakest

The Korean stock market was once the hottest target in this year's global AI trade, but now it faces a buyer shortage. In the first half of this year, Korea's Kospi attracted global funds with the strongest performance among major global stock indices; in the second half, the same market has fallen 22% cumulatively, making it the world's worst performer. At the same time, Taiwan and US stock markets, which also have strong AI exposure, keep setting record highs. According to Bloomberg, foreign investors have net withdrawn $131 billion from Korean stocks this year, the most among major Asian markets; market turnover has plunged 70% from its peak at the end of May, with retail and institutional investors retreating in tandem. ^[5]

The rise and fall of Korea's Kospi is almost dominated by two memory chip giants, Samsung Electronics and SK Hynix, which together account for more than 50% of Kospi weighting and were the core drivers of the index's surge in the first half of this year, but now have become a drag. Samsung Electronics' quarterly operating profit surged nearly ninefold year-on-year, yet its share price fell instead of rising. Another pillar supporting Korean stocks is also loosening: Samsung and SK Hynix's combined stock buyback plan of about KRW 55 trillion (about $41 billion) is nearing completion, and according to JPMorgan data, the buybacks by the two chip companies accounted for the bulk of about $23 billion in buy orders in the Korean market last month. ^[5]

Retail investors leaving and leveraged funds not recovering further weaken buying. According to the Korea Financial Investment Association, margin balances stayed at about KRW 33 trillion over the past month, far below the June peak of KRW 38.6 trillion; investor deposits in brokerage accounts waiting to enter the market also fell from a record high of nearly KRW 140 trillion to about KRW 100 trillion. Meanwhile, Taiwan's stock market is becoming a more institutionally favored AI alternative: the Taiwan Weighted Index has risen 70% this year and outperformed the Kospi by about 23 percentage points last quarter, the largest quarterly gap this century; about 10% of Taiwan stock constituents have at least doubled this year, while only 4.7% of Kospi constituents have done so. ^[5]

Bonds End the Bubble: Rate Shock and Capital Flows

BofA strategist Michael Hartnett compresses his core judgment in the latest Flow Show into 'bonds end the bubble'. Over the past week, the US 10-year Treasury yield touched 5.36%, the 30-year yield rose to its highest since 2002; the 10-year Treasury auction priced at the highest yield since 2000, but near-record overseas demand pulled sentiment back. Across the Atlantic, the France-Germany government bond spread widened to 140 basis points, returning to the stress range of the 2011-2012 European debt crisis. ^[6]

Hartnett's most counterintuitive inference is that the most bullish event for risk assets before year-end would be a Fed rate hike in October, using one proactive tightening to stop the long end from spiraling further out of control. US stocks are still up 13.4% year-to-date, with the S&P 500, Nasdaq, and global tech indices still at highs, but government bonds are down 4.4% year-to-date, lagging cash returns by 7.2 percentage points. Since 2026, global central banks have hiked 54 times, the first time since September 2023 that global central banks have turned net tightening again. Asset performance has diverged markedly: oil up 58.5%, US stocks up 13.4%, global stocks up 10.6%; cash returns 2.8%, government bonds down 4.4%, gold down 4.8%, bitcoin down 6.7%. ^[6]

Bonds hit first the parts most dependent on cheap money. Hartnett takes Korea as a sample: over the past 18 months Korean bond yields have risen about 200 basis points, and Mirae Asset, Korea's largest retail brokerage, after previously becoming a 'four-bagger', has fallen 65% since May. But this does not mean the Korean stock market bubble has already burst; Korean stocks are still up 98.9% year-to-date, one of the world's best-performing markets. Fiscal cracks are also showing: BofA chief global economist Claudio Irigoyen points out that the rate shock is exposing the unsustainable reality of fiscal policy in developed economies, with France the clearest example; the France-Germany government bond spread has returned to 140 basis points, and Rabobank commented that this is 'the latest example of a developed-market economy behaving like an emerging market'. ^[6]

Fund flow data give a fairly clear signal. As of Wednesday of that week, cash inflows were $166.4 billion, the largest since April 2020; bond inflows were $33.8 billion, equity inflows $12.4 billion, gold inflows $2 billion, and crypto asset outflows $600 million. In detail, Treasury inflows were $16.2 billion, the largest since April 2025; investment-grade bond inflows were $10.3 billion; tech stocks still saw $3.5 billion of inflows, while financial stocks saw $3 billion of outflows, the largest since March 2023. Money market fund assets have reached about $8 trillion, and at a 4.2% T-bill yield, this money generates about $330 billion in interest per year. ^[6]

Common Trends and What to Watch Next

The six threads point to the same constraint: when long-end rates are high and credit spreads are sensitive, AI capital spending, geopolitical conflict, and the US election are no longer isolated themes, but transmit through energy prices, bond yields, and capital flows. Going forward, watch AI-related borrowers' credit spreads and data center asset securitization, the impact of Saudi security conditions on foreign investor confidence in Vision 2030, whether the Russia-Ukraine energy ceasefire can move from verbal commitment to verifiable cessation of strikes, the linkage between gasoline prices and the probability of a Democratic sweep before the US midterms, and whether foreign investors continue to shift to AI hardware markets such as Taiwan after the Korean stock buyback tide recedes. ^{[1][2][3][4][5][6]}