Stocks pulled back Tuesday after seven straight gains, as the government shutdown entered its second week and a mid-day selloff in AI-linked tech names rippled through the broader market. 

The S&P 500 retreated from fresh intraday highs near 6,700, while small and mid-caps lagged. Consumer staples and utilities led gains as investors rotated into defensives; discretionary and communications names fell.

The reversal followed a The Information report revealing Oracle lost roughly $100 million renting out Nvidia’s new Blackwell chips, with server-rental margins averaging just 16% this year. The headline hit semiconductors, nuclear infrastructure, and data center operators, briefly shaking one of the market’s most crowded trades. 

Still, the index held above key support, a sign of underlying resilience even as veteran investors like Paul Tudor Jones and Orlando Bravo warn of an AI bubble.

Bond yields slipped as rate-cut expectations firmed. The 10-year Treasury closed near 4.13%, down three basis points, while the 2-year ended at 3.57%. Futures now price one to two more cuts this year and another round early in 2026, taking the policy rate toward 3.0–3.25%. 

The Fed’s own forecast implies one fewer reduction, but markets are betting the ongoing shutdown, slower job creation, and rising layoff risk will nudge policymakers toward a faster pace.

Yield-curve steepening remains a major theme, driven by both fiscal strain and central-bank normalization. Strategists at Amundi and PIMCO expect further steepening if deficits widen or Fed independence is perceived at risk.

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Futures point modestly higher this morning as traders brace for another day of shutdown headline, central-bank chatter, and AI headlines. The focus turns to whether the pullback in yields continues and how markets digest the latest Fed commentary ahead of next week’s inflation data.

The 10-year Treasury starts the day near 4.12%, holding its decline from Tuesday as investors lean into expectations for additional rate cuts this year. 

Futures imply one or two more reductions before December and another round early in 2026, potentially bringing the fed funds rate down toward 3.0–3.25%. That’s still more aggressive than the Fed’s official guidance, but the bond market continues to price a softer economy as the shutdown drags on and labor indicators weaken.

Traders will also be watching the yield curve, where steepening pressure has dominated since late summer. Fiscal uncertainty in the U.S. and Europe, coupled with renewed political scrutiny of central banks, could keep long-end yields elevated even as short rates fall. 

Amundi and PIMCO both note they remain tactically positioned for further steepening if deficits widen or Fed independence is questioned.

In short, the Street’s tone today is cautious but constructive, betting that lower rates are coming, while keeping one eye on Washington to see just how messy the road there gets.

Central banks are finding their independence tested as political pressures mount from both populist leaders and struggling economies.

In Europe, Italy’s central bank governor Fabio Panetta warned that unsustainable debt levels across low-income nations now threaten global stability, urging “innovative” solutions like debt-for-development swaps to channel relief into education and climate resilience. 

He noted that nearly a quarter of the world’s population lives in countries facing fiscal distress, a growing source of geopolitical strain.

Meanwhile, a Financial Times investigation detailed how quantitative easing has become a flashpoint in domestic politics. In the U.S., Treasury Secretary Scott Bessent accused the Fed of “mission creep” for maintaining an outsized balance sheet, echoing critics who say QE fueled inequality and fiscal excess. 

The Bank of England faces similar blowback over losses from its bond holdings, while German policymakers remain wary of new asset purchases.

Together, these developments suggest a turning point: central banks must now defend their legitimacy not only in financial markets but also in the political arena, where the next crisis could test how much independence they truly have left.

Geopolitical and trade headwinds are colliding this week as protectionist impulses ripple through global markets. In Europe, the European Union’s surprise decision to hike steel tariffs and slash import quotas has triggered immediate pushback from automakers. 

The new plan cuts tariff-free steel volumes nearly in half and doubles duties to 50% on excess imports, sparking steep declines across Europe’s auto sector. BMW shares plunged more than 9% after issuing a profit warning tied to both weaker Chinese demand and higher material costs. 

The European Automobile Manufacturers’ Association warned the policy risks fueling inflation by driving up input costs and eroding the competitiveness of European manufacturers already squeezed by tariffs and sluggish demand.

In France, fiscal turmoil is compounding the problem. The resignation of Prime Minister Sébastien Lecornu, the country’s fifth leader in under two years, has frozen efforts to address a deficit near 6% of GDP and debt exceeding 110%.

President Macron has given Lecornu 48 hours to salvage a coalition deal, but the impasse has already rattled French bond markets and widened spreads with German bunds. Goldman Sachs now expects France’s deficit to remain above 5% of GDP through 2026, while Moody’s is weighing another downgrade.

China’s import freeze continues to impact soybean growers, causing the administration to consider redirecting tariff revenue away from debt reduction towards a bailout. Economists warn that using tariff proceeds for short-term stimulus could worsen fiscal imbalances and further blur the line between trade and fiscal policy.

Altogether, the week’s developments point to a reordering of the global trade landscape, one in which governments are increasingly weaponizing tariffs and subsidies to achieve political ends, even at the cost of inflationary pressure and long-term credibility.

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The government shutdown is now in Day 8 with no resolution in sight. The Senate again failed to pass rival funding bills, and the House remains out of session. 

Democrats insist on including an extension of ACA subsidies; Republicans reject any additions while the government remains closed. 

President Trump floated linking health subsidies to a reopening package but gave no details. Prediction markets now expect the standoff to last around 20 days.

Each week of closure typically trims GDP growth by 0.1–0.2%, with most lost spending recaptured once funding resumes. But this shutdown carries higher risks, possible permanent layoffs, delayed contracts, and widening political cost.

At the same time, Trump is considering redirecting tariff revenue, initially intended for deficit reduction, to fund up to $10 billion in farmer bailouts, potentially followed by $50 billion more. The Yale Budget Lab estimates tariffs have already cost U.S. households $2,400 on average this year.

FOMC Minutes

Fed Speakers: Musalem, Barr, Kashkari

AZZ

Asia: Nikkei -0.45%, Shanghai +0.52%
Europe: FTSE +0.62%, DAX +0.52%

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Markets enter midweek balancing euphoria and exhaustion. Gold’s surge past $4,000 signals deep unease with fiscal policy and faith in currencies, even as equities hold near record highs on hopes for rate cuts. Investors appear to be hedging both ways, buying the AI future while preparing for policy chaos.

The paradox may define the next stretch: the same forces fueling optimism in tech and credit, cheap money, political stimulus, and speculative belief, are also eroding the anchors of stability that made those bets possible. If the week so far has shown anything, it’s that confidence itself is becoming the most volatile asset on the board.