Apocalypse later

Warnings of machine-driven human extinction kicked off the week, but the market's attention quickly turned to more prosaic matters, namely Middle East energy disruption and the first Federal Reserve rate hike in three years. Amid growing reports of AI agents going rogue and warnings about the technology's potential to destroy humanity in the next decade, many leaders of major US AI companies have begun to call for more caution in the development of this technology. "We must slow the pace at which we improve the capabilities of AI models. Progress will still seem fast, and we must make wise use of the time we gain," Anthropic CEO Dario Amodei wrote in an extensive essay released last Saturday. Elon Musk, who runs xAI, and Sam Altman, CEO of OpenAI, publicly said they agree with Amodei. US President Donald Trump, on the other hand, clearly does not. "The only control or 'guardrails' that AI needs is a STRONG AND SMART (High IQ!) PRESIDENT, and the U.S.A. has that, in spades!" Trump wrote on Truth Social on Monday. He also argued that China would benefit from any slowdown in US AI development. But an editorial in China's state-backed Global Times newspaper said the move by US AI bosses was part of a "Cold War playbook" aimed at slowing China's technological development. This will likely be a point of discussion at Trump's scheduled meeting with Chinese President Xi Jinping next week in Washington. Whether these apocalyptic fears are legitimate remains to be seen, but the potential for a slowdown in AI development – and thus AI spending – did cause jitters on Wall Street and global bourses early in the week. But if AI is as dangerous as these warnings suggest, then there seems to be little chance that the race to dominate the technology will slow. The risk for the governments involved is too great. Moving to the week's marquee event, the Fed increased interest rates by 25 basis points on Wednesday to 3.75%-4.00% – and signalled that there may be more rate rises to come. While the hike itself was widely expected, the unanimous decision and signalling were slightly more hawkish than anticipated – especially given the previous doubts about Fed Chair Kevin Warsh's willingness to tighten policy against the public objections of the president who appointed him. President Trump was quick to criticize the move, writing on Truth Social: "Interest Rates in the United States should be 1%, or less, because we are the Best Credit in the World – BY FAR." Importantly, he didn't target Warsh himself, instead telling reporters that the board was to blame for being "very hostile" and "very political." For now, investors seem to approve of the hike and the hawkish messaging. While the front end of the yield curve rose, the back end nudged lower, potentially indicating that investors now have more faith in the Fed's – and especially Warsh's – ability and willingness to combat inflation. Moving back to the rates front, the Bank of England opted for a distinctly hawkish hold on Thursday, keeping the bank rate steady at 3.75% but warning that a hike would be more likely if energy price volatility continued. And, finally, the Bank of Japan lifted interest rates on Friday to a 31-year high of 1.25%. While the hike was widely expected, two BOJ members dissented and signalling about future tightening remained vague. This unnerved investors seeking decisive action, sending the yen to more than 157 per dollar. Looking to next week, geopolitics will be a key focus, with the UN General Assembly in New York and Xi Jinping's US state visit. So the end of the world will have to wait. Of course, one of the key inflationary forces is the spike in energy prices, and a 25-basis-point hike can't do anything to bring about a ceasefire in the Middle East or restore refining capacity. Crude prices surged early in the week, with Brent settling nearly 3% higher on Tuesday after crude loading at Saudi Arabia's Red Sea port of Yanbu was suspended. That came days after the Kingdom's East-West pipeline was temporarily shut following a drone attack from Baghdad, where Iranian-backed militias operate. The pipeline has helped Saudi Arabia reroute its exports through the Red Sea and the Bab el-Mandeb Strait during this conflict to avoid the Strait of Hormuz. At the same time, Yemen's Iran-aligned Houthis have moved to tighten their control over Bab el-Mandeb, while increasing their strikes on the Saudis. Brent traded as high as $109 per barrel on Monday and Tuesday, but prices began to slip mid-week, trading as low as $102/bbl by early Friday. This followed Saudi reports that they were seeking to maintain crude shipments by increasing loadings off Oman. US Energy Secretary Chris Wright also suggested that the East-West pipeline could come back online more quickly than initially expected. But these modest positive signs appear more like band-aids than solutions. The conflict in the Middle East is widening, and that is sending a clear message: the Iran war is no longer a short-lived energy supply shock, but a prolonged, unpredictable test of global economic endurance. The diesel market is a case in point. Prices of the refined fuel continued to rise above $6 per gallon in the US, after crossing that threshold for the first time last week. In an effort to help limit the price pressure on diesel, President Trump on Monday claimed he had brokered a deal between Russia and Ukraine to stop hitting each other's energy facilities, but neither side seems to be abiding by the proposal. Even if such a truce were to succeed, it could take years for refining capacity to cover given the extent of the damage.

Apocalypse later

AI warnings and policy pushback

Fed rate hike and market reaction

Central banks abroad and next week's focus

Middle East energy disruption and inflation pressures

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