by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with an analysis regarding new concerns about AI profitability, following the reported leak of internal documents from Oracle. We then assess a strategic pivot in global trade, as the EU considers more protectionist measures to counter US economic policy. We also examine the recent surge in gold prices and evaluate spillover risks from the First Brand bankruptcy. As always, we conclude by providing a summary of key economic indicators from the US and global markets.

 AI Concerns: Fears that Oracle may be unable to hit profit targets following its sizable Nvidia chip order triggered a massive AI-related sell-off. The core concern, fueled by leaked internal documents, is that profit margins in Oracle’s cloud computing business are lower than anticipated from the chips it currently leases from Nvidia. The reports raise doubts about Oracle’s $40 billion commitment to purchase Nvidia chips earlier this year to support data centers, reportedly for OpenAI.

• Following the report, Oracle shares plunged as much as 7.1% as investors scrambled to gauge the implications for the broader technology sector. The report, citing internal documents, revealed that Oracle’s Nvidia-powered server rentals generated approximately $900 million in revenue but yielded a gross profit of only $125 million. Even more concerning was the fact that the company incurred losses on smaller, less utilized quantities of chips.
• The revelations are likely to put a spotlight on chipmakers, underscoring their sensitivity to customer purchasing decisions. Since only a few companies can afford this cutting-edge technology, chipmakers face significant risk from potential pullbacks, prompting them to actively diversify their client base. This pressure was immediately evident when, on the same day the Oracle report broke, Nvidia announced a chip deal with Elon Musk’s xAI.
• Despite widespread skepticism regarding a potential bubble in the AI sector, these companies’ affiliation with the US government through the Stargate Project could sustain investor confidence. However, any concerns about the long-term commercial viability of these ambitious technologies could trigger a significant market correction. Consequently, we recommend investors maintain a well-diversified portfolio, utilizing exposure to value-oriented assets as a strategic hedge against a potential AI bubble.

EU Pushback: The EU is adopting an assertive trade posture on two fronts. First, it has raised concerns over new US demands perceived as an effort to compel regulatory concessions. Second, it is advancing a plan to cap steel imports and slapping a 50% tariff on any country that exceeds the quota — a measure that has already provoked a sharp response from the UK. Together, these developments illustrate the bloc’s strategic pivot in order to navigate a more protectionist global trade landscape.

• Despite a lack of public details, the US has consistently pressured the EU to overhaul its regulations across several critical sectors, including digital and technology rules, corporate compliance, and climate-related policy. While the EU has opened the door for discussions, it has characterized the US proposals as “maximalist” and has vowed to resist significant changes.
• The EU’s decision to resist trade pressures and impose new tariffs demonstrates a strategic play to assert both its independence and its trade power. This move has particularly impacted the UK steel industry, which sends over 80% of its exports to the bloc. The blow is especially sharp as the UK is still waiting for the US to lower its own steel tariffs from 25% to 0%.
• The EU’s assertive new trade posture is a double-edged sword: it shields vulnerable domestic industries from US pressure but risks provoking retaliatory actions. While a compromise remains possible as the European Parliament debates its response, a failure to reach an agreement could trigger an escalation. In such a scenario, the US would likely impose higher tariffs, forcing the EU to reciprocate with defensive measures of its own.

Gold Price: Gold prices soared to a record $4,000 an ounce on Tuesday as investors sought safety amid political and economic uncertainty. The rally was driven by a looming US government shutdown and a broader market shift away from the 10-year Treasury note. Investor skepticism toward US debt is growing due to concerns over rising national debt and higher inflation expectations.

First Brand: The demise of First Brand, a critical auto supplier, has exposed concentrated financial vulnerabilities among its creditors. The fallout underscores substantial exposure at several institutions, including a UBS fund with a highly concentrated 30% position and an estimated $500 million in total exposure for the firm. Jefferies is confronting an even larger estimated exposure of $715 million, with Blackstone and Onset Financial also having some exposure. This incident, while isolated, serves as a clear indicator of stress in the financial system.

France Stalemate: A breakthrough on France’s national budget appears imminent, with outgoing Prime Minister Sébastien Lecornu expressing confidence that a deal can be finalized ahead of the December 31 cutoff, notwithstanding remaining policy disputes. Following his announcement, a French legislator proposed withdrawing the controversial increase in the retirement age as a critical concession for parliamentary approval. The forthcoming budgetary resolution is anticipated to reduce market pressure on French sovereign bonds.

Shutdown Standoff: As the government shutdown enters its second week, the White House is considering withholding back pay from furloughed workers. This move would intensify the financial strain on federal employees, who have already gone without one paycheck. There is now concern that the threat of lost wages could compel essential staff — who are currently working unpaid — to walk off the job. Such an action would cripple vital government services and potentially weigh on market sentiment and investor confidence.

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