by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Today’s Comment opens with our analysis of Friedrich Merz’s warning regarding Russia. We then turn to AI, examining what the weak IPO of a South Korean cloud computing company reveals about the current AI boom. Next, we discuss post-midterm concerns surrounding defense spending, the outcome of the Alberta referendum, and the ongoing energy investment surge across the Americas. As always, we conclude with a review of recent domestic and international economic data.

EU Isolated? The European Union is increasingly concerned about Russia’s growing influence as Moscow builds closer ties with Washington. On Monday, German Chancellor Friedrich Merz warned that Moscow is seeking to disrupt democratic institutions within the EU. His warning comes amid signs of a deepening relationship between Russian President Vladimir Putin and the White House following a deal to supply diesel in order to lower US domestic prices. These worries are expected to further intensify calls for the EU to become more self-reliant.

• Merz believes the European Union has grown overly complacent about protecting itself against Russian threats. He explained that Putin feels threatened by European integration and liberal democracy, which has led Moscow to attempt to destabilize the region. His remarks come amid deteriorating relations between Germany and Russia; in September, Berlin accused Moscow of orchestrating a failed drone attack on Leipzig Airport in August.
• Merz’s comments appear to respond to a growing consensus that the White House is preparing to side with Russia in its war against Ukraine. On Monday, President Trump expressed openness to a trilateral meeting with Putin and Chinese President Xi Jinping at the upcoming Asia-Pacific Economic Cooperation (APEC) summit, provided the talks focus on nuclear weapons. His remarks suggest he may be willing to use Ukraine as a bargaining chip to secure a broader nuclear deal.
• As Europe becomes more isolated, it is seeking to become more self-sufficient. The region is exploring measures to lessen its dependence on foreign critical technology and appears to be moving toward developing its own independent military capabilities. This shift has already sparked friction with both the US and China, particularly as the EU moves to reserve portions of its satellite spectrum for European companies and restrict imports of Chinese hybrid vehicles.
• Despite the importance of unity, the EU often divides under pressure. Most notably, in 2025, the bloc failed to coordinate a decisive response to US tariffs after threatening action. As the US potentially shifts away from its traditional allies, maintaining cohesion will be a crucial test. Should the EU unite to forge a common strategy, its push for self-reliance may succeed. However, if member states prioritize national self-interest, the bloc risks unraveling, threatening the future of the euro.

Data Center Concerns: Fresh concerns about the sustainability of the AI boom have been raised following a disappointing IPO. On Monday, South Korean firm Elice saw its shares plunge as much as 38% during its debut. Its weak performance comes as investors reassess the value of AI companies amid fears that the rising cost of infrastructure will hurt their long-term profitability. Fears of an AI bust are likely to weigh on sentiment as several US companies prepare to go public in the coming months.

• Despite the weak performance, Elice still managed to raise $150 million in its IPO. The AI company plans to use the proceeds to purchase portable, modular data centers and related infrastructure to increase its overall capacity. Although retail shares were 400 times oversubscribed leading up to the launch, high initial demand quickly gave way to a selloff as investors grew more and more wary of stock valuations. This marked the worst opening day ever for a Korean IPO of this scale.
• Market sentiment surrounding AI has shifted following mounting debt concerns at cloud provider CoreWeave. Last week, the company saw its borrowing costs surge as investors began pricing in the risk that it might default on its debt within the next five years. Although these fears have eased slightly in recent days, lingering anxiety continues to weigh heavily on companies tied to the AI buildout, particularly South Korean chipmakers.
• While a drop in share prices following an IPO is not unusual, Elice’s weakness appears to reflect a broader trend. Over the past week, investors have questioned whether companies can service their debt given rising borrowing costs and input prices. These worries coincide with growing fears that intensifying competition among data center operators is depressing cloud computing rates, threatening future profitability.
• Elice’s weak debut raises the stakes for upcoming AI offerings, most notably Anthropic’s reportedly planned November listing. A strong showing from the Claude developer could reassure investors that AI momentum remains intact; a stumble, however, could amplify fears of a broader sector retrenchment. If the AI bubble bursts, value is likely to emerge in established enterprise software names.

Defense Cuts? Growing expectations of a Democratic sweep have started to weigh on defense stocks. Investors increasingly believe that if Democrats win control of both chambers of Congress, they could push for defense spending cuts to help narrow the deficit. That view rests largely on the expected winding down of conflicts abroad, including in Iran and Ukraine. While polls currently favor Democrats, we think an upset for them in the Senate is more likely than markets suggest. If we are correct, defense companies could rally after the midterms.

Alberta Stays: Alberta voters overwhelmingly chose to remain part of Canada in Monday’s referendum, with roughly 76% backing the remain option. The decisive result should ease concerns that the province was moving toward independence. The vote followed a push by separatists for a referendum, amid pressure from the US for Canada to become the 51^st state. This vote is unlikely to be the last separatist push, but the result suggests the risk of a successful independence bid remains low.

OPEC Dominance to End? Escalating conflict in the Middle East has triggered a surge in energy investment across the Americas. Capital is increasingly flowing into North and South America as the confrontation involving Iran and Saudi Arabia accelerates global efforts to diversify supply lines. While energy prices are likely to remain elevated in the near term, this expanding capacity in the Western Hemisphere should drive down global oil prices over the next decade, ultimately weakening the Middle East’s historic dominance over global energy flows.

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