Opinions

Bloomberg reported on Saturday that the Federal Reserve is asking major US banks for details about their exposure to private credit following a surge in redemptions from the funds and a rise in troubled loans in the industry. Investors have requested a record -$14.0 billion in redemptions from private credit funds in Q1 2026. This is up +146% from -$5.7 billion in Q4 2025 and +278% higher than the -$3.7 billion in the full year 2024. Meanwhile, just half of those requests were met, leaving ~$7.0 billion in unmet redemptions, the largest backlog on record. Our concerns have always been based on the fact that private capital experienced fast growth during the ‘cheap money’ years and remains opaque. We have not seen a true credit cycle since the recovery from the Global Financial Crisis. There are a lot of new players in private credit that haven’t been tested through cycles. In addition, underwriting standards tend to deteriorate during extended benign periods. The concerns about private credit have manifested themselves in the listed BDC stocks. These have very high allocations to private credit and, particularly, software. BDCs trade at the biggest discount to their net asset value since the covid shock as software has taken a massive hit post the AI rollouts. Many private credit managers do have significant exposure to software and technology companies, in some cases as much as 25% or 30% of their portfolios. Even US insurance companies have significant exposure to private credit. Spreads in the insurance sector widened from 85bps at the end of January to 114bps, before settling at the current level of 102bps The demand to have some form of protection, should private credit risks escalate dramatically and spill over to the broader financial sector, is clear. Hence many US banks have rolled out CDS on synthetic financial index consisting of BDCs, banks & insurance companies. Considering the scale of investments and the level of interconnectedness, the queries by Fed examiners are intended to assess the level of stress in the private credit industry and the potential for it to spill over to the wider financial system. These questions are one of the strongest signals that US regulators are working to get a handle on the scale of the strains in private credit, which has ballooned to an $1.8 trillion industry marketed first to institutional investors and increasingly now to individuals. With Fed coming to actively question exposure to private credit, we can assume that there is no smoke without fire. While the current headline news flow is all about middle east conflict, private credit pain might be the next trigger for global risk asset’s weakness.

Imagine a new AI LLM finding security flaws 27 year old in an operating system world renowned for it's security primarily. These are called zero day vulnerabilities. Zero-day vulnerabilities are bugs that were not previously known to exist. f a language model can identify such bugs, we can be certain it is not because they previously appeared in the training corpus: a model’s discovery of a zero-day must be genuine. Finding zero-day vulnerabilities are extremely difficult to find but can be sold to government intelligence agencies for millions of dollars. This new AI LLM is called Mythos which might be the next weapon of mass destruction for sovereigns. Claude Mythos Preview found thousands of zero-day exploits in every major operating system and web browser. The numbers are hard to believe: 1) $50 to find a 27-year-old bug in OpenBSD, one of the most security-hardened operating systems ever built. 2) Under $1,000 to find AND build a fully working remote code execution exploit on FreeBSD that grants unauthenticated root access from anywhere on the internet. 3) Under $2,000 to chain together multiple Linux kernel vulnerabilities into a complete privilege escalation exploit. Mythos is so powerful that Anthropic has formed a project Glasswing which includes Amazon, Apple, Microsoft, Google, Cisco, CrowdStrike and JPMorgan Chase. It is an effort to use Mythos Preview to help secure the world’s most critical software, and to prepare the industry for the practices the industry will need to adopt to keep ahead of cyberattacks. Mythos has cracked flaws in TLS, AES-GCM, and SSH. This is the encryption protecting your bank, your messages, your data. Mythos has a 100% solve rate on the Cybench cybersecurity benchmark in every challenge in every trial. Mythos found and chained together several flaws in the Linux kernel, the core of the operating system and software that runs most of the world’s internet servers to allow an attacker to take complete control of the machine. In nut shell, Mythos is far ahead of any LLM used to date for finding security breaches. In fact it can create new security issues hitherto unresolved to most of the system architecture used by systematically important US banks. We see Mythos as a new weapon of choice for cyber warfare sooner than later. Current systems might adopt but Mythos might adapt faster.

Commodity and FX markets entered the weekend under the impression that the US and Iran made “significant progress” in last week’s negotiations. Hence the first order reaction to the weekend's escalation will likely see the dollar benefit on the back of higher energy prices and elevated risk aversion - to the tune of c. 0.5-1% for every 10% increase in oil. Currencies sensitive to energy prices and a flatter US curve, such as the Yen, may come under pressure. Our own view is that current events in Iran might take few weeks to fully unfold. We will have news flows on both sides of the event i.e. peace efforts and further ratcheting up in war efforts. Indications from Trump’s statement since the war started yesterday looks to us that this is likely to be a prolonged military conflict, much longer lasting and broader than what we saw last year. Iran’s supreme leader was killed in US–Israeli airstrikes, a seismic development in a conflict that’s spread to half a dozen countries across the Middle East and threatens to disrupt energy flows. The current US strategy appears to be closer to what Bill Clinton authorized in the Balkans: American airpower plus support for indigenous forces with their own reasons to fight, without American ground troops governing foreign cities. We believe a post Khamenei era is likely to be more conservative and not softer as some strategists are pointing out. This new breed of IRGC administration might be worse for Iranian people than Khamenei himself. Iran has built a multi layered contingency plan for this situation only. We would not probably know who the current Supreme Leader is for the next few weeks because Iran risks losing the new one too in light of continued leaks to Israeli and US intelligence. We expect to see news driven market gyrations across asset classes. Equities likely to see significant downturn because it was the least prepared for the current sequence of events. On S&P500, we believe we are headed towards 200 DMA at 6550 which is also the 23.6% retracement of the top of 6977 till 5115, the rally which started in April’2025. On Brent, first stop is $80 levels which was the June’25 highs when Iran nuclear facilities were attacked in joint airstrikes from Israel & US. While there are some market opinions that OPEC might increase it’s supply in today’s meeting, we beg to differ. At the end of the day, crude has to pass through strait of Hormuz. If no ships go through Hormuz, it does not matter where the output level is from OPEC. In Fx, we like to buy CHFJPY to buy on Monday opening and keep the risk open for next few weeks. Friday’s close was 202.87. We like to buy in the range of 200-204 for eventual target of 210. Stop to this view is 198. On UST curve, we are waiting for opportune levels to put on steepeners around 20-22 levels with a profit target of 35-40 in next few weeks. Stop to this view is 15.

Today the Iran war has begun, with joint US-Israeli strikes on Iran now underway, and significant Iranian retaliation in the region too and going by news reports, the scope of the conflict appears vast. Unlike the 12-‎day war in June, this confrontation could prove longer and more intense. As a result, this round ‎carries more threats to ‎oil prices and the global economy.‎ Because this war has no end objective beyond removing the current Iranian leadership. And till the point it does not happen, expect maximum pushback from Iran via all channels including Strait of Hormuz. There is no exit route for the current Iranian leadership & hence by the time, they are replaced, there will be repercussions for energy as well as risk assets globally. We looked at various alternate post war scenarios and realised that 3/7 led to Brent prices surging above $100 levels. The current geopolitical risk premium is roughly $5-$6 per barrel which can easily go to $20-$25 levels in case Iranian exports (currently 1.5 mbpd) halt or Strait of Hormuz gets attacked by current Iranian leadership. We believe this new wave of war is bigger, broader, and messier than previous episodes, such as the June war. The gap between attacks and retaliation has also narrowed: in previous waves, it took days; today, it’s hours. And the arena is already wider covering various countries in the middle east. The Iranian system may survive an initial US strike. Toppling governments is hard, especially with no US boots on the ground. Hence, we believe that it is highly probable that not only Islamic Republic survives in the first few days, it escalates the defence response to attacks on energy infrastructure in middle east as well as strait of Hormuz. 20% of global oil, condensates and petroleum products transit through Hormuz. Also about one-fifth of global liquefied natural gas trade also transit the Strait, mainly from Qatar. So the next question is how long can Iran close Strait of Hormuz? We believe it might be temporary as US forces would ultimately be able to reopen the waterway. US naval vessels could escort commercial oil tankers akin to Operation Earnest Will in the 1980s, where the US Navy protected Kuwaiti oil tankers from Iranian attacks and mines during the Iran-Iraq War. US warships and aircraft could fire upon attacking Iranian ships. The US could sink Iranian vessels blocking the Strait with air- and ship-launched missile attacks. But US efforts to reopen the route would come at a cost: both financial and in capabilities. A direct military clash could further escalate and also risk casualties. And reopening the waterway wouldn’t prevent Iran from trying to close it again. Nonstop instability would continue to affect shipping. This raises shipping insurance costs, freight costs as well as the underlying crude price too. Summary: We believe Iran's current leadership wont go with out a fight. Today’s Israel-US attack on Iran might be drawn into a long-drawn war of minimum 2-3 weeks before the current leadership is either taken out militarily or there is an internal revolt. Till then we will Brent moving higher to $90-100 levels, gold testing $6000 levels and S&P500 testing 6000 levels. 10yr UST yields might push lower towards 3.85 but beyond this level, it might not drop further. Post the initial risk off, there might be massive selling in US assets as inflation fears take centre stage. DXY might strengthen initially but finally fall. This war could not have come at a worst time. The market positioning was tilted in favor of long risk assets before the war began today. Equities might correct significantly as dip buyers vanish and systematic models drive markets lower via momentum driven strategies. In short it might get worse before it gets better.

There is a famous British saying “Power tends to corrupt, and absolute power corrupts absolutely”. Trump after seeing his loss of face by the SCOTUS decision on IEEPA tariffs rollback is more likely to make a military manoeuvre on Iran than before. Seeing his core policy failure, we believe Trump might be motivated to prove on global stage his authority by announcing a full-fledged war on Iran. Global risk assets are not at all pricing in this likelihood as seen in calm equities when Brent has shot up to $72 per barrel in spite of a weak physical demand supply situation. We looked at where the military assets are lined up in Iran and surround areas from both sides. We believe one can’t have this much of hardware located at one place just for show and no action. While there are valid grounds to think of this show of force as a negotiating tool from Trump, we believe he himself will light the fire if push comes to shove. From the US side, there are 2 carrier strike groups USS Abraham Lincoln (CVN-72) carrier Strike Group in the Arabian Sea & USS Gerald R. Ford (CVN-78): World's largest carrier, deployed with strike group. Then there are at least 12 destroyers along with 3 combat ships. On the airsupport side, more than 120 US aicrafts are currently positioned in & around Iran. These aircrafts include F-22 Raptors and F-35 Lightning IIs for air superiority/strike, F-15E Strike Eagles and F-16 Fighting Falcons, B-2 Spirit stealth bombers (potentially for strikes on hardened targets), surveillance aircrafts such as E-3 Sentry (AWACS), E-11A Battlefield Airborne Communications Nodes, refulers such as KC-135 Stratotankers, KC-46 Pegasus, C-17A Globemaster, and C-5M Galaxy, defence & recon aircrafts such as Navy P-8A Poseidon. Above all this there is missile defence of THAAD & Patriot battery installations. Flight-tracking data shows many departing bases in the US and Europe, supported by cargo aircraft and aerial refuelling tankers, a sign of sustained operational planning rather than routine rotations. So how is Iran responding to it. Iran has built a layered anti-access strategy centered on mines, submarines, anti-ship missiles, swarm craft, and air defenses to complicate any U.S. campaign in the Strait of Hormuz and surrounding waters. The design is less about decisive victory and more about stretching U.S. missile defenses, logistics, and political tolerance long enough to shape escalation on Tehran’s terms. Iran’s defensive design for a clash with the United States is built less around winning decisive naval or air battles and more around manufacturing sustained friction at every layer of the campaign. The intent is to pull U.S. forces into a dense, overlapping threat environment where time, interceptor inventories, and political tolerance become the real centers of gravity. Tehran’s architecture aims to force carrier air wings, Aegis destroyers, and regional airbases to fight for access step by step, while its most survivable launchers keep operating after fixed sites and static radars have been hit. The decisive question is not whether Iran can reliably sink a carrier or permanently bar stealth aircraft, but whether it can keep the Strait of Hormuz unsafe, keep U.S. strike packages stressed, and keep U.S. missile defense magazines bleeding long enough to shape escalation on Iran’s terms. Hence, we believe that if US/Israel attacks Iran in the current standoff, it might be a long drawn low intensity war. Iran had learnt it’s lessons well from the last year’s 12-day attacks from Israel. The level of Iranian preparedness we are witnessing in satellite photos as well as defence radio chatter is symbolic of Iran ready for a long-drawn war. It is US-Israeli military might versus Iran’s multi theatre low intensity defence. If our assumptions on Trump’s current frame of mind are correct, we should expect an attack soon in Iran in the next few days itself. Global equities can see 10-15% correction as the war prolongs much beyond every one’s imagination. Initially the 10yr UST yields might drop due to risk off but as brent goes above 85/90 levels, there might be massive selling in US assets as inflation fears take centre stage. DXY might strengthen initially but finally fall.

In a landmark judgement today, the Supreme Court struck down President Trump’s IEEPA tariffs in a 6-3 ruling (Justices Kavanaugh, Thomas, and Alito dissenting). SCOTUS made no decision regarding potential refunds of past tariffs, with the question likely to return to lower courts. Hence in response to the court ruling, President Trump announced he would implement a 10% “global tariff” under Section 122 of the Trade act of 1974, followed by Section 301 investigations, which could provide a more-durable basis for tariffs. Our current base case is that these will substitute for the overturned IEEPA tariffs, maintaining exemptions which were previously in place. We estimate the net impact would reduce the average effective tariff slightly by 1.6pp to 12% from the current 13% levels. Despite Trump’ s insistence in his press conference that tariff revenues would increase as a result of the Supreme Court decision, we put more weight on USTR Ambassador Greer’s comments that the newly announced tariffs would maintain “continuity.” Some trade partners with reciprocal tariff rates above 10% (such as Brazil) are likely to benefit in the near term from the transition from IEEPA to Section 122 tariffs. From a timing point of view, it is noteworthy that a Congressional vote to continue the Section 122 tariffs will need to occur in late June or early July, right when the midterm elections are expected to become front and center. On the issue of refunds, we believe roughly $150 BN could be potentially under litigation. But it might be a long drawn legal process with marginal benefits for small businesses & modestly disinflationary. Market impact is likely some steepening in UST yield curve as well as higher US equities. We had given a trade reco on initiating a 2*10 US flattener at 47 levels on 7th Feb. Profit target was 35 levels. Currently it is at 36.5 levels where we close the trade in profit as today’s tariff decision is significant enough to change our core view. We remain bullish on US equities as per our trade reco on 8th Nov when S&P was at 6729. Currently it is at 6909 and we have a target of 7015.