Global markets face a confluence of headwinds on Monday. AI leaders have collectively called for a slowdown in technological development, triggering a significant sell-off in tech and chip stocks. Simultaneously, escalating tensions in the Middle East have pushed oil prices above $107 per barrel, intensifying inflationary concerns.

Adding to the complexity, the probability of a Federal Reserve rate hike this week has surged to nearly 90% amid surging oil prices. The simultaneous impact of high interest rates, elevated oil costs, and AI valuation concerns is weighing heavily on global risk assets. As of writing, Dow futures are down 0.20%, S&P 500 futures have fallen 0.55%, and Nasdaq futures have dropped 1.39%. AI-related stocks have suffered further losses following calls from OpenAI and Anthropic leaders to slow the pace of artificial intelligence development to manage associated risks and protect humanity. In European markets, the Stoxx 600 index declined 0.3%, with gains in oil and gas stocks offset by losses in technology shares.

Where the market stands now

Anthropic CEO Dario Amodei expressed concerns about AI risks in a letter, with xAI head Elon Musk and OpenAI CEO Sam Altman echoing similar views, putting broad pressure on technology stocks. In pre-market trading, core AI-related stocks including Marvell Technology (MRVL), Intel (INTC), and Micron are showing declines ranging from 4.5% to 5.7%. Additionally, an exchange-traded fund tracking major chip stocks fell 4.7% in early trading, as traders worry that efforts to limit AI development could disrupt the current AI boom driven by hundreds of billions in capital expenditure. SoftBank Group, an investor in OpenAI, saw its shares post their biggest drop in nearly three months, while South Korea's KOSPI index declined 3.3%.

The rare united front from AI giants

The most immediate risk for the market is the potential slowdown in the multi-billion-dollar spending that has underpinned the AI boom. This concern has intensified especially after Altman indicated that OpenAI will not pursue an initial public offering this year due to safety concerns. Kathleen Brooks, research director at XTB, noted, "This is a very rare unified signal from a group of technology company CEOs, and it's dragging down AI trading in early sessions today." She added, "Do these warnings about AI mean we're approaching the end of hyperscale AI computing and infrastructure buildout? If so, this would have enormous implications for financial markets and could trigger a major sell-off in chip stocks and other AI-related assets at the start of the new trading week." Chris Armstrong of Berenberg commented, "There was some irrational exuberance in the mid-summer period, and now that sentiment is being gradually squeezed out. I see this as another phase in the downward revision of market expectations."

Oil breaches $107 as supply concerns mount

Further disruption to Middle Eastern crude supply has added to the market's pessimistic mood. Saudi Arabia has temporarily shut down its east-west oil pipeline as a precautionary measure following an attack, while a meeting between Iran and Gulf Arab states scheduled for Monday in Oman to discuss opening the Strait of Hormuz has been postponed. Brent crude futures are latest trading up 2.5% at $107.18 per barrel, following a cumulative gain of nearly 9% last week. Prices for diesel, gasoline, and jet fuel are now significantly higher than pre-conflict levels, meaning consumers will directly bear the increased costs. Tim Waterer, chief market analyst at KCM Trade, stated, "Two unwelcome headwinds have collided. The warnings about slowing AI development, combined with rising oil prices after Saudi Arabia shut its east-west pipeline, create a very tricky combination for risk assets."

Trump downplays AI slowdown concerns

Anthropic CEO Dario Amodei said on Saturday that the company would introduce new safety measures while urging the entire industry to slow the development pace of the most advanced AI models. OpenAI's Sam Altman has endorsed this proposal, and xAI's Elon Musk echoed, "Dario is right." However, with competition from Asian regions remaining fierce, questions persist about the extent to which AI company leaders will genuinely slow their development efforts. President Trump has downplayed these concerns. Mohit Kumar of Jefferies noted, "Setting some guardrails helps guide the direction of AI development, but we don't think this will actually slow things down. In our view, the overall trajectory will continue moving forward."

Fed rate hike probability approaches 90%

The dollar rose 0.4%, with the euro falling to a one-month low against the greenback. The dollar strengthened 0.6% against the yen to 154.46, after having declined approximately 4% over the past two weeks and moving well away from the July high of 163.99. Following last Friday's US consumer inflation data coming in higher than expected, traders now see nearly a 90% probability of a Fed rate hike on Wednesday. If realized, this would mark the Fed's first rate increase since mid-2023. The European Central Bank has already raised rates last week, hinting at further potential hikes if inflation continues to heat up. Government bond yields are edging higher, with global bond markets recording their worst weekly performance since mid-May last week. The benchmark 10-year US Treasury yield is approaching the 5% level, which would be the highest since 2023, while the German 10-year yield has broken above 3.53%, reaching its highest level since 2009. European bonds are underperforming due to worsening inflation prospects from higher oil and gas prices. The UK two-year gilt yield rose 6 basis points to 4.87%.

Central banks may need additional hikes

The technology stock sell-off comes at the start of a pivotal policy week. With inflation risks rising, both the Fed and the Bank of Japan face pressure to hike rates at their policy meetings on Wednesday and Friday, respectively. While the market does not currently expect the Bank of England to raise rates on Thursday, the possibility of a hawkish policy shift with a November hike remains. Markets currently price approximately a 76% probability that the Bank of Japan will raise rates by 25 basis points to 1.25% at its Friday meeting, potentially signaling further tightening ahead. The BoJ continues to support the yen, with previous market intervention helping it rebound from 40-year lows. Samy Chaar, chief economist at Lombard Odier, remarked, "Equities haven't really experienced dramatic volatility in the face of 5% yields and high oil prices. But now we clearly need to factor in a new variable: if supply disruptions in the Strait of Hormuz continue, we'll have to consider that central banks may need to hike several more times, which is exactly what the market is currently pricing." He added, "The Fed has less patience than before, and so do other central banks, including the ECB. They're not going to just let time take its course; they want to act preemptively."

Triple pressure points to stagflation risks

Bank of America chief investment strategist Michael Hartnett warns that record diesel prices, the 30-year Treasury yield surging to highs not seen since 2007, and productivity concerns masked by the AI boom are collectively building toward an autumn stagflation risk. Hartnett highlights the transport ETF (IYT) as the most critical indicator to watch, noting that a break below the 200-day moving average support of 80 points would confirm that the summer's "best time is over" and that macro de-risking is formally evolving into an autumn stagflation event. He warns that "complacent markets combined with hawkish policy are a breeding ground for volatility" and explicitly states that "it's not too late to hedge the AI bubble stock index."

Key stock movers

Following calls from AI industry leaders including Anthropic CEO Dario Amodei to slow AI capability development, major chip stocks are declining in pre-market trading. Intel (INTC) is down nearly 6%, Marvell Technology (MRVL) has fallen over 7.4%, and AMD is down more than 5%. Due to rising oil prices and Middle East tensions at the start of the week, the SPDR Energy ETF (XLE) is up over 1.2% in pre-market trading. Devon Energy, Apache, Marathon Oil, and EOG Energy are all up 2%, leading the sector. Following warnings from Elon Musk, Dario Amodei, and Sam Altman about the excessively rapid pace of AI development, market concerns over AI safety have intensified, pushing cybersecurity stocks broadly higher. Palo Alto Networks is up over 4%, and CrowdStrike has risen 5.4%. Due to AI development and safety risks raised by Musk, Amodei, and Altman, Hewlett Packard Enterprise is down over 7%, while IT solutions provider Super Micro Computer has also dropped more than 5%. Wolfe Research has issued a bullish note on Affirm, viewing the post-earnings share price pullback as a buying opportunity with expectations of outperformance, sending Affirm shares up more than 2.1%.