The rule that has governed global finance for forty years has been that when something breaks, money leaves the developing world. It happened in 1994, in 1997, in 2008, in 2013 when the US Federal Reserve merely hinted at slowing its bond purchases, and again after 2020, when the COVID pandemic shock pushed Zambia into default that November, and Sri Lanka and Ghana into default two years later.

By that rule, 2026 should have been a bloodbath. A war that began in late February has effectively closed the Strait of Hormuz, the passage that carried roughly a fifth of the world’s oil. Brent crude has traded near USD 89 a barrel in mid-August, up about a quarter on pre-war levels after touching USD 110 earlier in the year.

Fertiliser prices have followed, and behind them food. The yield on the 10-year US Treasury note, the number against which almost all developing country borrowing is priced, sits near 4.65%, against 3.97% before the fighting started. Traders have spent the summer arguing not about how quickly the Fed will cut rates, but whether it will have to raise them.

The rule did not hold. Institute of International Finance data shows foreign investors put USD 214.4 billion into emerging market debt in the first seven months of 2026, against USD 177.7 billion in the same stretch of 2025, the strongest run in more than two decades.

Governments have exploited the appetite. Roughly USD 19 billion of sovereign bonds were sold in July alone, about twice the average for that month over the past ten years, taking issuance for the year to a record USD 187 billion.

Something has changed, and it is worth being precise about what.

The comparison that flatters the developing world

Ask whether emerging economies have handled geopolitical disruption better than rich ones and the honest answer is that they have handled their own balance sheets better, which is not quite the same thing.

The IMF’s April 2026 Fiscal Monitor put global public debt just under 94% of GDP in 2025, on course to cross 100% by 2029, a year earlier than the fund projected only twelve months previously. The accumulation is driven overwhelmingly by the largest economies.

On the fund’s April World Economic Outlook database, US general government gross debt is projected at 126% of GDP this year and 142% by 2031, the biggest absolute increase in the advanced world. Japan sits above 200%. Twenty-three economies now carry gross debt above 100% of output, and the list is dominated by rich countries, not poor ones.

Set against that, the emerging market picture looks almost conservative. Central banks across Latin America, Asia and Africa spent the 2022 to 2024 inflation shock raising rates early and hard, which left them with real yields that are genuinely positive, and room to cut when their advanced counterparts have none.

Reserve buffers are thicker. Central bank independence, which was a slogan in the 1990s, is now closer to institutional fact in Brazil, Mexico and South Africa.

Ratings agencies have noticed. Pakistan, Ghana, Ecuador, Nigeria and Argentina have all collected upgrades. Oman and Azerbaijan have reached investment grade. Fund managers report the strongest upgrade momentum among lower rated sovereigns in over a decade, an unusual thing to say in a year of war.

Political risk, meanwhile, has migrated. The disorder that investors once priced into Latin American and African assets now shows up in a record US government shutdown, fractured European coalitions, and defence spending commitments that nobody has explained how to fund.

The growth arithmetic points the same way. The IMF’s July update expects emerging market and developing economies to grow 3.8% this year and 4.5% in 2027, against 1.7% and 1.8% for advanced economies. Global growth of 3.0% in 2026 recovering to 3.4% in 2027 is what the fund calls a V shaped path around the war shock.

The caveat matters, though, and it is a heavy one. The World Bank’s June Global Economic Prospects cut its global forecast to 2.5% for 2026, the weakest since the pandemic, and downgraded two-thirds of economies. South Asia, the fastest growing region, decelerates from 7% to 6.3%.

Low-income countries manage 5.4%, three-tenths lower than previously expected, with fertiliser driven food inflation doing much of the damage. Most sobering, the bank calculates that by 2028 developing economies other than China and India will have spent nearly a decade making no progress at all in closing the income gap with rich countries.

So, the financial resilience is real. The developmental resilience is not. Bond markets and living standards have decoupled, and anyone reading the inflow numbers as evidence of broad-based prosperity is reading them wrong.

Why the money is moving

For a decade-and-a-half, global portfolios were built on a single assumption, that American assets were the default, and everything else was a satellite allocation. That assumption is being quietly unwound.

The IMF has begun writing about the erosion of the US Treasury’s safety premium in its own fiscal surveillance. Investors who spent 2025 watching the dollar post its sharpest annual fall in eight years have concluded they are over allocated to one jurisdiction, and, in a fragmenting world, they want to be spread across many.

The mechanics reinforce the mood. For Japanese and other Asian institutions, hedging US Treasuries back into home currency now wipes out most of the yield, which makes local Asian bonds structurally more attractive than they were.

Emerging market debt was yielding around 6.9% in February, against roughly 4.2% for US bonds and 3.6% globally. Rising Treasury yields have narrowed that gap since, but not closed it.

The pull side is the story of a decade of quiet plumbing work. Emerging economies have built domestic capital pools deep enough to reduce their dependence on foreign money altogether.

Local currency sovereign bonds outstanding totalled roughly USD 13 trillion by the end of 2024, against about USD 1.4 trillion of international hard currency sovereign debt, according to research from JP Morgan and UBS. Large economies, such as Brazil and South Africa, now fund themselves overwhelmingly at home, in their own currency, from their own pension funds and insurers.

That changes the physics of a shock. When foreign investors sell, domestic institutions are on the other side of the trade. Fund managers describe the result as an absence of the liquidity crunches that used to define emerging market sell-offs. Prices fall, but the market does not gasp.

Positioning is the third leg. After what Bank of America’s head of emerging market fixed income strategy David Hauner, speaking to Reuters, called the ‘valley of tears’ running from roughly 2015 to 2025, a stretch of strong dollar, US exceptionalism, and serial defaults, global investors are still structurally underweight.

Emerging economies hold about 60% of the world’s population and produce around 40% of global output, yet account for barely a tenth of the MSCI All Country World Index. Several months of inflows barely dent a decade of under-investment.

There is a risk buried in the composition of the money, and the IMF flagged it in April. Portfolio flows to emerging markets have risen eightfold since the global financial crisis to about USD 4 trillion in cumulative terms.

Portfolio debt liabilities now average around 15% of GDP, against roughly 9% in 2006. About 80% of that capital comes from non-banks, twice the share of twenty years ago, and non-bank money is faster money.

Private credit in emerging markets, opaque by design, has grown fivefold in a decade to somewhere between USD 50 billion and USD 100 billion. Deeper markets have not abolished the sudden stop. They have changed who would cause one.

Safe haven, or simply the least crowded trade

The safe haven question deserves a careful answer, because the marketing departments have got ahead of the evidence.

A true safe haven does two things. It holds value when everything else falls, and it stays liquid when liquidity vanishes. Emerging market assets do neither reliably. What they have done in 2026 is something narrower and still significant. They have offered diversification at a moment when the traditional refuges look compromised.

Look at the split inside the flows. While USD 214.4 billion went into debt, roughly USD 86 billion came out of emerging market equities in the same seven months, nearly ten times the outflow at the same point in 2025. This is not a wall of money buying an asset class. It is a discriminating reallocation into yield, and away from concentrated technology risk.

The performance record is similarly mixed. The JP Morgan GBI-EM Global Diversified index of local currency debt lost 2.25% in the first quarter as the dollar strengthened on safe haven demand, then gained 3.85% in the second.

An index of inflation linked emerging market local currency government debt has returned 11.3% this year, against 1.5% for the broader local debt index, and a small loss for the Bloomberg Global Aggregate. The winners are specific, not general.

Currencies tell the same story. Emerging market currencies erased their 2026 gains by the start of July as speculation about higher US rates revived the dollar. Capital Economics’ aggregate currency risk indicator has nonetheless stayed near multi-year lows, which is the more interesting fact. Currencies weakened without anyone fearing a crisis.

The deepest evidence for a structural shift comes from official reserve managers rather than fund managers, though it needs reading carefully. The dollar’s share of global reserves has fallen from roughly 71% in 1999 to 57.1% in the first quarter of 2026.

That latest reading, however, was up from 56.4% three months earlier, and the IMF is at pains to point out that much of the recent movement reflects exchange rate valuation effects rather than central banks actively selling dollars.

Intent shows up more clearly in what reserve managers say and in what they buy instead. In the World Gold Council’s 2026 survey, 74% of central banks expected the dollar’s share to be moderately or significantly lower within five years.

Official gold buying ran at an estimated 244 tonnes in the first quarter, ahead of both the previous quarter and the five-year average, with Poland the largest single purchaser.

Central banks are not calling emerging markets a haven. They are calling the ‘Old Haven’ crowded, and looking for anything neutral. Emerging market debt is one beneficiary of that search. Gold is the bigger one.

Professional investors are behaving accordingly. Several large houses, BlackRock’s investment institute among them, have cooled on emerging market equities and hard currency debt even as flows continue.

Managers describe themselves as highly selective, ignoring benchmarks, avoiding countries with debt problems and skipping those where yields no longer compensate. That is not haven behaviour. It is careful, well-paid risk taking.

What the institutions are actually saying

The IMF’s July update describes an economy pulled by two crosscurrents, a war shock that punishes energy importers and vulnerable states, and an AI investment boom that lifts anyone plugged into the technology value chain.

Global disinflation has stalled. Headline inflation is expected to rise from 4.1% in 2025 to 4.7% in 2026 before easing to 3.9% in 2027, with energy and food doing the work.

The Fiscal Monitor adds the geopolitical arithmetic. IMF staff estimate that a one standard deviation shock to their geopolitical fragmentation index is associated with public debt ratios rising about 1.5 percentage points of GDP over the medium term. Fragmentation is not an abstraction. It has a price, it is paid in borrowing costs, and it is being paid now.

The World Bank supplies the development warning. Its June report is explicit that emerging economies unable to build the ecosystem and policy environment for wide AI adoption risk falling further behind, and that private investment growth in developing economies has been declining since the 2000s even as public balance sheets improve.

The US Energy Information Administration expects Brent to average USD 87 a barrel across 2026 and does not see Middle East production returning to near pre-conflict levels until early 2027.

The IEA has warned of the widest global supply deficit in five years. For oil importing developing economies, that is another eighteen months of imported inflation.

Fund managers add the risk nobody controls. The threats most often named to the flow story are not war headlines but food prices, fertiliser costs, and El Nino. A drought does more damage to a frontier sovereign’s fiscal position than a missile does.

The next shock is already priced, badly

If the world has survived geopolitics, artificial intelligence (AI) is the test that has not yet started. And the strange thing about emerging markets in 2026 is that they are simultaneously the most exposed and the least prepared.

Start with the index. As of July 31, information technology accounted for 40.8% of the MSCI Emerging Markets Index. Taiwan is the largest country weight at 26.6%, China 21.4%, and South Korea 20.3%.

Taiwan and Korea together are almost half the benchmark. In January those weights were 21% and 15.7%, with technology at 30.3%.

India, meanwhile, has slid from roughly 20% of the index in mid-2024 to under 12%. Its equities are down around 5% in local currency terms this year, with the Sensex at 77,728 on August 17, having lagged badly through the first half before a July rally that pulled about USD 1.6 billion of foreign money back in. Expensive crude and a weaker rupee did most of the damage.

The emerging market equity benchmark is now, to a first approximation, a leveraged bet on the AI semiconductor cycle.

That has been enormously profitable. It also means every boom and bust in AI sentiment transmits straight into an asset class marketed as diversification. Korea’s Kospi moving 3.7% in a single session on AI earnings is not an emerging market story at all. It is a Silicon Valley story with a Seoul postcode.

Then there is the labour market, where the exposure runs the other way. IMF research puts around 40% of global employment in occupations exposed to AI, rising to 60% in advanced economies but sitting at 40% in emerging markets and 28% in low-income countries.

The fund’s 2026 work on new job creation finds AI related skills appearing in almost 5% of US job postings by 2025, with incidence in emerging economies roughly half that.

The comfortable reading is that developing economies face less immediate disruption. The correct reading is that they face less immediate disruption because they have fewer of the cognitive jobs that AI both threatens and rewards, and they are much less equipped to capture the productivity gains.

The IMF’s AI Preparedness Index, which covered 174 economies when it was published in 2024, places India at 0.49 against 0.77 for the US and 0.80 for Singapore. Bangladesh scores 0.38.

For countries whose development model runs through services exports, business process outsourcing, back-office work, entry level coding and customer support, this is the central strategic question of the next decade, and it is barely being discussed in the same rooms where capital flows are celebrated. Cheap labour was the comparative advantage. AI attacks precisely the tasks that made it valuable.

The economies best placed are the ones already inside the hardware chain, Taiwan and Korea above all, along with the handful of middle-income economies drawing data centre investment on the strength of cheap power. The ones most at risk are populous middle-income countries with young workforces, thin digital infrastructure, and social safety nets designed for a different century.

What to watch out for

The bull case for emerging markets rests on three things holding. That the Fed does not have to raise rates. That Hormuz reopens before food inflation does structural damage to importing sovereigns. That the reallocation away from American assets is a strategic decision rather than a carry trade wearing a strategic costume.

The first two are out of the hands of finance ministries from Accra to Jakarta. The third is not. Governments that use this window to extend maturities, deepen domestic investor bases, and build the digital and educational infrastructure that AI adoption requires, will look, in five years, as though they earned something.

Those that simply enjoy the cheaper borrowing will find out that the oldest rule in global finance was not repealed in 2026. It was merely suspended.

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They funded the same trade bodies, signed the same comment letters, ran the same advertisements and told regulators the same story about credit, competitiveness and the cost of holding idle equity. 

That campaign has largely worked. The Federal Reserve is now finishing a rewrite of capital rules that will leave the biggest lenders holding less capital than they do today.

And that is precisely where the alliance has broken. JPMorgan, Bank of America, Goldman Sachs and Morgan Stanley are now feuding over a single technical adjustment inside the Fed’s proposal, with billions of dollars at stake, according to public documents and four people familiar with the discussions who spoke to Reuters. 

The disagreement is narrow, highly technical and almost entirely invisible to anyone outside the regulatory bar. It is also worth more to the banks involved than most of the rest of the package combined.

What the surcharge does
The instrument at the centre of the argument is the capital surcharge applied to global systemically important banks, known as GSIBs. 

There are eight of them in the United States, namely JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, BNY Mellon and State Street. 

The surcharge is an extra layer of common equity tier 1 capital they must hold on top of everyone else’s requirements, calibrated to the damage their failure would inflict on the wider system.

The Fed built the surcharge after the 2007 to 2009 financial crisis, originally around five systemic risk factors carrying equal weights of 20% each, one of which was short-term wholesale funding. 

The logic was drawn straight from the wreckage of that period. Before the crash, the largest Wall Street firms funded their balance sheets aggressively with short-term liabilities that, for several of them, disappeared almost overnight, a dynamic that accelerated the collapse of Lehman Brothers and forced Morgan Stanley and Goldman Sachs to convert into bank holding companies.

Short-term wholesale funding, or STWF, covers repurchase agreements, commercial paper, brokered and uninsured wholesale deposits and similar instruments. It is cheap, flexible and prone to vanishing at exactly the moment a bank needs it most.

The tweak that split the room
In March the Fed proposed changes it said would make the surcharge more risk-sensitive, including a revision to how short-term wholesale funding is treated. The mechanics matter here.

At present the Fed measures short-term wholesale funding as a ratio of risk-weighted assets. That normalised comparisons across the eight banks, but it also pushed the effective weighting of the funding measure to roughly 30% of the overall calculation. 

The Fed has proposed scrapping the ratio and simply measuring the absolute dollar amount of short-term wholesale funding a bank carries. 

The recalibration is designed to bring the funding component back to around 20% of aggregate Method 2 GSIB scores, its originally intended weight, with the Fed attributing the drift to early data limitations.

Strip out the jargon and the change is simple. Today a bank’s funding risk is judged relative to how risky its assets are. Under the proposal it would be judged on its own, in dollars.

That single substitution redistributes billions across the industry, because the eight banks look very different once the denominator disappears.

Winners, losers and the maths behind them
The banks that benefit are the ones with small risk-weighted asset books relative to their funding. The banks that lose are the universal lenders with enormous balance sheets that were, in effect, being flattered by a large denominator.

According to 2026 federal data, short-term wholesale funding accounted for 37% of Morgan Stanley’s liabilities and 30% of Goldman Sachs’s. For Bank of America the figure was 24%, and for JPMorgan 21%.

The scoring effects are stark. Morgan Stanley currently carries the highest funding score among the eight at 333 basis points, despite ranking only fifth in absolute terms with $503bn of short-term wholesale funding, because its comparatively small $529 billion risk-weighted asset base inflates the ratio. 

Under the proposal its score would fall to 116 basis points, a decline of 65%. JPMorgan runs by far the largest short-term wholesale funding book at $903 billion, yet ranks only fourth on the current measure at 165 basis points, because its $1.9 trillion risk-weighted asset denominator dilutes the result. 

Under the proposal JPMorgan would move to the top of the table at 208 basis points. Goldman Sachs, second highest today at 271 basis points on $552 billion of funding, would drop to 127 basis points.

Translated into capital, the numbers are large enough to explain the sudden loss of solidarity. The overall package still reduces requirements for all of them, but JPMorgan told the Fed in a June letter that the funding tweak would cost it $13 billion of additional relief it would otherwise have received, and Bank of America $9 billion. 

In the same letter JPMorgan estimated that Goldman Sachs and Morgan Stanley would each pick up a further $1 billion to $2 billion, a figure that is its own calculation of a rival’s gain rather than an independent one. 

Better Markets has reached the same directional conclusion, namely that the two investment banks stand to benefit most.

The Main Street argument
The change caught executives at JPMorgan and Bank of America by surprise, the people told Reuters, because the two largest US lenders sit on deep deposit funding and the revision hands the advantage to commercial rivals who rely more heavily on wholesale markets. 

To them it also sat awkwardly with the stated rationale for capital relief under President Donald Trump’s regulators, which has been to expand lending into the real economy.

That has become the core of their public case. According to the same account, JPMorgan and Bank of America executives have lobbied Fed officials, at times in joint meetings, to kill the proposed change, arguing that the new formula could constrain lending and support riskier trading activity instead. 

JPMorgan’s business banking chief Stevie Baron made the argument publicly in a blog post in August, warning that the proposal as drafted would encourage trading over lending to small businesses and customers.

The formal objections were filed in June. In separate comment letters submitted on June 18, JPMorgan and Bank of America told the Fed it had not adequately justified removing risk-weighted assets from the denominator, arguing the change could distort how reliance on short-term funding is measured and produce uneven outcomes across the largest US banks. 

Bank of America’s chief financial officer Alastair Borthwick wrote that a gross funding measure with no denominator risks overstating the danger posed by a larger firm whose relative reliance on such funding is low.

Bank of America has kept its public language broad. A spokesperson said the bank supports changes that drive Main Street lending, job creation and affordability. The Fed, JPMorgan, Goldman Sachs and Morgan Stanley all declined to comment.

The case for absolute dollars
The two investment banks take the opposite view, and they have the more orthodox regulatory argument on their side.

Goldman Sachs and Morgan Stanley filed their own letters backing the revision, on the grounds that it would improve the accuracy of the surcharge by better aligning the funding measure with the risk it is meant to capture. 

Goldman argued the change would produce a more transparent and economically grounded measure, while Morgan Stanley, which two of the people who spoke to Reuters described as especially active in pressing the case, told the Fed the revision could improve liquidity in the Treasury market by cutting the capital banks must hold against dealing in government bonds.

Financial reform advocates, who agree with almost nothing else in the Fed’s package, agree with them on this point. 

Better Markets argues that the damage a funding run inflicts depends on the absolute dollar volume of run-prone liabilities, not their ratio to a risk-weighted figure, since a bank forced into a fire sale must liquidate real assets at real prices regardless of what risk weights those assets carried. 

The group also notes that scaling by risk-weighted assets creates a perverse incentive, because banks that successfully optimise their risk weights downwards see their funding scores rise, while banks that become genuinely riskier see them fall.

Christopher Appel, director of banking policy at Better Markets and a Fed official from 2019 until March, said the surcharge is a key remaining safeguard as regulators trim overall capital levels and that the revision would better gauge funding risk. 

“It’s absolutely critical that the Fed get this right,” he said. Appel was among many staff who left the central bank this year as the administration overhauled federal agencies.

The wider package
The funding dispute sits inside a far larger rewrite. On March 19, the agencies released a linked set of proposals covering Basel III implementation, a revised standardised approach and the GSIB surcharge methodology, marking a decisive retreat from the 2023 drafts that would have pushed capital requirements sharply higher across the industry. 

Fed Vice Chair for Supervision Michelle Bowman set out the logic a week earlier, saying the Basel III element would raise requirements slightly for the largest banks while the surcharge proposal would produce a modest decrease, leaving a small net reduction.

The surcharge proposal does several other things beyond the funding measure. It adjusts the fixed systemic indicator coefficients to account for economic growth and inflation, replaces year-end snapshots with daily and monthly averages, and narrows the Method 2 surcharge bands from 50 basis points to 10 basis points to soften the cliff effects of moving between buckets. 

Industry economists have long complained that fixed denominators calibrated to 2012 and 2013 activity levels cause Method 2 scores to drift upwards over time for reasons unconnected to systemic risk, with a bank holding a constant global market share seeing its size score rise by 29% over the period.

The aggregate figures are substantial. The surcharge proposal alone is expected to cut common equity tier 1 requirements for GSIBs by roughly 3.8%. Taken together, the March package is estimated to reduce required CET1 by up to 4.8% for Category I and II GSIB organisations, 5.2% for Category III and IV regional banks and 7.8% for community banks.

Not everyone at the Fed agreed. Governor Michael Barr put the surcharge cut at $33 billion and said that once the recent changes to the enhanced supplementary leverage ratio are included, tier 1 requirements for GSIBs fall by 6.0%, or $60 billion. 

“These significant reductions in capital requirements are unnecessary and unwise,” he said, while accepting that some elements, including annual averaging and narrower scoring bands, were genuine improvements.

Why the banks still object
It is worth noting that even the banks winning relief are unhappy with the headline outcome. Jamie Dimon told shareholders in April that the proposals remain flawed in specific areas and that some aspects are, in his words, nonsensical, while backing timely finalisation because everyone wants to move on. 

On JPMorgan’s first-quarter call, executives said the bank was planning for a surcharge of 5.2% in 2028, a 70-basis point increase on the current 4.5%, which combined with the Basel III risk-weighted asset changes would mean roughly $20 billion more GSIB capital on its present balance sheet.

That is the frame JPMorgan has adopted throughout. It is not arguing that the surcharge should disappear. 

It is arguing that the calibration remains disconnected from the Fed’s own stated rationale, and that the funding tweak makes the disconnection worse.

The timing explains much of the urgency. The infighting risks complicating the Fed’s effort to finalise the reforms before 2027, when Democrats are widely expected to take the House of Representatives and step up scrutiny of the administration’s regulators.

Access has not been the constraint. JPMorgan and Morgan Stanley executives have each met Fed officials on the GSIB proposal at least four times since March, according to public Fed memos reviewed by Reuters. 

The four people cited by the agency said it was unclear who will prevail. Bowman has told banks to limit their feedback, and three of them believe she will stay close to the current draft, partly because she wants the rule done by year-end.

All four banks support the overhaul in principle. What has changed is that a rare window has opened to maximise individual gains at a rival’s expense. 

The industry pushed for years to soften the surcharge with limited success, and only made progress when the Fed’s 2022 capital review triggered an unprecedented and unified backlash. Unity was the tactic that worked. It has not survived contact with the spoils.

What to watch
Three things will determine how this lands. The first is whether the Fed keeps the absolute-dollar measure intact, softens it with a partial denominator, or phases it in. 

A compromise that preserves the principle while smoothing the distributional effect is the most likely landing zone for a regulator trying to close a file before the calendar turns.

The second is the Treasury market question. Morgan Stanley’s argument that lower capital charges on repo activity would deepen liquidity in government bonds is the one strand of this dispute with consequences well beyond bank shareholders, and it is the argument most likely to resonate inside a central bank that has spent years worrying about Treasury market fragility.

The third is durability. Better Markets has pointed out an internal tension in the package, arguing that if risk-weighted assets cannot be trusted as a denominator for the funding measure, the accompanying Basel III proposal doubles down on the same metric across the rest of the capital framework. 

A rule finalised in December on a narrow supervisory majority, into a Congress about to change hands, is not obviously a settled rule.

For now, the spectacle is the story. Four of the most powerful financial institutions in the world spent a decade arguing that capital regulation was too blunt to reflect real risk. 

The Fed has finally accepted a version of that argument, and two of them have discovered they preferred the blunt version after all.

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The unanimous decision taken by the apex bank, under its new chief Kevin Warsh, has effectively put a stamp of acknowledgement on the Trump administration’s inability so far to control inflation.

While Trump, during his presidential campaign two years back, had promised to lower prices on his watch, the combined impact of his global import tariffs, an energy shock following the Iran war, and ‌capital spending from the AI boom has kept price pressures intense enough.

Additionally, Trump’s ongoing trade war with Canada, which has cast serious doubt on the future of the USMCA (North America’s trade glue), along with the passage of the new bipartisan bill granting him further powers to impose 100% secondary tariffs on China and India—two of Russia’s largest energy producers—will likely keep the Fed vigilant.

The benchmark overnight interest rate, which was raised by a quarter of a percentage point to the 3.75%-4.00% range, may go up further, given the updated quarterly economic projections that show 16 out of 18 apex bank policymakers anticipating at least one more quarter-percentage-point hike by the 2026 end.

All but one indicated they saw upside risks to inflation that they now attributed to more than just one-off supply shocks.

Warsh, who again did not submit rate or other economic projections to the media, attributed the need for tighter monetary policy in part to an economy he sees as picking up speed.

For the new Fed boss, strong economic and job growth are adding to price pressures that no longer seem rooted in oil costs or import tariffs alone.

“There’s been a pretty wide-ranging set of data, including the labour market, indicating that the economy has strengthened. Domestic spending has been resilient, productivity growth strong, and capital investment is robust,” Warsh told reporters in listing the reasons that prompted him and the wider Fed policymaking panel to support a rate hike after advocating that ⁠rates should remain on hold at the Fed’s July 28-29 meeting.

Ironically, the rate increase became the first such move in three years and the first policy shift under the new Fed chief, who took office in late May after being selected by Trump with an expectation that he would cut rates.

“Inflation remains elevated. Today’s policy action will support a timelier return to the committee’s 2% goal,” the central bank’s Federal Open Market Committee said in its policy statement, after the end of a two-day meeting.

Warsh, speaking at his post-meeting press conference, called the rate hike the “right decision”.

“I would be hard-pressed to describe broad financial conditions as restrictive. This view was widely shared by the committee, so we removed a dose of accommodation,” he added further.

However, Warsh’s statement managed to displease Trump, who reacted quickly, repeating what has been a standing call since returning to office in January 2025 that interest rates in the world’s largest economy should be slashed to perhaps 1%, a level usually associated with Fed efforts to boost the economy out of a crisis, especially during inflation times.

“Interest Rates in the United States should be 1%, or less, because we are the Best Credit in the World — BY FAR. Our Country is BOOMING with new Investment! If we stopped Trading with every country that we have a Deficit with, which is most of them, we would make, at least, 1.5 Trillion Dollars a year. The word ‘Deficit’ is nothing more than a fancy word for LOSS … LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!” Trump said on his Truth Social platform.

Trump clashed with former Fed Chair Jerome Powell, an episode that saw the Republican launching routine verbal attacks at the celebrated banking figure, who served during Trump’s first presidency and the reign of Democrat Joe Biden.

The clash ended up with Warsh replacing Powell.

Warsh, known for his style of conducting truncated press conferences, is currently focusing on the emerging evidence that has convinced him inflation would not improve at an adequate pace without tighter monetary policy, a direct counter to Trump administration officials’ comments that inflation was no longer a problem or would fall on its own over time.

The dollar strengthened broadly, and yields on two-year U.S. Treasury notes, highly influenced by Fed policy rate expectations, shot to the highest in more than two years after the release of the Fed’s policy statement and projections, which showed the ⁠policy rate rising to the 4.00%-4.25% range by the end of this year and ending 2027 at the same level.

According to CME Group’s FedWatch, the current direction of the rate futures markets reflects about a 90% probability of a follow-up quarter-percentage-point Fed rate hike by the end of this year.

The midterm elections will be crucial in terms of determining whether Republicans maintain control of the US Congress for the final two years of Trump 2.0.

As per the various surveys and projections, voters are already ⁠angry about high gasoline prices and interest rates on home mortgages, with the latter rising steadily this year.

The average rate on a 30-year fixed-rate mortgage is approaching 7%.

Fed policymakers marked up their estimates of inflation, as measured by the Personal Consumption Expenditures Price Index, to 3.7% versus the 3.6% projected at the June meeting.

As per their estimates, inflation is not projected to return to the 2% target until 2029, a year in which Uncle Sam will go into the presidential election.

Economic growth was marked up slightly from 2.2% to 2.3%, while the unemployment rate is seen ending the year at 4.1%, versus the 4.3% projected in June.

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The benchmark yield rose almost five basis points to an intraday high of 5.01% on September 14 before paring much of the increase as buyers emerged. It was the first time the closely watched rate had crossed the 5% threshold since October 2023, when it breached the level for one day.

The move came as surging crude prices fuelled fears that inflation could remain elevated, complicating expectations for the Federal Reserve’s monetary policy decision this week. Brent crude approached USD 110 a barrel amid escalating geopolitical tensions and concerns over energy supplies.

The 10-year Treasury yield is a key reference point for borrowing costs across the US economy and global financial markets. Its rise can affect mortgage rates, corporate debt, consumer loans and the cost of financing government spending. For investors, the crossing of 5% is also a significant psychological marker.

“The 5% mark in 10-year rates is clearly a key psychological level for investors – a point at which some may have earmarked for buying a dip,” said Molly Brooks, a US rates strategist at TD Securities.

Inflation and borrowing pressures
The latest rise reflects a clash between expectations for monetary policy, inflation risks and the enormous amount of debt that governments and companies must finance.

Oil prices have become a major source of uncertainty. The ongoing conflict involving Iran and Israel, along with disruptions to energy infrastructure, has pushed crude higher, raising concerns that fuel and transport costs could feed into consumer prices.

Higher oil prices can make it harder for central banks to bring inflation back to target. Investors are therefore reassessing expectations for the Federal Reserve, with some anticipating that policymakers may need to keep interest rates elevated for longer or consider further increases if inflationary pressures intensify.

The surge in Treasury yields also reflects the supply of debt coming to market. The US government faces substantial borrowing requirements, while companies are raising funds for investment, including spending on artificial intelligence (AI) infrastructure and data centres.

The combination of increased supply and inflation uncertainty can make investors demand higher yields to hold longer-dated bonds. Treasury prices move inversely to yields, meaning the latest increase has resulted in losses for bondholders.

Global bond sell-off
The move in US Treasuries formed part of a wider sell-off in government debt. British and German bond yields also rose as energy prices climbed, highlighting how closely connected global fixed-income markets have become.

Investors have been watching whether the 5% level will once again act as a floor for yields or whether the market could push higher.

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The company will now work through remaining applications and approvals with the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve (Fed), and final approval from the OCC as it progresses towards its planned 2027 launch of the proposed bank.

Revolut described the “Conditional US OCC Approval” as a major turning point in its quest to become the world’s first truly global bank.

“Once all approvals are received, Revolut will be able to directly offer US customers a wide range of banking products, including loans, credit cards, and FDIC-insured deposits, as well as access to stablecoins and cryptocurrencies, delivering the full Revolut experience Americans have been waiting for,” the European fintech giant remarked.

Revolut Founder and CEO Nik Storonsky said, “Conditional OCC approval is an important first step towards establishing the proposed Revolut Bank US. It gives us the foundation to build in the world’s largest financial market and bring the full Revolut experience to millions of Americans.”

Revolut US CEO Cetin Duransoy noted, “We’re grateful for the OCC’s open and transparent dialogue throughout this process. They were both diligent and expedient with our application, allowing us to remain on track for a 2027 launch of our proposed national bank.”

The launch of the proposed US bank will build on Revolut’s expanding footprint across the Americas, as the company has been rapidly securing banking licences and launching operations throughout Latin America.

Revolut has recently launched its Mexican bank and is making progress in Brazil, Colombia, Peru, and Argentina, establishing the foundation for a fully integrated financial network across the hemisphere.

Beyond the Americas, Revolut has continued its global push in 2026, obtaining bank licences in France, Australia and the United Kingdom, a payments licence in the UAE, and progressing a bank licence application in South Africa. The company remains on track to reach 100 million customers by mid-2027.

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While the phenomenon has continued for the 65th straight month, the recent Iran war-induced peak is likely to intensify the debate within the Fed’s policy circles over whether interest rates should be lifted or held steady.

As per the latest government data, consumer spending decelerated modestly last month, while flatlining against inflation. However, one positive aspect is the faster increase in personal incomes compared to inflation, which could lead to a rise in consumption as the year progresses.

Orders for big-ticket items bounced back in July, mainly due to more orders for transportation equipment, and the rise in shipments of long-lasting goods outside the defense and aerospace areas suggests that investments in artificial intelligence (AI) are still growing. Corporate profits rose at the second-fastest pace on record in the Q2 2026.

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Another tailwind has been President Donald Trump’s recent appeal to the US Congress to pass a bill, called the “Clarity Act,” that would bring clearer definitions to the growing sector. After the speech got aired last week, Bitcoin, the world’s largest cryptocurrency, has gone up 16%.

It was last at USD 80,323.24 in Asian hours, having earlier touched USD 81,237.94, its highest level since mid-May. Bitcoin is up 28% so far in August, ⁠set for its biggest monthly gain since November 2024.

As per the analysts, cryptocurrencies got a big boost after the US Treasury’s decision to buy back more long-dated bonds to help cap the gains in the long-end yields, a move that has led to the US dollar bearing the brunt of investor anger.

In his latest media address, Treasury Secretary Scott Bessent has stressed that the Treasury will continue with its regularly scheduled debt auctions, including for long-dated bonds, despite the move to increase buyback sizes of 10- to 30-year securities.

He further added that the Treasury hasn’t purchased any bonds yet in the enlarged buybacks, which will start on September 10 for 10- and 20-year securities.

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The yield on the 10-year Treasury note ended the week at about 4.73%, while the 30-year yield stood near 5.27%, according to market data reported by The Wall Street Journal (WSJ). Both remain close to their highest levels in years. The latest rise came despite the Treasury Department’s decision to increase its purchases of outstanding long-dated government bonds in an attempt to steady the market.

The intervention briefly pushed yields lower, but the relief did not last. Investors quickly returned their attention to the forces driving the sell-off: persistent inflation, heavy government borrowing, geopolitical risks and uncertainty over the Federal Reserve’s future interest-rate path.

The episode highlights a growing problem for Washington. The US government can influence the supply and maturity of Treasury debt, but it cannot easily dictate the return investors demand to hold it. As deficits expand and the stock of federal debt rises, investors increasingly want compensation for inflation and fiscal risk.

That pressure is becoming more significant as the national debt has passed USD 40 trillion for the first time. Reuters reported this week that the milestone is intensifying concern over the government’s rising interest bill, which is already competing with major federal spending programmes.

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That is the lowest reading since September 2024 and about 52% below the record high set in October 2025, when bitcoin traded at USD 126,000.

What makes this decline unusual is what did not cause it. No major exchange collapsed. No large stablecoin lost its peg. There was no fraud at the centre of it and no single villain to name.

The damage came instead from two forces that sit entirely outside the industry, a war in the Middle East that rewrote the inflation outlook, and a Federal Reserve that responded by taking rate cuts off the table.

The war that moved the oil price

The chain of events began in late February, when the United States and Israel carried out a joint military operation against Iran that killed Supreme Leader Ali Khamenei and several senior officials.

Iran retaliated with missile strikes on American bases across Jordan, the United Arab Emirates (UAE) and Qatar, and moved to disrupt shipping through the Strait of Hormuz.

The energy market did the rest. Brent crude surged around 64% from roughly USD 73.50 before the conflict to a peak near USD 120 in early March. A ceasefire in mid-April pulled prices back below USD 100, but the truce never fully held.

Through May and June, tanker seizures, naval build-ups and on-again, off-again negotiations kept a heavy risk premium in the price of oil, and kept markets guessing.

For crypto, the transmission was fast and mechanical. Institutional investors cut their most volatile positions first when geopolitical stress spikes, and digital assets sit at the top of that volatility ladder.

Bitcoin fell on the oil headlines in April, and again in early June when tensions flared once more. Altcoins fell harder, as they always do.

The quarter did not start badly. April was one of the strongest months of the year, and bitcoin recovered towards USD 80,000 in early May as ceasefire talks progressed.

The collapse came later. A single day in early June saw USD 1.8 billion of forced liquidations, the heaviest since February.

How a shipping lane became a monetary problem
The deeper damage was slower and more consequential. Sustained expensive energy feeds directly into headline inflation, and by March the tone at the Federal Reserve had turned.

Governor Christopher Waller, who had supported easing after weak February labour data, publicly reversed course and pointed to the prolonged Hormuz disruption as the reason. Rate cuts that markets had already priced in for 2026 began to be priced out.

Then the leadership changed. Kevin Warsh was confirmed as Fed chair by a 54 to 45 Senate vote, the narrowest in modern history, and brought a markedly different communication style.

His first meeting in June this year delivered a unanimous hold, a shortened statement stripped of its easing bias, and a dot plot showing nine of eighteen officials penned in at least one rate rise for 2026. The median year end rate expectation jumped to 3.8% from 3.4% in March.

On July 29, the committee held again at 3.50% to 3.75%, but the vote split 9:3, with the Cleveland, Minneapolis and Dallas presidents all dissenting in favour of an immediate quarter point rise. It was the sharpest split since 2016.

Warsh told reporters there is no soft inflation target on his watch. Futures markets now put the odds of a September rise above 60%.

This matters more to bitcoin than any protocol upgrade. In its current form bitcoin trades as a high beta risk asset.

When safe assets pay more, the cost of holding something that yields nothing goes up, and capital rotates out of the riskiest holdings first.

The ETF machine ran in reverse
The clearest evidence sits in fund flows. Spot bitcoin exchange traded funds were the marginal buyer that carried the market to its 2025 high. In the second quarter they became the marginal seller.

April was strong, with USD 2.02 billion in net inflows. May reversed to USD 2.41 billion of redemptions.

June was carnage, with about USD 4.5 billion pulled out according to SoSoValue, the worst month since the products launched in January 2024 and comfortably past the previous record of USD 3.56 billion set in February 2025.

That took net redemptions for the quarter to nearly USD 5 billion and pushed the year’s flows negative for the first time.

Between mid May and early June the funds recorded thirteen consecutive days of outflows, the longest such streak on record, draining roughly USD 4.4 billion on its own. Ether products lost a further USD 690 million over the quarter.

Total assets in the US spot bitcoin complex fell from roughly USD 109 billion on 10 May to about $77 billion a month later, tracking bitcoin’s 27% slide from a May peak of USD 81,443 to a low near USD 59,353. The funds’ bitcoin holdings are now around 7.2% below their October 2025 level.

A symbolic corporate sale added to the mood. On 1 June, Strategy, the listed company that has bought bitcoin consistently since 2020, disclosed that it had sold 32 coins for roughly USD 2.5 million to fund dividends on its preferred stock. In money terms it was nothing.

As a signal it was considerable, being the firm’s first disclosed net disposal since December 2022. A far larger sale followed, 3,588 coins for about USD 216 million between June 29 and July 5, at prices well below its average cost of about USD 75,476 a coin.

The decoupling nobody expected
The defining feature of the quarter was not the fall itself but the company crypto failed to keep. While bitcoin dropped 14.2% and ether 25.4%, the S&P 500 rose 14.9% and the Nasdaq 100 gained 27.2%, both lifted by a violent rotation into artificial intelligence equities. Gold also fell 14.2%.

For a decade the sector’s pitch has rested on two claims, that bitcoin is a hedge against monetary debasement and that it belongs in a diversified portfolio. A quarter in which equities rallied hard and crypto did not undermines both. Institutional money did not leave the risk trade. It simply found a better one.

Underneath the price action, liquidity drained away. Spot trading volume across the top ten centralised exchanges fell 27.9% to USD 1.95 trillion, with May setting a monthly low of USD 619 billion.

Average daily volume across the market dropped 20.9% to USD 93.1 billion. Most tellingly, stablecoin market capitalisation slipped 1.6% to USD 305.1 billion, the first quarterly decline since the third quarter of 2023 and the surest sign that capital is leaving the industry rather than rotating within it.

Not everything shrank. Prediction market notional volume grew 48.7% to USD 113.8 billion, with June setting an all time high on the back of the World Cup and other sporting events. Hyperliquid’s HYPE token broke into the top ten. Speculative appetite has not vanished, it has narrowed.

What the rest of 2026 looks like
July offered relief. Bitcoin rose roughly 9.8% to close the month near USD 63,000, ETF flows turned briefly positive, and the market steadied in the low sixties.

Three things will decide whether that holds.

The first is the Federal Reserve. The September meeting on the fifteenth and sixteenth is the next scheduled test, with Warsh’s Jackson Hole appearance in August ahead of it. A rate rise would likely push bitcoin towards the USD 50,000 to USD 55,000 zone that several banks now flag as downside risk.

The second is regulation. The CLARITY Act, the bill meant to give institutions the legal certainty to allocate to digital assets, is still fighting the Senate calendar.

Citigroup has already cut its twelve month bitcoin target from USD 112,000 to USD 82,000 and now forecasts zero net ETF inflows over the coming year, partly because it no longer expects the bill to arrive on time.

The third is the oil price, which remains hostage to whether the Iran ceasefire holds.

Analyst forecasts for year end run from a USD 53,000 floor to USD 150,000, a spread wide enough to be honest about how little anyone knows.

The realistic base case is a market that grinds sideways in the high fifties to mid sixties, with a possible deeper flush in the autumn before any recovery.

The industry spent 2025 arguing that institutional adoption had made crypto less volatile.

What 2026 has shown is that institutional adoption made crypto more sensitive to interest rates instead.

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During the April-to-June timeframe, investors rejected riskier assets amid concerns over the Fed’s policy approaches, volatile geopolitics, and persistent outflows from crypto investment products. The overall market weakness extended a retreat from record highs reached in October 2025.

This affected Coinbase’s numbers as well, as the exchange’s transaction revenue dropped 21% to USD 599 million during the quarter, from USD 764 million a year earlier.

However, the silver lining came from the “Everything Exchange,” Coinbase’s strategic initiative to expand from a pure cryptocurrency platform into a multi-asset financial hub.

Coinbase’s crypto trading volume market share stood at 10.3% in Q2 2026, a new all-time high, up from 9.1% in Q1 2026. This was Coinbase’s third consecutive quarter of market share gains. Crypto derivatives trading volume, on the other hand, proved resilient, nearly reaching Q1’s all-time high despite the market overall declining double digits quarter-over-quarter.

“Prediction markets contracts and revenue more than doubled, growing 106% quarter-over-quarter and crossing USD 100 million in annualized revenue. A new crypto binaries experience launched late in the quarter drove 3x daily traders and 4x daily revenue vs. May’s daily average,” Coinbase said.

Coinbase gained on the Stablecoin and payments front as well, with average USDC held in “Coinbase Products” reaching an all-time high of USD 20 billion in Q2 2026, more than 30% of all USDC in circulation as of quarter-end. Since 2025, Coinbase has captured approximately 50% of all USDC economics.

“Market stablecoin transaction volume has exceeded USD 37 trillion year-to-date, with 79% coming from USDC and Coinbase Partner Stablecoins, up from 51% in full-year 2024. Stablecoin transaction volume on Base Chain is up 7x year-over-year,” the venture told the investors and analysts.

Coinbase has also emerged as the leader in on-chain agentic finance (AiFi) by completing more than 99% of on-chain agentic commerce using USDC. Over 90% of agentic stablecoin transaction volume ran on Base, while more than 97% of onchain agentic transactions used Coinbase’s x402 protocol in Q2 2026.

Coinbase, off late, has been aggressively diversifying its revenue sources, resulting in more balanced revenue streams that, as per the company’s leadership, will make it a far more durable entity than previous down cycles.

“Net revenue excluding Bitcoin spot trading was 88% in Q2 2026, nearly double vs. Q2 2020, reflecting a business driven by a broader set of assets and use cases. Subscription and services revenue grew from USD 6 million in Q2 2020 to USD 555 million in Q2 2026. Subscription and Services revenue represented 48% of net revenue in Q2—up from 29% less than two years ago (Q4 2024)—reflecting how Coinbase has evolved beyond a trading platform into a diversified financial infrastructure company,” the venture stated further.

While Coinbase delivered its 14th consecutive quarter of positive adjusted EBITDA, it also announced the reduction of its FY26 adjusted expenses range, demonstrating continued expense management.

“Coinbase is growing AI usage faster than spend. As AI drives efficiency, pull requests per engineer are being processed more than 2.2 times year-over-year, increasing product velocity. Integration test coverage across core services has grown more than 2.5 times in the last six months,” the exchange remarked.

Questions still remain
Despite solid financials, Coinbase’s crypto trading revenue fell sharply as prices slid. Subscription and services, the segment the company and its analyst base have positioned as a low-beta hedge against exactly this kind of downturn, also came in below estimates.

The poor performance on the subscription and services front will put pressure on CEO Brian Armstrong and CFO Alesia Haas, as investors and analysts will be seeking answers on whether Coinbase’s diversification strategy is actually working or just growing slowly enough to matter.

Despite the exchange reporting total revenue of USD 1.22 billion for the Q2, the ratio ended up missing the USD 1.29 billion Wall Street consensus by USD 70 million, apart from falling short from the USD 1.5 billion recorded in the year-ago period, a 19% decline.

Transaction revenue, Coinbase’s largest single revenue line, came in at USD 599 million for Q2, below analyst expectations of USD 628 million. However, things here got affected due to Bitcoin dropping approximately 14% during the quarter while Ether declined around 25%, reducing both retail and institutional trading appetite. Industry-wide spot volumes also contracted for a third consecutive quarter.

Coinbase has been looking to the “Clarity Act,” introduced in May 2025, to provide long-sought regulatory clarity for digital-asset trading platforms. While the Senate Republicans released a revised version of the Act last week, negotiations are still ongoing. Armstrong, during the analysts’ call, expressed optimism about the legislation securing a full Senate floor vote.

“There is a lot of ⁠last-minute negotiations happening, which to me is a sign that everyone is invested in getting something over the line,” he concluded.

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