Market Overview

Summary of world markets in October

Global equity investors enjoyed robust positive returns in October, with the AI theme dominant once again. That said, the traditionally stormy month of October was not without its turbulence, with the ongoing US government shutdown, US-China trade frictions and concerns about frothy valuations causing elevated stock volatility. Government bond yields fell, with UK gilts performing strongly as better-than-expected inflation data boosted hopes of rate cuts. However, there was a more nervous tone to credit markets due to troubling idiosyncratic stories and growing nervousness about loose lending standards in non-public markets.

The lacklustre growth picture in the UK continued, with real GDP coming in at 0.1% in August, following a downwardly revised 0.1% decline in July. The UK unemployment rate rose to 4.8%, the highest since 2021, while the annual inflation rate held steady at 3.8%. However, UK retail sales were perkier than expected, rising by 0.5% in September. The Halifax House Price Index fell by 0.3% month-on-month, with affordability remaining a challenge. The Index has risen by just 1.3% year-on-year. Confidence amongst small business owners continued to fall, with reportedly nearly a third predicting that they will downsize, sell up or close over the next year.

UK public spending net borrowing widened and was the highest since 2020. Notably, interest payments on central government debt were higher than any September on record. That said, the results were better than had been forecasted, easing some of the pressure on Chancellor Reeves as she prepared for the highly anticipated Autumn Budget in November. However, there was unwelcome news from the OBR as it lowered its productivity growth forecast, with negative implications for public finances.

Somewhat unexpectedly perhaps, the UK equity market was an outperformer amongst its developed market peers. Supportive corporate earnings and better-than-expected economic data lent support, particularly signs of some resilience from the consumer. Energy and basic materials stocks benefited from the weaker pound, and banks enjoyed yet another positive month. This sector has been a powerful driver of UK index returns this year.

UK gilt yields fell, providing investors with positive total returns over the month. Prices were buoyed by softer inflation data, causing the market to price in further base rate cuts. Long-dated maturities performed particularly strongly. Investment grade bonds basked in the halo of falling government yields and gained ground, although underperformed UK gilts.

Investment grade bonds basked in the halo of falling government yields and gained ground, although underperformed UK gilts.

The US government shutdown delayed major statistical reports such as the monthly jobs data, leading to a focus on alternative surveys and measures. In terms of the labour market, data continued to point to sluggish hiring. An inflation rate of 3% year-on-year was slightly lower than predicted, countering the worst fears of tariff-inspired price rises.

Monetary policy: The Federal Reserve cut its target lending rate by 0.25%, establishing a new range of 3.75% – 4%. This came despite the challenges of the US government shutdown, which has delayed official data publications. This is the lowest rate for three years against the backdrop of a slower jobs market. However, Chairman Powell stressed that another cut in December is not “a foregone conclusion”, especially given the data impact of the shutdown. The Fed also indicated that it would stop shrinking its balance sheet amid evidence that money market liquidity conditions have begun tightening and bank reserve levels dropping.

While US equity gains were interspersed by bouts of volatility, the positive sentiment around the AI theme dominated the outcome. Momentum was the name of the game, with US retail investors participating in large numbers and leveraged ETFs multiplying market volume. Technology hardware stocks forged ahead, although the gains were accompanied by high volatility as there were increasing concerns about valuations moving into “bubble” territory, as well as consternation about hyper-scaler spending and the impact of this upon their cashflows, especially when the “killer app” is yet to be identified. As the capex needs continue, it will be interesting to see how investors respond to the idea of share issuance by the heroes of the moment, rather than share buybacks. In the meantime, marking this period of high enthusiasm, the ten largest stocks reached 40% of the main index; this number was only 26% in the dot.com boom. This speaks to the unhealthy narrowness of the market rally. Incredibly, the main index has soared by almost 40% since the Liberation Day-inspired declines in April.

The European Central Bank left its benchmark interest rate unchanged at 2% for the third consecutive meeting, its lowest level since December 2022. ECB president commented that the EU economy had continued to grow and that the outlook for inflation was broadly unchanged. Eurozone growth beat expectations, moving ahead by 0.2% over the third quarter, while Eurozone inflation fell slightly to 2.1% in October, closer to the ECB’s 2% target. The German economy continued along its lacklustre path, with factory orders falling again and industrial production registering a steep monthly drop of 4.3%, driven primarily by contractions in the automotive industry.

Notwithstanding the challenging political situation in France, European equities made progress, with better returns emanating from the smaller markets. Profit-taking was seen in banks and financials as well as aerospace and defence, sectors that have delivered extraordinary returns this year.

Sanae Takaichi became Japan’s first female prime minister. Referred to as Japan’s “Iron Lady”, her focus will be on improving economic growth, uniting the ruling party and easing cost-of-living concerns amid voter dissatisfaction. The French political saga continued as new prime minister, Sebastien Lecornu, resigned after 26 days in the role but was re-appointed and subsequently won two no-confidence motions. However, this was achieved thanks to major concessions to the left of the house. Meanwhile, S&P Global Ratings downgraded the country’s credit rating by a notch.

Japanese stocks reached record highs following the election of Sanae Takaichi on expectations of fiscal stimulus and improved economic growth. Softbank’s share price surged following corporate deals to accelerate its expansion into AI, adding to the positive momentum supporting a clutch of AI-related names. Defence stocks also performed well. The changing political backdrop hit the currency, which meant that sterling-based returns were not quite as strong.

There were impressive gains from Asian and emerging market indices. The Korean index rose by over 20%, driven by AI-themed optimism as well as ongoing corporate governance reforms. Samsung Electronics and SK Hynix were major gainers on the back of their key role in the AI supply chain. The Taiwanese market also performed well thanks to enthusiasm for AI beneficiaries. By contrast, China lost ground as stocks gave back some of the strong gains made earlier in the year.

Style-wise, it was a mixed picture. The strength in US technology stocks saw growth indices fare better than value, but more broadly, value continued to outpace growth in other global markets.

The gold price reached an all-time high during the month, with momentum taking hold even after the strong rise already seen this year. Silver also experienced a short squeeze, surging to an all-time high mid-month. However, precious metal prices declined in the second half of the month as US-China trade tensions eased and participants moved quickly to take their profits, which saw heavy withdrawals from gold-backed ETFs. Fading expectations of further US rate cuts also lessened gold’s appeal.

The oil price gyrated on supply/demand newsflow. On the supply front, the decision by OPEC+ to raise production by less than had been feared supported the price, as did ongoing disruption to refineries in Russia and renewed sanctions.  However, concerns about weaker fundamental demand metrics kept a lid on prices.

The US dollar benefited from safe-haven flows, as well as hawkish comments from the Federal Reserve. UK sterling weakened, which boosted the returns of unhedged overseas portfolio allocations.