The US government shutdown carries on, while the earnings season opened on a constructive note, nudging global equities higher amid softer trade rhetoric, resilient bank results and renewed hopes of Fed easing. These tailwinds, however, contrast with credit-quality concerns linked to regional-bank fraud reports and mounting unease over a potential AI-driven bubble, leaving markets more vulnerable to negative headlines. US inflation data due this week are expected to show moderate upward pressure.
Market recap
Beyond the numbers
Macroeconomics
As the US government shutdown continues, the availability of data remains limited. Business confidence has increased in the housing sector and in New York manufacturing, but has decreased among small and medium-sized firms. Key information came from Fed Chair Powell, who said that a rate cut in October is likely due to weak labour data, and that the Fed should stop quantitative tightening over the next two months.
In the eurozone, industrial activity remained weak in August, with industrial production down by 1.2% m/m, and all main sectors contracting. The final CPI for September revealed an upward trend of 2.2% y/y, up from 2.0% y/y.
In the UK, labour market conditions continued to deteriorate: the unemployment ratio increased from 4.7% to 4.8% in August and jobless claims rebounded in step with this. Wage growth remained at 5.0% y/y, which was too high to offer the Bank of England (BoE) any comfort.
In China, inflation remained negative in August (-0.3% y/y), mainly due to falling food prices. In India, inflation fell below 2.0% to 1.54% y/y, fuelling expectations of another rate cut.
This week, the focus will be on US inflation, which is expected to show ongoing moderate rising pressure, with both headline and core inflation exceeding 3.0% y/y.
Elsewhere, the flash PMI indices should indicate continued fragility in developed countries’ manufacturing sectors after positive September data releases. UK CPI is expected to peak at around 4.0% year-on-year, while retail sales are also expected to show still-decent growth.
Chinese Q3 GDP data were slightly firmer than expected (4.8% y/y) thanks to exports and auto production, but retail sales remained sluggish (3.0% y/y) and property investment is contracting. The Chinese Communist Party’s Fourth Plenum is scheduled for 20–23 October, where top party leaders will discuss the 15th Five-Year Plan (2026–2030).
Asset allocation: strategic views as at October 2025
Equities
Global equities finished higher (MSCI ACWI +1.2%), retracing part of the prior week’s decline. Beneath the advance, trading whipsawed as investors weighed supportive drivers (softer trade rhetoric, solid bank earnings, and rising hopes of Fed easing measures) against credit-quality worries tied to regional-bank fraud reports and lingering concerns about an AI-driven bubble. The backdrop remains volatile, leaving markets vulnerable to negative headlines.
The earnings season opened constructively. Major US banks came out well on investment banking and trading, setting a firmer tone for the weeks ahead. The consensus view of 9.0% year-on-year S&P 500 EPS growth for Q3 looks attainable.
At the same time, disclosures from two regional lenders – Zions Bancorporation and Western Alliance – of losses linked to fraudulent loans, together with recent implosions among auto lenders, reignited concerns about pockets of underwriting weakness and broader credit risk.
After three strong years, valuations are stretched (S&P 500 at 22.7x forward EPS) and the equity risk premium is thin. We remain constructive, with a focus on sharper risk management, namely by diversifying across regions and sectors, tilting toward quality balance sheets and cash-flow resilience, and considering tactical option hedges to protect year-to-date gains.
The earnings season opened constructively, but markets remain volatile
Fixed income
US 10-year Treasury yields dipped below 4.0% for the third time in under two months, amid US–China trade tensions and concerns over regional banks and private credit. However, credit spreads recovered from the prior week's widening, with high-yield (HY) spreads narrowing 13 basis points to close at 260 bps in the BB-B segment. Investment grade (IG) and AT1s were up 0.4%, while HY recorded a 0.5% gain for the week.
In Europe, S&P downgraded France's sovereign debt to A+, highlighting the budget uncertainty and political risks that could exacerbate deficits. Despite this, Prime Minister Lecornu survived a no-confidence vote and suspended pension reforms to bolster government stability, underscoring the challenges in tackling fiscal woes. French 10-year yields fell 12 bps to 3.48%, outpacing the Bund's 6-bp decline. In positive news, Italy's finances strengthened, with a projected 2026 deficit of 2.9%; its 10-year yield dropped 14 bps year-to-date, contrasting with the Bund's 21-bp rise.
Last, the Swiss Federal Administrative Court deemed the 2023 USD 17 billion Credit Suisse AT1 bond write-off to be unlawful, revoking FINMA's decree and lifting related claim values amid hopes for compensation. The decree is revoked but not reversed, with FINMA appealing, thus setting the stage for protracted litigation.
Concerns about regional banks and private credit weigh on investors sentiment
Forex & Commodities
Last week, the USD traded slightly lower against most of the major G10 currencies, with the US Dollar Index falling to levels of just above 98.00. Fed Chair Powell hinted that the Fed could move to end its quantitative tightening process. We think the USD will remain rangebound in the near term, given the dearth of US economic data releases.
The JPY rose as markets priced out an extended period of domestic political uncertainty, with LDP leader Takaichi set to become Japan’s first female prime minister. We do not expect ongoing JPY appreciation in the near term.
The GBP weakened following poor UK labour market data, with the unemployment rate hitting 4.8%. The main event over the coming week will be the publication of UK CPI data. Markets maintain negligible GBP exposures ahead of November’s budget, meaning that sterling will continue to trade within tight ranges.
Gold traded to another all-time high of above USD 4,360 per oz; however, it retraced these gains on Friday, and it now appears to be set for a period of consolidation. Silver also traded lower, as the scramble for physical supplies eased; we expect a consolidation in prices for silver, too.
The GBP weakened following poor UK labour market data, with the unemployment rate hitting 4.8%
The opinions expressed herein are correct as at 20 October 2025 and are subject to change without notice. This information should not be relied upon by the reader as research or investment advice regarding any particular fund, strategy or security. Past performance is not a guide to current or future results. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
