MARKETS HOLD FIRM AMID SHIFTING POLICY SIGNALS AND APPARENT GLOBAL UNCERTAINTY
MONTHLY HIGHLIGHTS
- In mid-October, U.S. banks borrowed more than $15 billion from the Federal Reserve’s Standing Repo Facility, the highest usage since the COVID era. This demand suggests that short-term funding markets are under stress, possibly with the influence of the Fed’s quantitative tightening (QT)on excess reserves.
- Concern over the health of U.S. regional banks spilled into global equities. Key indices tumbled on the news with global equities falling with gold hitting a fresh record high as investors fled to safety. The banking rout was triggered by disclosures at Zions Bancorporation and Western Alliance, reigniting concerns of weak credit quality and contagion risks U.S. equity funds saw net inflows of $1.04 billion, in contrast to the prior week’s outflows. The renewed appetite appeared to be supported by investor expectations that the Federal Reserve might begin cutting rates, combined with better-than-expected earnings from big banks like Morgan Stanley and Bank of America. The inflows were uneven, favouring sectors such as technology and finance.
- In the IMF’s latest Fiscal Monitor, it was estimated that world government debt could average 100 percent of global GDP as early as 2029 which is a level not seen since the post-World War II period. The rise has been attributed to prolonged fiscal expansions, rising interest costs, and the aftershock of pandemic-era debt accumulation.
- The Liberal Democratic Party (LDP) in Japan elected Sanae Takaichi as its new president, making her the frontrunner to become Japan’s first female prime minister. Markets responded with the Nikkei 225 surging past 47,000 for the first time, while the yen weakened. Her win coincided with speculation that the Bank of Japan could consider a further rate hike.
EQUITY MARKETS
Asian markets led by Japan saw gains as the Nikkei 225 surged over 6%, extending its relative outperformance among major global indices. Investor sentiment in Japan appeared to be supported by political optimism following the ruling party’s leadership change and speculation that monetary policy would remain supportive in the near term. India’s Nifty 50 also advanced, gaining close to 3%, reflecting relatively strong corporate earnings and ongoing confidence in domestic growth prospects. European equities delivered broad-based yet moderate advances, with the CAC 40 in France and Stockholm’s OMX posting gains above 2%, while Germany’s DAX and Italy’s FTSE MIB lagged somewhat. The mixed regional performance reflected varying sectoral trends with technology and industrials faring better than financials while investors also digested fresh economic data hinting at stabilising inflation and subdued growth. Central and Eastern European bourses were among the regional outperformers, with Hungary’s Budapest index climbing close to 4% and Romania’s market also showing notable strength. The rebound in these markets was driven largely by local banking and energy shares, which benefited from improving macro indicators and renewed investor appetite for higher-beta assets in emerging Europe.
North American equities produced uneven outcomes, with Canada’s main index advancing above 2% thanks to strength in energy and resources, whereas the U.S. market was largely subdued. The S&P 500 and Dow Jones slipped modestly, weighed down by profit-taking in mega-cap technology stocks and concerns over short-term funding pressures in the banking system. Small- and mid-cap U.S. indices fared relatively better, reflecting rotation into more domestically oriented sectors. Global sector rotation was evident, with investors moving selectively towards cyclical and value-oriented segments. This shift coincided with renewed debate over central-bank policy trajectories and early signs of stabilisation in global bond yields. Technology-heavy benchmarks, including the so-called “Magnificent 7”, recorded mild losses after a strong earlier rally, suggesting a pause in investor enthusiasm for the high-growth segment. The period reflected cautious optimism amongst investors. Gains were largely region-specific, underpinned by improved confidence in certain economies, while others grappled with persistent inflation, currency volatility, and policy uncertainty. Markets generally priced in a slower pace of rate adjustments by major central banks, allowing risk appetite to recover but keeping investors alert to pockets of fragility.
In the corporate world, JP Morgan unveiled its third-quarter 2025 results, revealing a net income of $14.4 billion and earnings per share of $5.07, comfortably ahead of expectations. Revenue (on a managed basis) rose by about 9% year-on-year to $47.1 billion, while noninterest revenue surged 16%, propelled by trading and investment banking gains. BlackRock released its Q3 2025 earnings, showing adjusted EPS of $11.55 (versus $11.46 a year ago) and reporting $205 billion of net inflows across its business. The firm’s total revenue rose by 25% year over year, benefiting from market tailwinds and base fee growth, especially in its iShares ETF business, private markets, and cash flows. At the same time, BlackRock’s assets under management hit a new peak of $13.46 trillion, underlining its scale and its appeal amid rising investor demand for passive and fiduciary structures. ASML published its Q3 2025 results, with €7.5 billion in total net sales and a net income of €2.1 billion, along with gross margins of around 51.6%. Crucially, it secured €5.4 billion in net bookings, of which €3.6 billion was from EUV (extreme ultraviolet) systems which is an indicator that demand for cutting-edge lithography remains resilient in the AI hardware race. Looking ahead, ASML has projected Q4 2025 sales in the range of €9.2-€9.8 billion and signalled full-year growth of ~15%, while cautioning that demand from China may soften in 2026. Samsung revealed expectations for its highest quarterly operating profit since 2022, forecasting a 32% year-on-year jump for its Q3. The company attributed this surge to robust demand and pricing in its DRAM and NAND memory segments, supported by AI infrastructure growth. It also expects record revenue of 86 trillion won and noted a weaker Korean won would further bolster reported results in dollar terms. Morgan Stanley’s Q3 2025 earnings exceeded expectations, with net income of $4.6 billion, beating consensus and driven in part by above average gains in equities trading. Notably, the bank surpassed Goldman Sachs in equities trading revenue, generating ~$4.1 billion versus Goldman’s ~$3.7 billion, a first in several years. Investment banking fees also rose sharply (up ~44 %), buoyed by a revival in IPOs, M&A, and underwriting activity. Meanwhile, its wealth management division also posted net inflows well above expectations, helping to diversify revenue beyond capital markets. The result is seen by many as a signal that Morgan Stanley is regaining momentum across multiple fronts, not just trading. Bank of America also delivered a stronger than expected third quarter. Its earnings beat estimates, with net income rising significantly year-on-year. A principal driver was a jump in investment banking fees rising ~43% alongside steady growth in the bank’s markets and consumer banking units.
CREDIT MARKETS
Government bonds delivered gains across major markets, with long-dated sovereigns leading the rally. UK Gilts and Eurozone government bonds rose, with longer maturities outperforming as investors priced in a more dovish stance from central banks and signs that inflationary pressures were gradually receding. The notable rise in UK gilt returns reflected growing expectations that policy rates may have peaked amid softening domestic economic data. U.S. Treasuries also advanced modestly, with the strongest performance seen at the long end of the curve. The move suggested renewed demand for duration as markets adjusted to the possibility of a slower pace of quantitative tightening by the Federal Reserve. Yields eased across most maturities, helping to offset recent volatility in funding markets and providing some respite to duration-sensitive assets. European and emerging market investment-grade credit posted moderate gains, supported by narrowing spreads and improved investor sentiment following stable inflation readings and contained volatility in sovereign yields. Investment-grade corporate bonds benefited from a steady tone in risk appetite and selective inflows seeking carry opportunities in higher-quality issuers. Emerging market debt produced mixed results, with investment-grade paper outperforming while local currency and high-yield segments lagged. Investor demand remained focused on hard-currency issues in relatively more stable jurisdictions, whereas confidence in frontier economies continued to perform relatively weaker.
High-yield markets were subdued to negative overall, particularly in Europe, where lower-rated segments underperformed sharply. The weakest returns came from CCC-rated and distressed European credit, reflecting concerns about refinancing risks and softer economic growth prospects. U.S. high-yield bonds, by contrast, remained broadly flat, aided by corporate earnings and lower default expectations. The tone across global bond markets appeared to turn more constructive, with investors reflecting increased discussion of a potential ‘soft landing’ scenario and taking comfort from a calmer inflation outlook. Longer-duration assets outperformed as yields eased, credit spreads narrowed in the higher-quality space, and risk appetite improved as high-yield and lower-quality debt remained vulnerable to lingering macroeconomic uncertainty.
CENTRAL BANKING, THE ECONOMY AND GEO-POLITICS
During the first half of October, the European Central Bank maintained a cautious stance, signalling that current policy levels are sufficiently robust to weather economic shocks without requiring further adjustments. Policymakers reflected that while inflation has moderated, it remains near target, allowing the Bank time to assess how previous rate changes are filtering through to the real economy. Updated inflation forecasts showed headline inflation averaging just above 2% in 2025 before gradually easing the following year, suggesting that no immediate rate action is necessary. Some members warned against overreacting to small fluctuations in inflation, noting that a modest undershoot would not justify drastic intervention. Others argued that rates should only be cut again if a new, unexpected shock hits the economy. President Christine Lagarde meanwhile underscored the importance of central bank independence, especially as policy paths diverge across major economies. The ECB’s tone was one of steadiness and cautious confidence whilst acknowledging risks but preferring to hold its current ground for now.
In Washington, the Federal Reserve entered October grappling with both data gaps and internal debate. A temporary government shutdown disrupted the release of several key economic indicators, forcing the Fed to rely more heavily on private-sector data and internal models. Chair Jerome Powell hinted that the ongoing reduction of the central bank’s balance sheet might soon slow, reflecting concerns about tightening liquidity conditions. Indeed, usage of the Fed’s short-term lending facility rose sharply in early October, suggesting strains in money markets. Within the Federal Open Market Committee, opinions were far from unanimous. Some policymakers advocated for quicker rate cuts, warning that policy had become too restrictive and that labour market momentum was cooling. Others favoured patience, arguing that inflation was not yet subdued enough to justify easing. The result was a sense of strategic hesitation where the Fed appeared to be edging towards a pivot but still wanted clearer evidence before making its move.
The Bank of Japan continued to strike a delicate balance between maintaining policy support and preparing the ground for gradual normalisation. Senior officials emphasised that future rate hikes remain possible, provided that inflation and growth evolve in line with expectations. Yet others warned that moving too quickly could unsettle markets and undo progress made in stabilising the economy after years of ultra-loose policy. Inflation readings for September showed a renewed pickup in core prices, keeping the debate alive over whether the time for another adjustment is near. Political developments also added a layer of complexity, as Japan’s new leadership urged coordination between monetary and fiscal policy to preserve momentum in domestic demand. Governor Ueda maintained that any shift in rates would depend on notable evidence of sustained wage growth and inflation above target. The BOJ therefore remains poised but prudent, that is, ready to act, yet wary of tightening too soon.
In the global economy, the October iteration of the IMF’s World Economic Outlook underscored a world in transition. Although headline projections edged slightly higher in comparison with the earlier April estimates, the overall tone remained one of caution. Growth is now forecast to decelerate from 3.3 % in 2024 to 3.2 % in 2025, before easing further to 3.1 % in 2026. Advanced economies are expected to grow at just about 1.5 %, while emerging markets may fare a bit better at just over 4 %. The report warned that the tailwinds seen in earlier parts of 2025 such as early policy stimulus and pent-up demand appear to be dissipating, and that fresh risks from trade conflicts, supply-chain strains and fiscal vulnerabilities loom large.
One of the more seemingly sobering forecasts from the same period came from the IMF’s debt monitors, which projected that aggregate global public debt might climb to 100 % of global GDP by 2029, an apex not witnessed since the aftermath of the Second World War. The assessment was particularly relevant for nations with already elevated debt loads where they are being urged to rebuild fiscal space, shift spending toward growth-enhancing investment, and guard against the threat that interest costs or market shifts could suddenly make debt unsustainable. Away from the numbers, geopolitics developments were eventful.
In the Middle East, diplomatic efforts accelerated around the Gaza conflict. On 13 October, global leaders gathered in Sharm El Sheikh for a Gaza peace summit co-chaired by Egypt’s President al-Sisi and Donald Trump, even though both Israel and Hamas were absent. The gathering represented a renewed attempt by international actors to embed the first phase of a U.S.-backed plan and avoid a return to open hostilities, amid a region still fraught with tension and humanitarian risk. Europe, too, saw fresh political signalling. On 2 October, the 7th European Political Community Summit convened in Copenhagen, gathering 43 nations to explore shared security dilemmas, economic cohesion, and Ukraine’s future. The summit underlined the sense among many European capitals that the post-2022 security environment demands closer alignment not only in defence, but in trade and resilience policy.
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