Weekly Market Recap

Let us kick off with AI, and markets were nervous ahead of the highly anticipated Nvidia earnings results on Wednesday 19 November.

As the poster child and arguably one of the biggest beneficiaries of AI, Nvidia is in a position to make or break the AI enthusiasm that has propelled global stock markets to record highs this year. It once again beat high expectations and delivered a stellar report card. Revenue increased 62% year-on-year (YoY), and earnings per share surged 67% YoY against a tremendous base, both handily above expectations.

In terms of outlook, Nvidia highlighted continuously strong demand for AI data centres, high utilisation rates, and continued momentum in new platform deployment. CEO Jensen Huang said demand for Blackwell (its top AI chip infrastructure) is “off the charts”. Broader integration across software and networking reaffirms Nvidia’s competitive advantage.

As a result of its moat (its long-term competitive advantage), the business is highly profitable, with an impressive 75% gross margin guided for Q4 2025, despite the surging cost of memory chips.

However, market reactions show sentiment has turned fragile on AI. Nvidia and the broader AI-related stocks initially rallied but reversed intraday to end the session lower. With Nvidia now comprising around 8% of the S&P 500 index, its price movement has a significant influence on the broader market.

This behaviour suggests even companies with exceptionally strong fundamentals and growth prospects face a valuation reality check. It could simply come down to investors taking profits before year-end across a sector that has performed so well.

It’s too early to say that the AI rally is over, but we are entering a stage where investors are putting more scrutiny on aspects such as return on investments and valuations.

The long-term AI opportunity remains intact. Demand for compute capacity (the total amount of computing resources available to process data), infrastructure upgrades and AI adoption continues to accelerate. However, the market discussion has shifted from pure growth momentum to valuation and over-investment risks.

While we believe that AI will be a transformative technology, there are lingering questions about whether the returns generated by providers of AI services will be high enough to justify both the massive levels of investment, and the extended valuations the AI picks and shovels plays trade on. In addition, the S&P 500, excluding the so-called ‘Magnificent Seven’, also trades on a large price-to-earnings premium compared to the World ex U.S. market.

The U.S. unemployment rate rose

Another highly anticipated event last week (w/c 17 November) was the release of the September U.S. employment report, which was significantly delayed due to the U.S. government shutdown.

The report showed 119,000 new jobs were created over the month, well above the 51,000 expected. However, the unemployment rate edged higher from 4.3% to 4.4%. This was the third consecutive monthly increase, defying expectations of no change. This is likely to add to the dovish view within the Fed.

However, the Fed will not receive another jobs report before its December meeting, and visibility on inflation data is expected to remain more limited than usual due to the previous government shutdown. With the labour market a bit weaker (but still generating jobs), and conditions not deteriorating sharply, most investors now view a Fed pause in December as the most appropriate and likely scenario.

Markets have reduced expectations for a December interest rate cut, and further policy easing is considered more likely from 2026 if inflation and growth slow.

Economic trouble for the chancellor

In the UK, the data flow remained weak ahead of this week’s Autumn Budget. October retail sales fell by 1.1%, while the private sector business survey (PMI) suggested the economy was stagnant. Fiscal indicators have deteriorated, with the fiscal deficit widening more than expected in October.

This is an economic backdrop that makes it hard to raise taxes without further dampening growth, but it’s widely speculated that this is what Chancellor Rachel Reeves will do.

One silver lining is that inflation is heading in the right direction, albeit slowly. Headline UK CPI (Consumer Price Index) slowed from 3.8% to 3.6% while core inflation slowed from 3.5% to 3.4% in October. Services inflation, which is closely monitored by the Bank of England (BoE) as a measure of domestic price pressure, softened from 4.7% to 4.5%, falling below expectations.

A lower inflation trajectory helps support the case for a rate cut in December. Markets are pricing in a very high chance of that happening. Ultimately, whether the BoE will proceed with that depends on Governor Andrew Bailey’s swing vote. The latest inflation figure probably ticked a box, but we still need to see how the Budget goes.

Overall, last week’s market action reflected a more cautious stance. AI remains the dominant structural theme, but greater scrutiny is being applied now, so the bar for a further rally is high at this stage.

In the U.S., job growth continues, but there are signs of cooling. In the UK, data confirms a weakening backdrop ahead of significant fiscal decisions that ultimately impact growth.

Staying diversified remains highly relevant in this environment.

Coming up – 25 November to 2 December

UK Autumn Budget:

All eyes are on how Chancellor Rachel Reeves will tackle struggling UK finances against the backdrop of weakening growth.

U.S. retail sales:

Official retail sales (in addition to Black Friday sales data) will give a fresh glimpse into the state of U.S. consumers as the job market cools.

Fed’s updated view of the economy:

The Fed releases its Beige Book of regional economic assessments on Wednesday, which will be closely watched by markets.

In the current financial landscape, a dichotomy exists between high-growth structural technology demand i.e. artificial intelligence (AI), and short-term cyclical credit risks. The two should not be directly connected but as is so often the case, the best performing assets are susceptible to pullbacks when investor anxiety rises. That seemed to be the case last week.

Macroeconomic and credit backdrop: Signs of cooling

The best news of the week was that the U.S. government shutdown finally came to an end. While it was in place, we were without the usual catalogue of economic indicators. Those that were available (from private sources) were downbeat. For example:

• U.S. small business nervousness: The National Federation of Independent Business (NFIB) survey of smaller businesses showed weakness across several categories. Companies are less confident that the economy will improve, they are less likely to increase employment and have lower expectations for sales.
• Evidence of credit distress: The structural issues in the credit market are worsening, especially in less-liquid areas:
  • Commercial real estate (CRE): the commercial mortgage-backed securities (CMBS) market, the timeliest indicator of distress, confirmed a rise in delinquency. The CMBS loan delinquency rate (30+ days past due) rose to 5.66% in the third quarter of 2025 (source: MBA). While traditional bank data is lagged, this shows concentrated distress in non-bank and office-sector debt.
  • Private credit: the Federal Reserve’s (Fed’s) Financial Stability Report (FSR), released on 7 November 2025, confirmed elevated vulnerabilities, noting that while banks are sound, the ability of risky privately held firms to service their debt continues to decline amid high corporate leverage.
• UK economic fragility: The UK economy is suffering from a cautious business sector in anticipation of a tax hiking Autumn Budget. The unemployment rate rose to 5% in the three months to September, increasing the risk of weak consumer demand and late payments for small-to-medium enterprises (SMEs).

UK Budget speculation: The tax U-turn challenge

The focus last week on the upcoming Autumn Budget taking place on 26 November was dominated by speculation that risks undermining the government’s hard-won fiscal credibility.

The background to this was a slightly greater-than-expected increase in unemployment to 5%.

• Doubt over “hard choices”: Chancellor Rachel Reeves has successfully anchored gilt yields by maintaining a stern rhetoric of fiscal prudence and signalling a willingness to make “hard choices.” The market appraisal of this restraint is fragile, relying entirely on the assumption that the government will deliver sufficient revenue-raising measures to plug the estimated £30 to £40 billion fiscal shortfall against its fiscal rules.
• The U-turn briefing: Press reports last week indicated that the Chancellor may feel she has to revisit plans to increase headline income tax rates due to internal political pressure. Instead, the final Budget is expected to rely on a complex mix of ‘stealth taxes’, such as extending the freeze on tax thresholds (fiscal drag) and targeting wealth through adjustments to capital taxes.
• Market risk: There are a couple of reasons to be concerned about this. Currently, there are an estimated 1,100 tax reliefs in the UK. These undermine the concept of tax neutrality, meaning that, when spending decisions are being made, government policy is tipping the scales in favour of one area or another.

This lack of tax neutrality risks causing inefficient allocation of resources. But also, if the final Budget’s numbers are perceived by bond investors to be based on unreliable future spending cuts or insufficient stealth taxes, the gilt market could react badly, resulting in a rise in the political risk premium and higher government borrowing costs.

Rumours of the existence of two Budgets (one with headline tax increases and one without) rattled the bond market, as did rumours of a leadership challenge within the government. The Starmer/Reeves combination may be under pressure politically but remains the ‘devil-you-know’ as far as the bond market is concerned.

Geopolitics: Fragile truce and structural de-risking

The U.S.- China trade dynamic remains an exercise in tactical de-escalation rather than fundamental peace, while Europe’s approach hardens.

A couple of weeks ago, we saw a thawing of relations, with a truce reached between the U.S. and China over trade. Investors realised it was temporary in nature, but last week, the concerns were for how complete the agreement was, specifically in relation to Chinese purchases of U.S. soybeans. These commitments have not been officially recognised on the Chinese side, and purchases don’t seem to have resumed.

Meanwhile in Europe, European Commission President Ursula von der Leyen expressed the region’s commitment to “de-risking” it’s relationship with China. This strategy led to the official anti-subsidy probe into Chinese Battery Electric Vehicles (BEVs) and the activation of new trade defence mechanisms like the Anti-Coercion Instrument (ACI). It creates a long-term headwind for Chinese exporters and accelerates the trends of supply chain diversification and global fragmentation.

Risk assets: Rotation into resilience

The combination of geopolitical tension, economic cooling, and valuation concerns triggered a clear shift to risk aversion last week, with investors rotating out of speculative growth and into assets offering stability and structural tailwinds.

• Tech sell-off: Global equities experienced a pullback, led by the previously market-leading technology sector. The Nasdaq Composite gave back a fraction of recent gains as investors engaged in profit-taking, questioning the lofty valuations of AI-linked stocks and pricing in slower economic growth. This sector weakness comes at a time when RBC’s technical analyst noted the breadth of the market has been showing signs of improving, which is usually a good sign.
• Defensive sectors: This increased breadth was reflected more explicitly in defensive sectors like healthcare, utilities, and industrials. These outperformed, finally enjoying some benefit from their more predictable earnings, attractive dividend yields, and the long-term investment required for reshoring and supply chain diversification.

Coming up – 18 November to 25 November

Earnings season ends with a bang:

Nvidia reports its third quarter earnings.

Fed’s thoughts:

The minutes of the Fed meeting on 28 and 29 October will be released. Opinions on monetary policy outlook are unusually split.

Return to work:

U.S. federal employees will return to work and gradually start to collect and release data on how the economy is performing.

The bill pays back furloughed workers and prevents layoffs but defers the decisive vote (which the Democrats had been holding out for), on extending the Affordable Care Act premium subsidies. The deal, brokered by a bloc of centrist Democrats who dropped the subsidy renewal demand in exchange for a promise of a mid‑December Senate vote, sparked an intra‑party backlash but secured the crucial Freedom Caucus Chair’s conditional support.

House Speaker Mike Johnson has signalled a swift floor vote on Wednesday, and with the Grand Old Party‑controlled chamber expected to approve the measure, the bill should soon land on President Trump’s desk for signature.

Equity markets seem buoyed by the news. Nevertheless, analysts warn that air‑travel disruptions and SNAP (food stamps) benefit backlogs will linger, and the ultimate fate of the Obamacare subsidies remains uncertain.

Tariffs are back in the spotlight

The Supreme Court of the United States (SCOTUS) was in focus last week as it heard oral arguments on the legality of President Donald Trump’s sweeping global tariffs. These measures were the subject of legal challenges that were originally heard by the U.S. Court of International Trade, then moved to the Courts of Appeal, and eventually to SCOTUS. The tariffs were imposed under the International Emergency Economic Powers Act (IEEPA).

The challengers argue that the IEEPA does not grant the President authority to impose tariffs; that power is reserved for Congress according to the U.S. constitution.

The session seemed to favour the complainants. A majority of the justices, including Chief Justice John Roberts and Justice Neil Gorsuch, appeared deeply sceptical. They focused heavily on the separation of powers and the ‘major questions doctrine,’ questioning whether a law intended for emergency sanctions could be twisted to impose a massive, sustained, global tax (i.e., a tariff). This signals that SCOTUS is likely to rule that the President exceeded his legal authority under IEEPA.

What happens next?

The consensus among observers is that SCOTUS will strike down the IEEPA‑based tariffs, with a ruling expected sometime in December or early 2026.

The administration has said it will immediately try to reimpose the tariffs using alternative statutory tools, such as:

• Section 232 (National‑Security Tariffs)
• Section 301 (Unfair‑Trade‑Practice Tariffs)

However, the short‑term fix most likely involves Section 122 (Temporary Balance‑of‑Payments Tariffs). Legal experts believe the administration has the authority to use these provisions, so the substantive outcome may not change dramatically.

One important consequence of SCOTUS upholding the lower‑court decision is that the Treasury would have to refund all duties collected under the IEEPA authority, which is estimated at USD90 billion to USD130 billion (plus interest).

This amount is roughly 5% to 7% of the federal budget deficit. The refund would go to the parties that paid the duties directly, primarily U.S. importers.

Much debate took place in the immediate aftermath of ‘Liberation Day’ over whether the taxes were borne by exporters or U.S. consumers. In reality, both groups shared the burden, but only importers would receive the refund. Consequently, the net effect is a wealth transfer from consumers and exporters to importers.

Broader economic context

The event is significant, but it does not appear to be systemic in the short term.

However, assessing its impact is complicated by the record‑breaking federal government shutdown. Assuming this now ends, as seems likely, the U.S. economic data series will begin to resume.

A fractured look into the U.S. jobs market

Because of the shutdown, there is limited data on the broader U.S. labour market. Some private sector sources, such as the Challenger Job Cuts report, continue to track announced layoffs

Employment is highly seasonal, a nuance that is obscured in seasonally adjusted data series like non‑farm payrolls or the unemployment rate.

The Challenger report highlighted an unusual uptick in job cuts during October, a month when companies typically avoid layoffs to preserve goodwill before the holiday season. The second most cited reason for October cuts was artificial intelligence (AI).

The majority of these cuts came from the technology sector, which has experienced the largest amount of private sector job losses over the past two years (though the public sector surpassed it after the Department of Government Efficiency (DOGE) cuts earlier this year) amidst concerns over their investment plans

AI‑related layoffs in 2025 total under 50,000, a relatively small figure, especially given that most of those cuts occurred in the last month. At present, this looks more like a blip than a trend.

Strains in the credit markets

The high‑yield (HY) credit spread remains a robust leading indicator for both real economic activity and equity market performance.

A widening spread raises companies’ cost of capital, prompting them to cut investment and output growth. HY spreads are also predictive for equities; historically, high‑yield returns correlate with equity returns at a range of 66% to 92%. Essentially, equities and high-yield bond returns have a strong positive correlation.

Spreads have risen recently, but they started from a low base, so they are not yet prohibitively high.

A handful of credit concerns have emerged in recent weeks, involving names such as First Brands, Tricolor, Western Alliance, Zions Bancorp, Broadband Telecom, and Bridgevoice. This follows JPMorgan Chase CEO Jamie Dimon’s comment that the first credit worries, “like cockroaches”, often signal the presence of many more.

How to view the credit market

The recent uptick in credit spreads has been modest, and spreads remain relatively low in a long‑term historical context.

High‑yield investors accept higher default risk in exchange for extra yield; even with the recent spread widening, the overall yield on high‑yield bonds is still modest compared with safer credit.

There is room for defaults to increase without indicating a systemic financing crisis, this is what we would expect in a normal credit cycle.

Consequently, we can tolerate a further widening of spreads or additional distressed credit cases before becoming overly concerned about an economic slowdown.

Coming up – 11 November to 17 November

Shutdown breakthrough on the horizon:

Eyes will be on the potential end of the U.S. government shutdown.

China Singles Day:

The 11 November sees China’s annual e-commerce discount day.

U.S. Treasury Market Conference:

The Federal Reserve Bank of New York will host this event despite speculation that borrowing could be increased if tariffs must be refunded.

The size of the short and longer-term investment commitments is unnerving for investors, as it reminds them of previous investment cycles where long-term demand was slower than expected. This led to longer periods of underused capacity.

Large investments in telecommunications infrastructure during the late 1990s, or mining capacity during the early 2000s, led to correspondingly high depreciation charges, with little offsetting revenue and, often, asset writedowns (when the recorded value of an asset is reduced because the market value has fallen below its book value). This is why people worry about an AI investment bubble.

Instead, companies reported that their spending is based on the concrete evidence of robust, immediate demand, mitigating concerns over a potential AI spending bubble.

Executives were unanimous in reporting that AI demand continues to exceed available capacity. Microsoft’s CFO Amy Hood noted that the company is still operating from a “constrained capacity place,” primarily in power and data centre space, rather than just chip supply. Amazon CEO Andy Jassy echoed this sentiment, stating that despite aggressive building, “as fast as we are bringing it in, right now, we are monetising it,” indicating a rapid and visible return on deployed assets.

Crucially, Microsoft disclosed that it still has a remaining performance obligation (RPO) backlog of USD392 billion, an increase of 51% year-on-year. This represents the revenue that Microsoft expects to earn from services or products it has yet to deliver to clients and customers. This figure, which is expected to take about two years to realise, proves that Microsoft has committed customer contracts and a certainty of near-term revenue, which directly supports its elevated CapEx roadmap for the forthcoming years.

Alphabet raised its 2025 CapEx forecast and signalled a ‘significant increase’ expected for next year, driven by a USD155 billion backlog in demand for cloud business.

Central banks: Policy divergence and political scrutiny

Central bank activity underscored a notable divergence in global monetary policy, while the U.S. Federal Reserve and the Bank of Japan continued to face unique political pressures.

Federal Reserve (the Fed): The Federal Open Market Committee (FOMC) cut the federal funds rate by 25 basis points to a range of 3.75% to 4%. The cut was characterised as a pre-emptive easing measure designed to address rising downside risks to the employment mandate (its mandate from Congress to promote maximum employment).

Fed Chair Jay Powell affirmed that future policy would remain data-dependent, even as the narrative continues to focus on the administration’s strategy of using political appointments to the Board of Governors to pressure the rate-setting process.

European Central Bank (ECB): The ECB held its key interest rates steady, keeping the deposit rate at 2% for the third consecutive meeting. With Eurozone inflation stabilising near the ECB’s 2% target, it provided minimal forward guidance, suggesting a prolonged pause. Market expectations are pointing to rates staying unchanged well into 2026. No new economic forecasts were issued at this meeting.

Bank of Japan (BoJ): The BoJ also held its main interest rate unchanged at 0.5%. At the subsequent press conference, Governor Kazuo Ueda was inevitably asked about the stance of the newly installed prime minister, Sanae Takaichi, who is known to favour accommodative monetary policy.

Ueda made it clear that while the bank would “stay in close contact with the government and maintain necessary communication,” the BoJ’s decision to maintain its current stance was based solely on the need to evaluate more data, particularly concerning domestic wage trends and the impact of U.S. tariffs.

He pledged to “adjust the degree of monetary accommodation when we are convinced, irrespective of the political situation”, an explicit verbal defence of the central bank’s independence against both domestic and external (U.S. Treasury) pressure to quicken its tightening pace.

Trade spats: A tactical China-U.S. truce and chip policy volatility

The last few weeks have seen an intensification of trade stresses between the U.S. and China, with tech restrictions and tariffs from the U.S. prompting rare-earth metal export restrictions and other countermeasures from China.

But more recently, relationships seemed be thawing, resulting in a temporary de-escalation. However, volatility in the semiconductor sector underscored the fragility of the tech relationship.

The rare-earths and tariffs deal

Beijing secured short-term relief for key industries by agreeing to a one-year suspension of its latest, more restrictive rare-earth export control measures, and committing to resuming large purchases of American agricultural products (notably soybeans).

In return, the U.S. offered tangible concessions, agreeing to reduce existing tariffs by 10% on certain categories of Chinese goods. This marks a tactical retreat by both sides to stabilise markets, though the underlying structural controls remain in place.

The Blackwell chip drama

Market attention was intensely focused on the potential relaxation of export controls on Nvidia’s advanced Blackwell AI chips (B-series).

Speculation began when U.S. President Donald Trump publicly signalled, he might discuss the sale of a downgraded variant (e.g., the B30A) with Chinese President Xi Jinping. This talk ignited a massive rally in semiconductor stocks, driving Nvidia’s market capitalisation briefly toward the USD5 trillion mark on Wednesday, as investors anticipated access to the vast Chinese market.

However, the market impact proved short-lived. On Thursday, President Trump clarified that while semiconductors were discussed broadly, the advanced Blackwell chips were not specifically on the table, instantly cooling market optimism.

Analysts and U.S. lawmakers had vehemently opposed any relaxation, arguing that exporting even a scaled-down Blackwell chip would functionally end the existing export control regime and severely erode America’s critical advantage in AI computing power.

Technology remains the dominant force behind the economy and the market, with technological supremacy becoming the prevalent geopolitical issue.

Coming up – 4 November to 10 November

Earnings season:

More than half of companies have now reported.

Purchasing managers indices:

A host of business surveys may take on renewed importance as the U.S. government shutdown delays the production of official data.

OPEC+ meeting:

This week, the Organisation for Petroleum Exporting Countries (OPEC+) is expected to boost output for the ninth consecutive month.

Global markets ended the week on a firmer note, with sentiment noticeably more constructive than a couple of weeks ago.

A catalyst was the latest U.S. inflation data for September, which came in slightly below expectations, rising from 2.9% to 3% year-on-year. The modest pickup was lower than expected and reinforced the view that inflation is still under control despite U.S. trade tariffs. This paves the way for an interest rate cut next week, a move already fully priced in by markets.

Optimism also rose after the White House confirmed that President Donald Trump and Chinese President Xi Jinping will meet on Thursday in South Korea, on the sidelines of the Asia-Pacific Economic Cooperation summit. It will be their first face-to-face meeting since President Trump’s return to office, coming just days before the current trade truce is set to expire on 10 November.

Markets are leaning on a more optimistic outcome from the upcoming talks, even if a major breakthrough remains uncertain. Discussions are expected to cover a broad range of issues, from technology exports and agricultural purchases to restrictions on rare-earth minerals. The tone from Washington has softened recently, which investors are viewing as an indication that both sides want to extend the tariff pause while leaving room for longer-term negotiations.

Meanwhile, the U.S. signed a rare-earth partnership with Australia, agreeing to co-invest in mining and processing capacities to secure access to critical minerals used in clean energy and semiconductor production.

The deal improves America’s leverage ahead of the summit, though China remains overwhelmingly dominant in this strategic area. For instance, the International Energy Agency (IEA) estimates that China accounts for about 61% of rare-earth production and 92% of rare-earth processing. That concentration highlights Beijing’s enduring influence over global supply chains and its leverage in any trade discussions.

Ahead of the talks, China held its fifth plenum last week, which sets its long-term strategic plans and policy goals. Its 15th five-year plan focuses on artificial intelligence (AI), energy transition and stronger domestic consumption.

This underscores China’s long-term ambition for innovation-led and self-reliant growth. The five-year plan ensures that the strategic rivalry between the U.S. and China won’t go away, but both countries will need to learn to co-exist and not decouple for the stabilisation of the global economy.

Gold cools after a blistering rally, while oil prices jump

After months of relentless gains, gold prices finally took a breather from record highs of above USD 4,300 per ounce. The pullback was largely technical, with investors taking profits after an extended rally, and the momentum indicator that measures the magnitude of recent price changes suggested that gold was overbought.

Nevertheless, the case for gold remains intact, supported by central bank purchases, widening fiscal deficits and lingering geopolitical uncertainty.

Meanwhile, Brent crude oil prices jumped about 8% last week after new U.S. sanctions on Russia’s largest oil producers, including Rosneft and Lukoil. This move is intended to increase pressure on Russia to end the war in Ukraine.

The measures caused short-term oil supply disruption mainly for Asian buyers, with some Indian refiners scaling back Russian imports and Chinese buyers cancelling spot cargoes.

Even so, the IEA expects global supply to exceed demand by nearly four million barrels per day next year, suggesting the market remains comfortably balanced overall.

Japan’s ‘Sanaenomics’ energises markets

In Japan, Sanae Takaichi made history by being confirmed as the country’s first female prime minister, a milestone that injected optimism into markets and sparked enthusiasm for what commentators are calling ‘Sanaenomics’. She has pledged to boost public investment, expand defence capabilities, and deepen ties with the U.S. to help renegotiate a better trade deal.

So far, markets are receptive to her agenda. Her leadership has drawn comparisons to former Prime Minister Shinzo Abe’s reform-driven era, with hopes that ‘Sanaenomics’ can reignite domestic demand and attract renewed global interest in Japanese assets.

Japanese equities rallied, the yen weakened, and government bond yields climbed as investors anticipated higher borrowing to finance fiscal expansion.

UK data highlight resilience ahead of Autumn Budget

In the UK, economic data painted a picture of resilient consumers ahead of the Autumn Budget. Retail sales rose 0.5% month-on-month in September, beating forecasts, while the GfK Consumer Confidence Index improved modestly in October (although it was still in deeply negative territory).

The UK composite Purchasing Manager’s Index also strengthened in October, signalling resilient private sector services activity.

Meanwhile, UK inflation held steady at 3.8%. Although this was lower than expected, it is still far from comfortable. The good news is this could mark the high point of inflation, with slowing energy and utility prices likely to bring inflation lower in the coming months.

For the Bank of England (BoE), it’s still a high hurdle to justify cutting interest rates this year. Services inflation remains stuck at 4.7%, a big reason to stay cautious.

The BoE’s Monetary Policy Committee remains split. Hawks are focused on sticky inflation, while doves worry about economic weakness. The BoE is walking a tightrope between stubborn inflation and slowing growth.

Markets are now pricing in a higher chance of a December rate cut. While BoE Governor Andrew Bailey is leaning on rate cuts from his recent speech, these may not come as soon as markets hope and will probably be more of a 2026 story. It is hard to justify a rate cut in the near term unless there are more signs that inflation is truly under control or the economic data deteriorates significantly.

Coming up – 28 October to 3 November

Trump-Xi meeting:

All eyes now turn to the Trump-Xi meeting in South Korea, where investors will be watching for signals that both sides can extend the tariff truce and prevent renewed trade tensions.

Federal Reserve decision:

Markets have fully priced in another rate cut this week, with Federal Reserve Chair Jay Powell’s outlook guidance in focus.

Big tech earnings:

Tech giants including Alphabet, Microsoft and Meta will release their earnings reports this week, as investors look for evidence of any boost of earnings from AI.

After months of relentless gains, global markets took a breather last week.

Investors have shifted from exuberance to evaluation, reassessing whether stretched valuations can hold amid emerging signs of credit stress, renewed trade tensions between the U.S. and China, and concerns over a potential artificial intelligence (AI) bubble.

While caution has crept back in, the broader picture remains constructive, with solid corporate earnings, resilient consumer sentiments, and more Federal Reserve (the Fed) easing on the way.

The change in market tone began with renewed worries about credit quality in U.S. banks. The defaults at First Brands and Tricolor Holdings raised concerns about lax credit standards, potential deterioration in credit quality, and loan loss provisions at financial institutions.

To make things worse, two regional U.S. banks, Zions Bancorp and Western Alliance Bancorp, said they were victims of fraud in relation to loans to funds that invest in distressed commercial mortgages. This revived memories of the regional banking turmoil in 2023, and understandably investors have become nervous. JPMorgan Chase CEO, Jamie Dimon, made a goosebump-inducing analogy, which added to the unease: “When you see one cockroach, there are probably more.”

So far, the credit events feel like unconnected incidents. But when Jamie Dimon talks about cockroaches, it amplifies a long-lingering nervousness about the vast growth of private credit and the need to refinance real estate loans. The fact that the private market is so opaque makes it hard to know how strong credit quality is.

Encouragingly, the early earnings results from U.S. regional banks offered some reassurance. Reports from Truist Financial, Regions Financial, and Fifth Third Bancorp showed lower-than-expected provisions for credit losses. Several lenders also highlighted resilient consumer spending and stable deposit bases. Many regional lenders have also improved capital buffers since 2023.

Beyond the regional lenders, major U.S. banks delivered a strong earnings season, reinforcing the view that the financial system and the U.S. economy remain resilient. The biggest U.S. banks reported healthy net interest income, robust trading revenues and continued loan growth, underpinned by solid consumer spending. There are reasons to believe that the recent credit jitters are idiosyncratic rather than systemic.

Still, recent developments are a reminder that the aftershocks of higher interest rates can reverberate through smaller banks, weaker companies and credit markets. For the Fed, it helps further the argument for easing policy rather than keeping financial conditions too tight for too long.

Trade tensions are meant to escalate, then de-escalate

Renewed tariff exchanges between the U.S. and China added another layer of complexity to investors.

President Donald Trump has threatened additional 100% tariffs on Chinese goods after China tightened export controls on rare-earth materials. Yet, in typical fashion, President Trump struck a softer tone in a Fox Business interview, saying that “tariffs are not sustainable” and expressing confidence that “we’ll be fine with China.”

The markets’ interpretation is that by setting the next tariff increase deadline for 1 November, President Trump is clearly leaving room and time for negotiation. There is still a chance, and expectation, that he will meet President Xi Jinping in South Korea within weeks, which leaves optimism that both sides are ready to de-escalate.

The AI story remains powerful despite talks of a bubble

The AI-driven rally that propelled stocks to record highs has paused for breath. Talk of an AI bubble is front and centre. It is actually good to see this scepticism when optimism runs high.

Concerns over valuations, concentration and the circular nature of some AI deals have triggered some profit-taking, especially after months of extraordinary gains. Yet, the fundamentals of the AI story remain intact. Earnings from ASML and TSMC reaffirmed that demand for AI-related infrastructure, from semiconductors to equipment makers, remains robust. There’s still clear visibility of and longevity for the tangible capital investments going into AI.

That said, there are pockets and signs of froth (a lesser and milder version of a bubble), for instance, huge intraday stock price surges from large established companies following AI deal announcements and investors chasing momentum stocks.

AI start-up valuations are also sky high despite many being loss-making at this stage. AI will no doubt be a transformative technology, but there are lingering concerns over whether all the money will generate adequate returns.

With AI capital expenditure (capex) ramping up, and the Fed cutting interest rates again, there are parallels with the late 1990s tech boom. The AI-driven rally could well go further, and thoughts are to have at least benchmark exposure to that but stretched valuations is a reason for not being more bullish on this.

All that glitters… is gold

In this climate of cautious sentiment, gold has been the standout performer. The precious metal has surged to USD 4,356 per ounce, buoyed by macro uncertainty, institutional distrust, central bank buying and lower U.S. interest rates.

Buying gold is described as the ‘debasement trade’, a hedge not only against inflation but also against ballooning fiscal deficits and long-term currency value erosion. Meanwhile, government bonds have found renewed demand as investors price in further Fed easing and weaker growth.

Taken together, the week’s development marked a shift from complacency and euphoria to caution. Valuations are stretched, economic uncertainty persists, and trade tensions remain.

It is understandable that investors are taking a more measured stance after such a strong run since April, but the broader backdrop is okay. Corporate earnings are still solid, consumers are resilient, and the Fed is likely to continue easing. Markets are doing what they should, which is consolidating after exuberance, digesting new information and recalibrating expectations.

The AI investment cycle continues to provide a structural anchor, while gold and government bonds are fulfilling their roles as hedges in times of uncertainty.

Coming up – 21 October to 27 October

U.S. earnings season gathers steam

Tesla to be the first ‘Magnificent Seven’ company to report next week, as investors carefully watch AI-related capex and profits.

China Q3 gross domestic product (GDP)

Deflation remains rampant in China and investors will be looking out for any signs of recovery in domestic demand.

UK inflation data

Headline inflation is expected to have risen to 4% in September, dampening hopes for an interest rate cut in the near term.