Market Matters-Eerie Easing, Trade Tensions Thaw & Other October Oddities

Alliteration is one of the last great art forms no?

The Hang Seng was closed for the Lunar New Year, while the Nikkei 225 was closed for Japan’s National Day so I’ve replaced these indexes with some IA sectors for this edition.

Market Overview
After a week characterised by central bank activities, trade diplomacy, and another round of big tech earnings, markets concluded October with a curious mix of relief and caution. The Federal Reserve’s long-anticipated rate cut came in largely as expected. Still, Chair Powell’s remarks that further easing was “not a foregone conclusion” reminded investors that monetary policy remains a negotiation between hope and reality.

Meanwhile, the budget stalemate in Washington faded into the background, but its financial implications persist. Treasury issuance remains substantial, yield curve steepening has returned, and the discussion has shifted from whether rates will fall to how much they can decrease without reigniting inflation. Additionally, a long-awaited thaw in US–China relations sparked some optimism: Presidents Xi and Trump announced a modest rollback of tariffs on Chinese-made goods, effectively ending nine months of tension that had dampened global trade sentiment.

Equities responded positively to the combination of reduced policy risk and steadier macroeconomic data, despite market breadth narrowing and profit-taking emerging by the end of the week. The message from the market was clear: earnings remain more important than political considerations, but clarity in policy helps! With bond markets adjusting, volatility decreasing, and investor positioning becoming stretched, the question remains whether this marks the beginning of a new easing cycle or simply a calm period between volatile chapters.

United States
The Federal Reserve announced a widely anticipated 25-basis-point rate cut, signalling the end of quantitative tightening and establishing that future policy will be driven by data rather than ideology. Chair Powell’s ‘softly softly’ approach was a strategic move to restore credibility following weeks of political distractions and market pressures. Two regional presidents dissented, highlighting the growing divide within the Committee between those concerned about overheating valuations and those focused on lagging employment and spending indicators.

Initially, markets responded positively to the decision, with yields decreasing, equities rising, and the dollar weakening. However, enthusiasm waned by the weekend as investors balanced Powell’s cautious tone against stretched market positioning. The S&P 500 remains close to record highs, bolstered by a strong earnings season. However, expansion in multiples has contributed more to gains than earnings growth in recent months.

Earnings reports have been strong overall. Big Tech continued to lead, with companies in cloud services, cybersecurity, and semiconductors demonstrating sustained demand and effective margin management. Yet this quarter, the tone shifted slightly, with management teams focusing on execution and efficiency rather than unrestrained ambitions related to AI. Investors also appear to be distinguishing between companies that successfully monetise the AI cycle and those that merely ‘leverage the narrative’. With valuations reaching extremes, risk assets are more sensitive than ever to any disappointments in future guidance.

Macro data has been mixed. Labour market indicators remain strong, although job openings suggest slower turnover, and consumer confidence has dipped for the second consecutive month. There are signs of progress in inflation, but it is uneven, as persistent price increases in services counterbalance the deflation in goods.

Additionally, the effects of the government shutdown still loom in fiscal discussions, contributing to the perception that political instability in Washington is an economic factor in its own right.

Economic growth remains steady, inflation is manageable, and profits are healthy; this combination supports a moderate sense of optimism while necessitating careful discernment. This is not the clear signal some had anticipated, but it does confirm that the US market still possesses exuberance – its rationality remains in question.

Europe
Europe’s markets saw modest gains as earnings proved to be better than anticipated and bond yields eased from their peaks. The European Central Bank (ECB) kept interest rates unchanged on Thursday and maintained a calm tone, expressing satisfaction with progress on inflation. ECB President Lagarde stated, “From a monetary-policy point of view, we are in a good place,” and updated forecasts indicate that inflation is expected to dip below 2% next year before stabilising at the target level by 2027.

Source: ECB staff projections

The upcoming meeting on December 18 will provide new projections extending to 2028, which should clarify when potential rate cuts could occur.

Corporate results have been steady rather than extraordinary, but this is sufficient in the current environment. Banks continue to report strong capital returns with limited credit stress, while luxury and industrial companies are managing the slowdown reasonably well. The combination of easing price pressures and a cautious approach from the central bank keeps Europe in a relatively favourable position compared to earlier in the year. It is more a story of gradual normalisation than rapid growth, but with the tail risks for 2024 diminishing, investors are regaining confidence in the region’s earnings resilience.

UK
The UK market is currently characterised by low expectations that are starting to meet a modestly improving reality. While US bond yields have risen, UK yields have remained generally stable. This stability has helped ease financial conditions and support rate-sensitive areas of the equity market. The Bank of England’s Monetary Policy Committee is set to meet next week, with markets estimating roughly a 30-40% chance of a quarter-point rate cut. Implementing a cut before the November 26th Budget could be politically challenging, making December, which is currently priced at around 60-70% probability, a more likely time to begin an easing cycle.

Source: Market implied probability from sources cited in graph.

Corporate updates have been mostly positive, particularly from major banks and energy companies, although the industrial and consumer sectors are experiencing mixed demand. The sentiment regarding gilts and the pound remains cautiously optimistic, bolstered by the belief that inflation is finally heading in the right direction. Although the fiscal situation is tight, it is deemed manageable. With the Budget approaching, attention will focus on policy signals: whether the Chancellor favours business investment incentives or relief for households will influence market sentiment as we approach year-end.

For now, market valuations continue to provide a buffer against volatility. Foreign buyers are actively pursuing mergers and acquisitions, and share buybacks are enhancing the total-return potential across various sectors. While the mood is not euphoric, it is constructive… an equity market trading below its intrinsic value, slowly rebuilding trust as macroeconomic uncertainties begin to lessen.

This week..
This week’s picture remains blurred by the continued US government shutdown, which has suspended or delayed several major economic releases (BLS/BEA/Census releases…etc) leaving investors and policymakers without the usual signposts. The Fed has entered a data-dependent phase just as the data have gone dark — a frustrating irony that reinforces Powell’s decision to tread carefully.

With official numbers scarce, markets will rely more heavily on private indicators and corporate guidance. The next leg of the US earnings season, which includes retail, semiconductors, and energy, should provide a clearer sense of how consumer spending and capital expenditure are holding up heading into year-end. In the absence of macro visibility, these reports could set the tone for risk sentiment more than usual.

In the UK, the spotlight is on Thursday’s Bank of England meeting, where policy restraint appears to be the path of least resistance until after the November Budget. Across Europe, final PMIs and (admitted just after this week) the German ZEW survey will add texture to an economy still feeling the chill of weak global demand, but with disinflation offering some comfort.

All told, markets are still flying partially blind. The policy backdrop remains steady, and the earnings narrative is constructive; however, without hard data, the line between confidence and complacency is thin.

Until Washington reopens the statistical taps, it’s companies — not economists — who will shape the market narrative.