October intensified the regime shift already visible in September. The month began with sovereign bonds still absorbing the combined effects of renewed monetary tightening, heavy supply, fiscal anxiety and a worsening energy shock. Ten-year US Treasury yields remained above 5%, long-dated European yields stayed under pressure, and the stronger dollar tightened conditions further for energy importers and emerging markets. Oil extended its extraordinary advance, while gold weakened and the previously dominant AI complex lost momentum. Pictet describes the preceding bond sell-off as the largest weekly Treasury decline on record, with ten-year yields above 5.2%, thirty-year yields above 5.5% and oil up almost 18% over the review period.
Read MoreSeptember delivered a unusually severe test of the market’s internal structure. The ten-year US Treasury yield rose by 53 basis points, its largest monthly increase since September 2022; the Federal Reserve tightened for the first time since 2023; Brent gained almost 14%; and both the S&P 500 and European equities fell. Yet global equity indices ended the quarter only around 2% below record highs and remained more than 12% higher year-to-date.
The chartbooks largely confirm this resilience, but with an important qualification. The equity regime has not broken; rather, leadership has rotated towards assets capable of tolerating higher nominal growth, higher inflation and scarcer energy. Technology remains a structural leader, but energy, healthcare, materials and selected non-US markets are increasingly important. The weakest signals are concentrated in the rate-sensitive domestic sectors and in countries exposed to deteriorating terms of trade.
Read MoreThese chartbooks capture market themes which presently exist in a vacuum from which the oxygen has been sucked out by fears over the sell-off in bonds, its drivers and implications for monetary policy, and the AI story, which continues to capture the attention of bulls and bears alike. These two themes will continue to dominate the main market narrative as speculation intensifies over whether the data are pulling the Fed towards tightening, perhaps as early as this month, or whether it will ride out the storm with no change in rates. In the AI story, meanwhile, the next big test of the bull market’s strength and resilience will be the much-awaited IPOs of the frontier labs—OpenAI and Anthropic—which require significant and ongoing injections of capital to stay alive, even as they remain the principal conduits through which AI is transmitted to the real economy.
Read MoreI've written a lot about inflation recently. I still think markets are at the mercy of inflation and the triumvirate of doom, which means that the U.S. inflation report is likely to remain the most economic piece of data for markets, for the foreseeable future. I haven't been looking at the inflation trades for a while, however, which I will seek to make amends on here. Falling inflation eventually will allow central banks to perform the much-discussed pivot, both in terms of the speed of tightening and eventual terminal rate. The latter follows naturally from the fact the tightening cycle's end point inevitably draws nearer as central banks continue to raise rates. An even bigger question is what inflation regime will emerge once the current fever breaks—and it will break, eventually. Markets ought to be able to tell us something about that.
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