Global Markets Weekly Update

U.S.

Major U.S. stock indexes closed the week mostly lower as a sharp sell-off in artificial intelligence (AI)-related stocks, hotter-than-expected inflation data, and the start of third-quarter earnings season drove a rotation away from large-cap growth stocks and into more value-oriented and defensive segments of the market. The technology-heavy Nasdaq Composite fared worst, declining 4.48%, followed by the small-cap Russell 2000 Index, which fell 3.05%. Conversely, the Dow Jones Industrial Average added 0.67%. The Russell 1000 Value Index outpaced its growth counterpart by over 550 basis points (5.50 percentage points).  

Concerns about the sustainability of AI-related investment appeared to be a major driver of the week's sentiment, with semiconductor and memory stocks facing selling pressure amid heightened scrutiny of financing needs, valuations, and potential returns on AI infrastructure spending. Meanwhile, escalating tensions in the Middle East supported oil prices, providing a tailwind for the energy sector.

Consumer and producer price inflation exceed forecasts

The Bureau of Labor Statistics reported that its consumer price index (CPI) rose 3.7% year over year in September, above consensus estimates for a 3.6% increase and up from the prior month’s 3.4% rise. Core CPI, which excludes food and energy costs, rose 2.6% year over year, accelerating from August’s 2.4% increase. On a month-over-month basis, gasoline prices rose 9.1%, accounting for more than half of the headline index’s increase.  

Thursday's producer price index (PPI) report also highlighted accelerating price growth, with wholesale prices increasing 6.3% year over year, well above expectations for a 5.4% gain and the largest annual increase since December 2022.  

Meanwhile, comments from Fed Chair Kevin Warsh provided little clarity on what Fed policymakers will decide at their upcoming October meeting, noting that the central bank is no longer in the business of prejudging meeting outcomes and that he wants investors to focus on the economy. By Friday afternoon, data from the CME FedWatch Tool showed a roughly 17% probability of a rate hike at the meeting, little changed from the prior week despite the hotter-than-expected inflation prints.  

Retail sales rise amid higher gas prices; jobless claims remain subdued  

The Census Bureau reported Thursday that U.S. retail sales increased 0.8% in September, exceeding consensus expectations, although much of the increase was attributed to a 6.4% jump in gas station receipts. Control group sales—which exclude several categories, including gasoline, and feed into gross domestic product (GDP) calculations—rose just 0.1%, down from August’s revised 1.2% increase and below estimates for around 0.3%. 

Meanwhile, labor market data continued to suggest relatively limited layoffs. Initial applications for unemployment benefits came in at 199,000 for the week ended October 10, little changed from the prior week and the fifth consecutive reading below 200,000. Continuing claims for the prior week decreased by 4,000 to 1.71 million.  

Treasury yields decrease despite upside inflation surprises 

U.S. Treasuries advanced as the sharp sell-off in technology stocks appeared to fuel demand for government bonds, particularly longer-dated Treasuries, outweighing the upward pressure on yields from the week's inflation reports. (Bond prices and yields move in opposite directions.) The yield on the benchmark 10-year U.S. Treasury note dropped to around 5.09% by Friday afternoon from about 5.24% at the end of the prior week.  

Investment-grade corporate bonds also advanced, outperforming Treasuries over most of the week, while the high yield bond market experienced a sharp risk-off shift following Wednesday’s CPI report. 

Europe

The pan-European STOXX Europe 600 Index advanced 2.09% in local currency terms. The European earnings reporting season got underway, shifting investors’ attention back to corporate fundamentals. However, Middle East tensions and energy prices remained a major market driver. Among major stock indexes, Germany’s DAX closed 2.13% higher, France’s CAC 40 Index rose 1.97%, while Italy’s FTSE MIB nudged up 0.22%. Meanwhile, the UK’s FTSE 100 Index climbed 3.13%. 

Geopolitical tensions continue to drive markets  

Attacks on Saudi infrastructure and shipping around the Strait of Hormuz intensified this week. The prospect of further action against Iran also remained an overhang, keeping European natural gas prices elevated.  

AI-related names sell off

Early in the week, concerns shifted from chip availability to whether the enormous AI infrastructure build-out can be financed economically. Questions around leveraged data center investment, AI-related company revenues, and the returns on AI capital expenditure led investors to reduce crowded semiconductor positions. This led European semiconductor stocks to trade lower, contributing to a rotation toward defensive and previously underperforming areas of the market. Technology stocks staged a recovery toward the end of the week. 

European earnings season becomes meaningful sentiment driver 

European companies reported mixed quarterly results. Some luxury companies’ earnings disappointed early in the week. Semiconductor results were fundamentally solid, but broader uncertainty and already demanding expectations limited the positive reaction.  

Eurozone inflation remains elevated 

Spanish consumer price inflation was confirmed at 4.9% year over year in September, with core inflation rising to 3.1%. Meanwhile, French consumer price inflation was revised slightly higher to 3.1%, largely reflecting higher energy prices. Meanwhile, eurozone industrial production fell 0.5% month on month in August. This marked its third consecutive decline and was weaker than observers had expected.   

UK economy expands modestly  

UK GDP expanded 0.1% in August versus expectations for a 0.1% decline. Manufacturing production in the country jumped 1.2% month on month, while industrial production rose 0.8%. The monthly trade deficit also narrowed. 

Japan

Japanese stocks fell over the holiday-shortened week, with markets closed on Monday. The Nikkei 225 Index declined 5.37%, and the broader TOPIX Index was down 0.95%. The technology-heavy Nikkei’s significant underperformance reflected pronounced weakness in major AI- and semiconductor-related shares, with losses concentrated in Thursday’s sell-off before a partial rebound on Friday. Higher-than-expected U.S. inflation revived concerns about the outlook for interest rates and elevated valuations, while growing scrutiny of the substantial borrowing required to finance AI infrastructure investment further weighed on sentiment. Elevated oil prices and geopolitical uncertainty, particularly surrounding the ongoing conflict in the Middle East and risks to energy supplies, added to investor caution.  

Government bond yield falls to five-week low 

The yield on the 10-year Japanese government bond fell to 2.94% from 3.01% at the end of the previous week. Yields touched five-week lows on Thursday amid increased demand for safer assets following the global equity sell-off and a broader decline in government bond yields before recovering part of the move on Friday as risk aversion eased. Bank of Japan (BoJ) board member Junko Koeda said that financial conditions remained accommodative and underlying inflation was becoming anchored around the central bank's 2% target. Citing considerable upside risks to prices, she cautioned against excessive hesitation in raising interest rates. Governor Kazuo Ueda, in a speech delivered on his behalf by Deputy Governor Shinichi Uchida, reiterated concerns about underlying inflation overshooting the 2% target. Investors continued to anticipate further tightening, with most expecting the BoJ to leave rates unchanged at its October 29–30 meeting before considering another increase in December.  

The yen was broadly range-bound around JPY 158 against the U.S. dollar over the week. Investors weighed expectations for further interest rate increases in Japan against uncertainty over the outlook for U.S. monetary policy, with the interest rate differential between the two countries remaining an important driver of the exchange rate. 

Economic data released during the week showed that Japan's corporate goods prices rose 6.8% year over year in September, below consensus expectations for a 7.6% increase and slowing from 7.6% in August. The moderation suggested some easing in producer price pressures, although inflation remained elevated. Separately, core machinery orders, a leading indicator of capital expenditure, rose 5.2% month over month in August, exceeding expectations and reversing a 3.7% decline in July. 

China 

Chinese equities declined over the week, with mainland markets underperforming Hong Kong as selling in previously strong semiconductor and other AI-related shares weighed on benchmarks. The CSI 300 Index fell 3.40%, the Shanghai Composite Index declined 2.56%, and the Hang Seng Index edged down 0.10% in local currency terms, according to FactSet. The weakness coincided with renewed concerns about the scale and potential returns of AI-related spending and stronger-than-expected U.S. inflation, which revived worries about interest rates. Analysts also cited pressure from mutual fund redemptions.  

Financial shares generally held up better than technology stocks. Mainland equities recovered modestly on Friday, helped by announcements of share buybacks and upbeat profit forecasts from several technology companies, alongside gains in property shares. Separately, inflows into some broad-based exchange-traded funds were reported, although any state-backed buying was unconfirmed. 

Producer inflation accelerates while consumer prices remain subdued 

China's PPI rose 5.0% year on year in September, up from 3.8% in August and the fastest increase since June 2022, according to the National Bureau of Statistics. Higher energy and other raw material prices contributed to the acceleration. Consumer price inflation edged up to 0.9% from 0.8% in August, while core inflation, which excludes food and energy, was unchanged at 1.0%. The figures pointed to stronger producer-level price pressures without a comparable rise in consumer prices.  

Export growth accelerates on robust technology demand 

China's exports increased 36.3% year on year in September, accelerating from 25.0% in August and exceeding economists' forecasts, according to the General Administration of Customs. Imports grew 31.0%, lifting the monthly trade surplus to a record USD 133.5 billion. Strong overseas demand for technology-related goods, including semiconductors and data-processing equipment, supported export growth.  

Other key markets

South Korea 

Semiconductor sell-off and interest rate concerns weigh on markets 

South Korean equities declined sharply over the week as a global sell-off in semiconductor and AI-related stocks intensified, driven by concerns about elevated valuations and the sustainability of AI infrastructure spending. Shares of memory-chip leaders Samsung Electronics and SK Hynix came under significant selling pressure as investors reassessed the outlook for AI-related demand, rising financing costs, and increasing competition from Chinese chipmakers. The benchmark KOSPI fell to a six-month low on Thursday, triggering a temporary trading halt as selling accelerated. Markets subsequently rebounded on Friday, supported by renewed buying in technology shares and easing concerns about near-term U.S. interest rate increases, although the recovery only partially offset earlier losses.  

Foreign investor selling added to market volatility, extending a broader retreat from Asian financial assets amid rising global borrowing costs and uncertainty surrounding the outlook for U.S. monetary policy. Stronger-than-expected U.S. inflation data increased concerns that the Federal Reserve could raise interest rates further, putting additional pressure on investor sentiment. The Korean won weakened against the U.S. dollar during Thursday’s sell-off, while government bond yields declined as investors sought relatively safer assets. In response to the equity market turmoil, South Korea’s Financial Services Commission convened an emergency meeting Thursday to assess market conditions and strengthen coordination among financial authorities. The won subsequently recovered on Friday, while government bonds advanced as yields eased further. Despite the late-week improvement, uncertainty surrounding AI investment, foreign capital flows, and the global interest rate outlook continued to shape market sentiment. 

India

Technology shares rally while rising bond yields weigh on sentiment 

Indian equities advanced over the week, supported by a strong rebound in information technology shares as investors shifted away from global semiconductor and AI-related stocks. The sector benefited from improving earnings expectations and more attractive valuations following earlier weakness, with positive results and guidance from major software exporters helping bolster sentiment. The rally contributed to the strongest weekly gains in six months for India's benchmark Sensex and Nifty indexes.  

The Indian rupee also strengthened sharply, posting its best weekly performance in seven months as aggressive measures by the Reserve Bank of India (RBI) to stabilize the currency coincided with a weaker U.S. dollar, easing oil prices, and stronger domestic equities. The central bank introduced restrictions on foreign exchange transactions to curb speculative pressure and dollar demand while also tightening domestic liquidity conditions. However, these measures disrupted currency hedging activity and contributed to higher borrowing costs. Government bonds declined as yields rose, reflecting tighter liquidity and growing expectations that the RBI could raise interest rates further to contain inflation and defend the rupee. Despite the currency's recovery, elevated energy prices, foreign capital outflows, and uncertainty surrounding the monetary policy outlook continued to weigh on bond market sentiment.