Weekly Market Recap

Equity markets

Last week, the MSCI All Country World Index (MSCI ACWI) fell -1.6% (12.9% YTD).

The S&P 500 Index finished the week down -1.9% (12.9% YTD) 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 4.5% (13.0% YTD) followed by the small-cap Russell 2000 Index, which fell -3.0% (10.8% YTD). The Russell 1000 Value Index outpaced its growth counterpart by more than 5%, rising by 0.9% (23.0% YTD), while the Russell Growth Value Index fell by 5% over the week (3.1% YTD).

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.

In Europe, the MSCI Europe ex-UK Index rose 2.1% (11.5% YTD). 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 Index was up 2.1% (4.6% YTD), France’s CAC 40 Index gained 2.0% (0.6% YTD), and Italy’s FTSE MIB Index rallied by 0.2% (14.4% YTD). Switzerland’s SMI put on 4.4% (11.8% YTD). The euro was flat against the US dollar, closing the week at USD 1.12 per EUR.

The FTSE 100 Index in the UK also rose, by 3.2% (12.5% YTD), while the FTSE 250 Index of smaller companies gained 1.4% (12.1% YTD). The British pound rose versus the US dollar for the week, closing at USD 1.33 per GBP, compared to USD 1.32 per GBP at the end of the previous week.

Japanese stocks fell over the holiday-shortened week, with markets closed on Monday. The TOPIX Index declined -0.9% (21.8% YTD), and the TOPIX Small Index fell -1.0% (21.1% YTD). The technology sector’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 US 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. 

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

In Australia, the ASX 200 Index rose 1.1% (4.9% YTD) as materials sector rebounded on improved global risk sentiment on Friday. Australian government bond yields fell following the September job miss, with the curve modestly flattening.  The Australian dollar weakened against the US dollar by 0.4%.

In Canada, the S&P/TSX Composite finished the week up 1.4% (16.1% YTD).

Emerging markets and other markets

The MSCI Emerging Markets Index ended the week down -5.1% (17.5% YTD). Indian stocks rallied, while shares in China, Taiwan, Brazil and South Korea contributed negatively.

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, the main onshore benchmark, was down -3.3% (-8.1% YTD), while the Shanghai Composite Index declined -2.5% (-4.6% YTD). Hong Kong's benchmark Hang Seng Index fell -0.1% (-3.0% YTD). The MSCI China Index, which primarily comprises offshore-listed stocks, fell by 1.6% (-13.0% YTD). The weakness coincided with renewed concerns about the scale and potential returns of AI-related spending and stronger-than-expected US 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.

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 US 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 US monetary policy. Stronger-than-expected inflation data increased concerns that the Fed could raise interest rates further, putting additional pressure on investor sentiment. The Korean won weakened against the 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.

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 US 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.

Fixed income markets

Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned 0.7% (-0.4% YTD), the Bloomberg Global High Yield Index (hedged to USD) -0.1% (0.7% YTD), and the Bloomberg Emerging Markets Hard Currency Aggregate Index 0.7% (-1.1% YTD).

US 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.  Over the week, the 10-year Treasury yield decreased by -16bps to 5.08% from 5.24% (up 91bps YTD). The 2-year Treasury yield decreased by -8bps, ending the week at 4.71% from 4.79% (up 123bps YTD).

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.

Over the week, the 10-year German Bund yield fell by -6bp, ending at 3.42% from 3.48% (up 57bps YTD). The 10-year UK gilt yield fell by -7bps, ending the week at 5.37% from 5.44% (up 89bps YTD).