Global Markets Weekly Update

U.S.

Major U.S. stock indexes finished the week mixed amid volatility in artificial intelligence (AI)-related stocks, developments in the Middle East, and sharp moves in energy prices and Treasury yields. The S&P 500 Index advanced 1.15%, while the Dow Jones Industrial Average and Nasdaq Composite added 0.93% and 0.64%, respectively. Conversely, the Russell 2000 Index declined, and the S&P MidCap 400 Index was little changed. At the sector level, consumer staples, utilities, and energy led performance, while industrials and information technology stocks declined.

Middle East tensions push oil prices higher 

Oil prices were volatile throughout the week as investors weighed developments in the Middle East and the outlook for energy supply. Crude prices moved lower midweek following news that the International Energy Agency would accelerate a planned release of oil reserves. However, prices rallied sharply Thursday amid reports of further attacks on tankers in the Strait of Hormuz and speculation that the U.S. was considering additional military strikes against Iran. Brent crude briefly topped USD 105 per barrel on Thursday before retreating somewhat after President Donald Trump said that the U.S. would not attack Iran ahead of November’s midterm elections, though reports of additional attacks on Friday drove continued volatility. 

Fed minutes signal further tightening but uncertain timing

Minutes from the Federal Reserve’s September policy meeting—where officials unanimously voted to raise interest rates by 25 basis points (0.25 percentage points)—showed that most policymakers anticipated another rate increase by year-end amid persistent inflation pressures. However, the minutes provided little clarity on the timing of the next increase, noting that “decisions at future meetings would depend on incoming information.” Fed Governor Christopher Waller echoed this sentiment on Thursday, saying that he expects the Fed to continue raising interest rates to combat inflation but that “there is some flexibility about when those hikes will occur.”

Economic data released during the week also highlighted continued inflation pressures. The Institute for Supply Management reported that its services Purchasing Managers’ Index (PMI) remained in expansion territory in September, coming in at 54.9 versus 55.4 in August. However, the survey’s prices index climbed 1.4 points to 74.0, its highest level since July 2022. 

Separately, the New York Fed’s Survey of Consumer Expectations showed that year-ahead inflation expectations rose to 3.9% in September, the highest since May 2023. Meanwhile, the University of Michigan’s preliminary October Index of Consumer Sentiment reading dropped to a five-month low of 46.3, while year-ahead inflation expectations edged up to 4.7%. 

Treasury yields retreat from multi-decade highs amid strong auction demand

U.S. Treasuries were volatile during the week as investors assessed geopolitical developments, persistent inflation concerns, and the prospect of additional monetary policy tightening from the Fed. Yields on the 10-year and 30-year U.S. Treasuries rose to their highest levels since 2002 before retreating after stronger-than-expected auctions, while President Trump’s promise to not attack Iran ahead of November’s midterm elections also appeared to be supportive. (Bond prices and yields move in opposite directions.)

Meanwhile, investment-grade corporate bonds outperformed Treasuries for most of the week, and new issues were generally oversubscribed. The high yield bond market was volatile amid renewed inflation concerns, rising oil prices, and higher Treasury yields.

Europe

The pan-European STOXX Europe 600 Index ended the week broadly unchanged, up 0.03% in local currency terms. European equities were volatile as renewed Middle East tensions, a more hawkish European Central Bank (ECB) backdrop, mixed eurozone industrial data, and softer UK activity indicators shaped investor sentiment over the week. Among major stock indexes, Germany’s DAX closed 0.57% lower, France’s CAC 40 Index declined 1.19%, while Italy’s FTSE MIB fell 1.46%. The UK’s FTSE 100 Index climbed 0.86%.

ECB: Decision to raise rates was unanimous

Minutes from the ECB September meeting indicated that policymakers believed inflation risks were skewed to the upside when they raised interest rates for the first time since 2023. The minutes acknowledged that “inflation was set to remain well above target for an extended period” and that “the full inflationary impact of the energy shock had yet to play out.” The central bank also noted that it was “neither suggesting that the current decision was another step in a predetermined tightening cycle nor that it was the last rate hike.”

German exports slide

Germany’s exports fell 0.8% month on month in August. This was below the 0.5% drop recorded in the previous month and the 0.6% increase that had been expected. Germany’s factory orders fell sharply in August, tumbling 10.6% month on month. In contrast, industrial production in the country climbed 2.0% month on month in August. This was a rebound from the 1.2% drop experienced in July.

Industrial output in France declines

Official data showed that French industrial production declined by 0.3% month on month in August. This was in contrast to the 0.3% rise that had been expected. Extractive industries, energy, and water were particularly weak, down 2.4% due to lower electricity production.

UK private sector sees slower growth

The UK Composite PMI declined to 52.0 in September, down from 52.5 in August. This was marginally weaker than expected. The data showed that activity was still in expansionary territory but that the pace of growth has slowed.  

The Lloyds House Price Index showed that UK house prices were stagnant both month over month and year over year in September. This followed a 0.3% monthly decline in August.

Japan

Japan’s stock markets gained over the week, with the Nikkei 225 Index rising 1.06% and the broader TOPIX Index up 0.34%. Equities rallied strongly early in the period, led by AI- and semiconductor-related shares, as recent weaker-than-expected U.S. employment data reduced expectations for a near-term Federal Reserve rate hike and lifted global technology stocks. Those gains partially reversed later in the week as investors reassessed AI-related valuations and growth expectations. Concerns over Japan’s fiscal outlook, persistently high bond yields, yen weakness, and rising oil prices amid renewed Middle East tensions also weighed on sentiment. The yen weakened modestly over the week to around JPY 158 against the U.S. dollar from the high end of the JPY 157 range. 

Prime minister seeks to reassure investors

The yield on the 10-year Japanese government bond fell to 3.01%, from 3.09% at the end of the previous week. Despite the week’s decline, yields remained elevated amid concerns over Japan’s debt burden and the fiscal implications of the government’s policy agenda. Prime Minister Sanae Takaichi sought to reassure investors over Japan’s fiscal outlook, pledging to control bond issuance and stressing that fiscal sustainability remained a prerequisite for the government’s responsible and proactive fiscal policy. Her Cabinet approved legislation to reduce the consumption tax on food from 8% to 1% for two years from April 2027, alongside income-linked financial support for lower- and middle-income households, with the government indicating that the measures would not be financed through additional deficit bonds. 

Among the week’s economic releases, data pointed to continued improvement in household purchasing power that has yet to translate into a sustained recovery in consumption. Average nominal wages rose 3.8% year over year in August, slightly ahead of consensus expectations for 3.7%, although growth slowed from a revised 4.3% in July. Real wages increased 1.5% in line with expectations and down from a revised 2.0% in the prior month. Household spending nevertheless remained weak: Expenditures fell 3.1% year over year versus an expected 3.6% decline and the prior month's 3.6% drop, while seasonally adjusted spending rose just 0.1% month over month versus expectations for a 0.5% increase.

China 

Chinese equities diverged during a holiday-shortened trading week, with mainland shares declining while Hong Kong recovered to finish higher. The CSI 300 Index fell 0.93% and the Shanghai Composite Index declined 0.74% from their September 30 closes while the Hang Seng Index rose approximately 1.0% in local currency terms, according to FactSet. Mainland exchanges reopened on Thursday after being closed from October 1 to 7 for the National Day Golden Week holiday, with technology shares leading losses amid elevated global bond yields, higher oil prices, and renewed concerns over potential U.S. restrictions on Chinese optical communications products. In Hong Kong, energy shares benefited from higher oil prices earlier in the week, while a sharp rebound in internet and technology stocks on Friday, alongside easing oil prices, helped lift the Hang Seng into positive territory.

Technology shares retreat despite a sharp Friday market rebound 

Mainland technology stocks were among the week's main laggards, particularly semiconductors, artificial intelligence hardware, and optical communications companies. On Thursday, the technology-heavy STAR 50 Index plunged 4.8% as rising global yields and oil prices pressured growth stocks, while speculation about possible U.S. restrictions on advanced Chinese optical transceivers added to selling pressure. Losses extended into Friday morning before mainland benchmarks rebounded in the afternoon, led by areas such as media and entertainment, accompanied by a sharp increase in trading volumes in broad market exchange-traded funds. 

Golden Week tourism growth masks continued consumer caution 

China's seven-day National Day holiday saw 826 million domestic tourist trips, up 6.3% year over year, generating RMB 738.4 billion in tourism revenue, an increase of 4.3%, with both growth rates calculated on a comparable daily-average basis, according to the Ministry of Culture and Tourism. The slower growth in spending relative to visitor numbers, alongside weaker holiday box office receipts, suggested that household demand remained uneven rather than signaling a broad-based consumption recovery. Attention now turns to China's third-quarter gross domestic product release on October 19 and the Communist Party's fifth plenum on October 26 to 29 for further indications of the economic backdrop and broader policy direction.

Other key markets

Brazil

Election surprise fuels market rally, while inflation and fiscal risks remain in focus

Brazilian financial markets rallied sharply this week following a stronger-than-expected showing by Senator Flávio Bolsonaro in Sunday's first-round election. Bolsonaro secured approximately 47% of the vote, ahead of incumbent President Luiz Inácio Lula da Silva's 45%, setting up a closely watched runoff on October 25. The result surprised investors, who had anticipated a Lula lead, and raised expectations for a shift toward more fiscally conservative policies. Brazilian equities surged, with the benchmark Ibovespa index reaching a record high on Monday, while the Brazilian real strengthened and government bond yields declined. Foreign investors also increased their exposure to Brazilian stocks, reflecting optimism that a change in leadership could support efforts to contain government spending, improve public finances, and create room for lower interest rates. The rally also spilled into the region, with Argentine sovereign bonds rising on the Brazil result.

However, uncertainty remains over the election outcome and the next administration’s ability to deliver meaningful fiscal reforms. Although Bolsonaro has pledged to restrain spending and reduce taxes, he has yet to outline a detailed economic plan. Meanwhile, September inflation accelerated to 4.58% year over year, exceeding the central bank’s 4.5% target ceiling, partly due to higher electricity costs. The stronger inflation reading could complicate the outlook for further interest rate cuts, even as investors anticipate a more favorable fiscal environment. While markets initially welcomed the election results, sentiment is likely to remain sensitive to developments ahead of the runoff, with the credibility of future fiscal policies and the direction of inflation important factors for Brazilian assets.

India

RBI pivots to tightening as inflation and rupee pressures build

Indian markets navigated a volatile week as the Reserve Bank of India (RBI) shifted toward tighter monetary policy in response to broadening inflation pressures and persistent currency weakness. The RBI unanimously raised its benchmark repo rate by 25 basis points to 5.50%, its first increase in nearly four years, and changed its policy stance from neutral to “calibrated tightening.” The central bank also raised its inflation forecast for the fiscal year ending March 2027 to 5.2%, while upgrading its growth forecast to 7.1%. Policymakers indicated that additional tightening remains possible, reflecting higher energy costs, rising food prices following a weak monsoon season, and the inflationary effects of a weaker rupee.

The rate increase provided limited support to the rupee, which remained near its record low as elevated oil prices, foreign equity outflows, and demand for dollars from importers continued to weigh on the currency. RBI intervention helped contain the decline, although foreign exchange reserves have fallen substantially from September’s peak. The central bank subsequently announced additional measures to withdraw liquidity from the banking system, including government bond sales, reinforcing its shift toward tighter financial conditions. Indian equities were volatile but recovered later in the week, while government bond yields faced upward pressure as investors adjusted to the prospect that the RBI’s tightening cycle could extend into coming meetings.