October was an eventful month for financial markets. Higher oil prices reignited concerns over inflation and economic growth as technology stocks came under pressure amid mounting anxiety over whether AI spending will yield sufficient returns. Despite this weakness in technology shares, US stock market indices proved resilient as gains in other sectors largely offset the declines. Meanwhile, government bonds rose (and yields fell) after a tough few months as investors sought safety and the Federal Reserve left interest rates unchanged. In the UK, the budget passed without any major surprises for financial markets.
Reports indicate that crude oil flows from the Middle East have recovered to pre-war levels. However, the depletion of strategic reserves, which were drawn down earlier in the year to offset supply shortages, means there is limited capacity for authorities to respond to any further disruptions. Against this backdrop, ongoing geopolitical tensions continue to fuel concerns over oil supply shocks and are spurring precautionary buying which further pushes up energy prices. Recent data, especially in the US, continues to signal a resilient economy but, if sustained, high energy costs could put pressure on household and corporate budgets and hence weigh on consumer spending and business investment.
High energy prices also add to inflationary pressures, increasing the risk that borrowing costs remain higher for longer. This is particularly relevant for technology companies undertaking substantial AI investment programmes. Building the infrastructure required to support AI datacentres involves enormous capital expenditure (capex), from specialist semiconductors to electricity supply and cooling systems. Revenue growth across the technology sector has generally been strong this earnings season, particularly in cloud computing and AI-related services. However, technology stocks suffered in October as investors questioned whether this growth would translate into sufficient profits amidst the heavy capex and rising funding costs. The index of semiconductor equities dropped over 15% in October. The weakness was not uniform across the market though. Defensive sectors such as consumer staples and healthcare, and energy stocks, made gains, helping the broader US stock market end the month just 1% lower. The UK stock market, with relatively little exposure to technology companies, rose 1% over the month while emerging market indices, where technology accounts for more than 40% of the market, ended the month significantly lower.
Investor caution was also evident in corporate and government bond markets last month. In general, we have observed significant competition for capital in recent times as heavy sovereign borrowing has competed with extraordinary private financing needs, particularly from AI related companies. In corporate bond markets, credit spreads (the additional yield investors demand to hold corporate debt rather than equivalent government bonds) widened over recent weeks as risk appetite weakened. Although the move has been relatively contained, it suggests investors are becoming more cautious about taking credit risk, particularly against a backdrop of higher borrowing costs and uncertainty over the economic outlook. There has also been greater divergence within government bond markets, especially in Europe. Concerns about France’s ability to stabilise its debt trajectory, particularly given recent protests about public spending and the presidential election approaching in 2027, has led to yields on French bonds rising sharply relative to those on German bonds as well as the Euro weakening against its major currency peers.
Despite some weakness in corporate credit markets, core government bonds performed well in October after a few difficult months. Demand for safer assets increased and the Federal Reserve (Fed) provided more supportive messaging. At their meeting at the end of October, the Fed kept its policy rate unchanged. Chair Warsh emphasised that the economy remains strong but suggested that September’s rate hike was already starting to bring supply and demand into better balance. Nevertheless, the outlook remains uncertain as higher energy prices complicate the path towards lower inflation, and hence lower interest rates. Investors still expect another interest rate hike soon after the mid-term elections. Meanwhile, in the UK, the budget incorporated additional borrowing of £4.4 billion for 2026/27. This was broadly in line with market expectations and UK government bond yields fell modestly on the announcement.
Bottom Line
Financial markets face a range of near-term challenges, from geopolitical tensions and elevated funding costs to uncertainty over AI earnings and US mid-term elections in early November. Nevertheless, although near-term uncertainty influences market sentiment, it is important to maintain perspective and remain focused on the longer-term drivers of investment returns, including economic growth and strong corporate earnings. Increasing divergence between regions, sectors and asset classes reinforces the importance of diversification within multi-asset portfolios.
Noteworthy
Market Reaction to the UK Budget
On Wednesday, Chancellor of the Exchequer John Healey revealed his much-anticipated budget. For a more comprehensive insight into the exact measures unveiled, we published a breakdown which can be found on the publications section of our website. Within the Investment Team, our focus has been on watching the market reaction to the budget and any implications for the UK economy and asset prices. By design, the budget avoided any drastic measures and reassured the market that the Burnham government is committed to fiscal discipline. Widely characterised as a ‘do no harm’ Budget, the announcements contained little that we expect to materially alter the outlook for UK growth or inflation. Importantly, additional taxes on banks were less onerous than initially feared, prompting a rally in banking shares, a significant component of the UK equity market. Modest tax increases on savers and measures aimed at improving tax compliance helped offset additional spending commitments, although the overall fiscal position was also supported by a reduction in the government’s fiscal headroom rather than an increase in debt issuance. Financial markets responded relatively positively, with gilt yields edging lower, UK equities advancing and sterling strengthening modestly. However, these movements were relatively subdued, reflecting the limited significance of the announcements compared with broader drivers of asset prices, including geopolitical developments, corporate earnings and global financial conditions. Meanwhile, the OBR downgraded its growth forecasts moderately, reflecting, in part, higher energy prices and economic disruption associated with the conflict in the Middle East. Ultimately, the Budget did little to change our assessment of the UK economic outlook or the relative attractiveness of different asset classes. As a result, we saw no reason to adjust the positioning of our multi-asset portfolios.
Surprise Election Result in Brazil
The world’s fourth-largest democracy went to the polls in October, with left-wing incumbent President Luiz Inácio Lula da Silva seeking re-election. Following the first round, Lula appeared to be heading for defeat, having received two million fewer votes than his right-wing challenger, Flávio Bolsonaro. Subsequent polling also pointed to a loss, while a deficit of this magnitude had never previously been overturned in the decisive second round. Despite this, Lula secured an additional four million votes, delivering a surprise victory that unsettled financial markets. In US dollar terms, Brazilian equities fell 20% in the aftermath of the election, leaving them 8% below their levels following the first round. Bond markets also reacted, with long-term borrowing costs rising by almost two percentage points. Lula is viewed as less fiscally orthodox and more unpredictable than his challenger, with his victory raising further concerns about Brazil’s long-term debt sustainability. However, Congress is not aligned with the president, meaning any major reforms will require cross-party support. This could serve as a check on the administration but may also constrain its ability to implement market-friendly reforms. Attention will now turn to the composition of the cabinet, which should provide investors with greater clarity on the government’s fiscal intentions. Our portfolios have limited exposure to Brazilian equities, meaning the direct impact of the market movements has been minimal.
Month in Numbers
Change in various markets over the month as of 31 October, 2026
