Markets Power Through Uncertainty

October proved to be a strong month for stock and bond returns, but it wasn’t all plain sailing. Renewed trade spats between the US and China and the uncovering of losses at a couple of regional US banks catalysed jitters. Nonetheless, strong earnings and reassurance from the Federal Reserve, which kept bond yields in check, benefitted stocks. Meanwhile, the election of a new Prime Minister (PM) in Japan, Sanae Takaichi, brought fresh impetus to Japanese markets.

After many months of progress on negotiations, concern amongst investors over trade agreements had all but vanished. That’s why the news on 10th October that China was planning to tighten export controls on rare earth minerals had such an impact with stocks falling sharply. Rare earth minerals are vital to many growing technologies such as batteries, semiconductors, and renewable energy sources. China has a huge share of the world’s reserves of rare earths, providing them with a strategic advantage. In response to the announced export controls, President Trump threatened to impose an additional 100% tariff on Chinese imports. However, as is familiar, positions on both sides subsequently softened and the fear that was injected into stock markets subsided.

Intra-month, these jitters over trade agreements were compounded by reports of losses at a couple of regional US banks. Zions Bancorp and Western Alliance Bancorp announced that they were the victims of fraud on loans to funds that invest in distressed commercial mortgages. This sparked fears of more widespread lending problems but deeper analysis shows that most banks are in good shape with strong margins and low delinquency rates. A basic revenue source for banks is borrowing over a short period and lending for a longer period. US rate cuts over the last year or so have pushed down short-dated yields relative to longer-dated yields, helping bank profitability. Indeed, third quarter bank earnings have been strong.

Concerns over trade and regional banks faded and sentiment improved further as strong earnings results were announced. Companies appear to be largely unaffected by tariffs so far with most reporting greater than expected sales. In addition, technology giants are rapidly increasing AI spending, benefitting companies across a range of industries such as chipmakers and electricity producers. October’s returns were also supported by expectations that the Federal Reserve would cut interest rates again and stop the ‘quantitative tightening’ program which reduces bond holdings – actions which were announced towards the end of the month. Although bond holdings are a relatively technical element of central bank policy, stopping the sale of securities from the Federal Reserve’s balance sheet effectively reduces bond supply. With demand unchanged, this puts downward pressure on yields and thus has an effect broadly equivalent to lowering policy interest rates. Lower bond yields encourage businesses and consumers to borrow and spend or invest, so it should ultimately be good news for corporate earnings. US stocks increased to new highs in October.

In global markets, Japanese stocks celebrated the election of its new PM who has a pro-growth agenda favouring higher defence spending and investment which targets lower energy costs. Stock prices gained sharply in response to her appointment. She is also keen not to raise interest rates too quickly, supporting borrowers. However, Japan’s inflation rate has been above its 2% target since 2022 and the squeeze on household budgets is unwelcome. Gradual rate hikes have been enacted since early 2024 to tackle this but Takaich’s approach favours structural changes instead. This has paused the upward trend in bond yields and weakened the Japanese yen, tempering equity returns for UK-based investors.

Bottom Line

Volatile episodes in asset markets should be expected, particularly in the current environment where political noise is loud and some pockets of valuations appear high. However, a supportive tone from central banks is encouraging bank lending at the same time as modestly improving global trade relationships and AI developments are catalysing fresh capital investment. We expect that earnings and stocks can benefit further over the medium-term with this backdrop.

Noteworthy

Does the US Government shutdown matter?

The US government shutdown, which halted large parts of federal spending, began on 1 October 2025 after Congress failed to pass the budget. Deep partisan divisions are to blame. House Republicans have tied short-term funding to strict spending caps and rollbacks of green-energy and healthcare measures, conditions Democrats refuse to accept. The result is a political stalemate, with neither side willing to appear weak ahead of the 2026 mid-terms and there are little signs of either side budging.

So far, the market impact has been modest but may be increasingly felt. The disruption to economic data releases has complicated interest rate expectations and clouded visibility for investors. At the Federal Reserve’s October meeting, Chair Powell cautioned that further rate cuts may be delayed if the poor information persists. Yet equity markets have remained resilient, buoyed by strong corporate earnings expectations. Still, if the spending freeze drags on, it could weigh on economic activity and eventually pose a headwind for equities.

Soybean diplomacy

Seven months have passed since President Trump’s now famous Rose Garden address, where he upended global trade norms and broke with several presidential conventions by announcing the most significant shift in US trade policy in nearly a century. This was unveiled memorably, on a large cardboard placard titled “Reciprocal Tariffs”. Since that day, now widely referred to as “Liberation Day”, the administration has adopted a more open-minded approach to trade, striking several new agreements with key partners. This month brought one of the most notable developments yet, as the US and China provisionally agreed to ease tensions and began discussing a potential “historic” trade accord that could be signed as soon as this week. The deal is expected to include US tariff reductions alongside Chinese commitments on fentanyl, rare earth exports, and the resumption of soybean purchases from the US. This was welcome news for American farmers who have borne the brunt of the trade war. China, which historically purchased more than half of all US grown soybeans, halted imports earlier this year in retaliation against tariffs, instead rubbing salt in American wounds by sourcing from Brazil, a country itself targeted by US trade measures amid political tensions between Brazilian President Lula and Trump. This position was becoming increasingly difficult for the US administration to justify, with pressure mounting from a key voter base ultimately leading to the latest policy reversal.