A Two-Sided Market

A Two-Sided Market

The last fortnight marked a shift in character for a market that had grown used to one-way momentum. A fiscal flare-up in France, a pullback in gold, and greater selectivity within the AI trade gave the period a more balanced, two-sided feel. Yet the headline story remained constructive: equities proved resilient, major indices held near record highs, and corporate earnings broadly reassured. The tone is simply more discerning than a month ago, with investors paying closer attention to valuations and to where leadership is coming from.

The standout development in Europe was renewed pressure on French government bonds. The 10-year OAT yield pushed above 5% for the first time since 2002, and at one point French borrowing costs briefly exceeded those of equivalent US Treasuries — the first time since 2013. The spread over German Bunds widened to around 160-168bps, the widest since late 2011. The driver is a familiar mix of political fragility and fiscal strain: Finance Minister Roland Lescure is working to pass a budget targeting a 5% deficit through a fragmented parliament, with the revenue vote delayed and the prospect of invoking Article 49.3 in play. Moody’s is due to review France’s rating imminently. With non-residents holding nearly 58% of the debt, investors are asking for a higher premium — though, importantly, the stress has so far remained contained to France rather than spilling into broader European risk.

On the geopolitical front, there were tentative signs of progress on Russia-Ukraine. US envoy Steve Witkoff met President Putin in St. Petersburg on 21 October, having met President Zelenskyy and European leaders in Oslo the day before. Putin agreed in principle to resume trilateral Russia-Ukraine-US talks after 10 November, aimed at a post-conflict security framework, though expectations remain measured given how little previous rounds achieved. Notably, Russia lifted its ban on diesel exports — a welcome development for global fuel supply at a time when energy prices remain a key input to the inflation picture.

On the central bank front, the set-up into month-end is clear. The Fed is widely expected to hold its target range at 3.75-4.00% at the 28 October meeting, while a December hike has become the consensus view — a Reuters poll found all 100 economists expecting one, and futures price it around 83%. The ongoing US government shutdown, now among the longest on record, continues to delay official data, leaving the Fed leaning more on private gauges and corporate commentary than usual. The ECB meets on 29 October, with its tightening bias intact after September’s hike to 2.50%.

In terms of market moves, oil stayed firm, with Brent around $112 and WTI near $102, one session swinging more than 5% intraday before settling lower. Gold, having run strongly all year on central bank buying and a weaker dollar, consolidated: spot prices touched a record $4,381 on 20 October before easing over 5% the next session as momentum traders took profits and the dollar firmed, settling back near $4,130 — a healthy pause after an exceptional run rather than a change in trend. Equities ground higher, with the S&P 500 around 7,710 and the Dow back above 52,000, supported by resilient earnings. On rates, US long-end yields eased modestly from their multi-decade peaks, with the 10-year back around 5.12% and the 30-year near 5.43%, while the French-led move kept European bonds in focus. EURUSD softened toward 1.12 as the dollar firmed.

On the corporate side, Q3 earnings season moved into full swing and dispersion widened. Industrials impressed, with GE, RTX and 3M all beating or raising guidance, while GM slid on cautious guidance despite a beat. The marquee events were in technology — Netflix, Tesla, SpaceX and Meta all reporting — with SpaceX surging as its fundamentals reassured, even as Meta eased back and questions grew around the debt funding behind the data-centre buildout. Most notably for our space, Anthropic’s draft IPO filing surfaced, revealing $16.3bn in first-half revenue alongside a sizeable net loss — a vivid illustration of both the extraordinary revenue ramp and the capital intensity defining the AI leaders. OpenAI’s own anticipated listing remains in focus.

Looking ahead…

The immediate calendar is dense: the Fed on 28 October and the ECB on 29 October bracket a week in which Big Tech earnings will set the tone for the AI trade. France’s budget process and Moody’s review are the key European events, the Russia-Ukraine talks offer a potential source of de-escalation, and the shutdown remains the main uncertainty for data visibility. It is also worth remembering that the calendar turns supportive from here: November and December are historically among the strongest months for equity returns, and the approach of the year-end “Santa Claus” rally has often provided a seasonal tailwind. Have a good weekend.

Written by: Michael Konstantinou, Head of Portfolio Management