Markets remained volatile in October. Investors weighed a resilient global economy against renewed geopolitical tension, elevated energy prices and growing questions over whether the current level of investment in artificial intelligence can be sustained. Equity markets became more mixed as the month went on, while government bonds recovered some of the significant losses seen in September.

Developments in the Middle East remained a key influence. Further disruption to shipping in the Gulf pushed oil prices materially higher and kept inflation concerns firmly in focus.

Equities: a broader market beneath the headlines

Equity performance diverged significantly during the month. US markets reached fresh highs early on but weakened towards month end, as investors grew more cautious about the scale of AI-related capital expenditure and the valuations of the largest technology companies. The S&P 500 fell by around 1% over October, while the technology-heavy Nasdaq saw a more significant decline.

Beneath the headline indices, however, performance broadened considerably. Value-oriented and more defensive sectors outperformed technology. European and UK equities were comparatively resilient, supported by their greater weighting towards financial, energy and value-oriented companies.

Bonds: a partial recovery after September

Bond markets recovered after September’s sharp sell-off. The US 10-year Treasury yield fell from around 5.3% at the end of September to approximately 4.9% by month end. Investors moved back towards government bonds as technology stocks weakened and demand for defensive assets increased.

This happened even though inflation remained elevated and oil prices rose, which highlights the competing forces currently affecting bond markets.

Central banks: on hold, but not relaxed

The Federal Reserve left interest rates unchanged at 3.75% to 4.00% at its October meeting, following September’s increase, although two members voted for a further 0.25% rise. The European Central Bank also left rates unchanged. It acknowledged that higher energy prices present both upside risks to inflation and downside risks to growth.

Commodities: oil up, gold down

Commodity markets continued to reflect geopolitical developments. Oil prices rose sharply as disruption to Middle Eastern energy supplies intensified. Reports of further attacks on tankers and mining incidents in the Gulf added to concerns about the security of regional shipping, and crude oil finished the month around 15% higher.

Gold moved in the opposite direction. It fell after its exceptional gains earlier in the year, as the US dollar remained relatively firm and demand for government bonds gave investors an alternative defensive asset. The continuing US-Iran conflict remains an important source of both inflationary and market risk, particularly if disruption to energy supplies becomes more persistent.

The economy: solid growth, sticky inflation

Economic data remained relatively robust. The US economy grew at an annualised rate of 3.4% in the third quarter, up from 2.2% in the second quarter, supported by consumer spending and investment. Inflation, however, remained a problem, with headline PCE inflation running at around 3.7% in September.

The eurozone also continued to grow despite the energy shock, expanding by 0.4% in the third quarter. Performance varied considerably between countries, and concerns about French public finances and political stability remained evident in sovereign bond markets.

Outlook

October highlighted an increasingly complicated environment for markets. Economic growth and corporate earnings remain supportive. However, elevated energy prices, persistent inflation and significant government borrowing leave central banks with limited scope to ease monetary policy. At the same time, weakness in parts of the technology sector showed how sensitive highly valued assets are to any questioning of future earnings expectations.

Lower government bond yields provided some relief after September’s sharp repricing, although geopolitical risks and concerns about fiscal sustainability remain significant. Markets enter the final months of the year supported by resilient economic fundamentals, but with relatively little margin for disappointment on inflation, earnings or geopolitical developments.