The Week Ahead

As we start a new week, early indications suggest that risk sentiment is picking up. Stock futures are higher in the US and Europe at the start of this week, as investors put the recent period of volatility behind them and instead focused on some positive news flow. Asian shares are also broadly higher, the Nikkei in Tokyo is higher by nearly 3% and the Hang Seng by more than 2%.

Easing trade tensions soothe fretful markets

Reports at the weekend suggest that President Trump will ease some of his reciprocal tariffs for dozens of products that cannot be easily made in the US. There is also hope that hundreds more products could be added to the list. This watering down of Trump’s tarrif threats could be good for overall risk sentiment as we start a new week, and highlights the game being played between financial markets and the President: markets take what Trump says literally, risky assets swoon, the President backtracks and then stocks come back.  This is another sign that trade developments can move in both directions, and it also suggests that President Trump would rather his policies do not interrupt the US stock market rally.

Investors are less complacent, but the uptrend continues

However, recent price action suggests that investors are becoming less complacent than they were just a few weeks ago, and we may need to get used to bigger swings in price action. The Vix index surged to more than 25 last week, and is still above the 12-month average of 18.

Although there were some big losses across global indices last week, the S&P 500 closed higher on Friday, and rose by 1.7% last week. The S&P 500 is inching towards record highs from earlier this month, and recent volatility did not trigger a close below the 50-day sma, which suggests that the uptrend remains in tact.

No unifying theme for markets

The S&P 500 and the Dow Jones index outperformed the Nasdaq index, however, there was no overarching or unifying theme. The top equity performers in the US last week included Estee Lauder, On Semiconductor and Best Buy. The equal-weighted S&P 500 outperformed the market-cap weighted S&P 500 last week, however, the Magnificent 7 roared back into life on Friday and Tesla was one of the top performing stocks on the main US index, along with Estee Lauder and American Express. This suggests that individual factors could drive stocks in the coming weeks.

Likewise, there was no single driver that caused the sell off last week, instead it was a confluence of factors that weighed on sentiment: 1, renewed trade tensions between China and the US, which knocked sentiment at the start of the week, 2, the concerns about AI stock valuations, and 3, issues with the credit market.

Credit concerns were overdone

As we start a new week, two out of three of these issues have been ameliorated. Firstly, trade tensions have eased, as we discussed above. Secondly, fears about large scale problems in the credit market look overdone. The concerns originally emanated from the collapse of two auto lenders, First Brands and Tricolor, which fueled concerns about the quality of loans issued by the private credit markets. This caused a sell-off in US regional bank lenders and triggered a flight from risky assets. However, while these two failed companies were highly leveraged, this looks like an acute problem not a chronic issue with the private credit markets. Some better-than-expected regional bank results have eased concerns, and the collapse of First Brands and Tricolor appear to be caused by idiosyncratic factors, and do not suggest that a systemic crisis is brewing.

Why a mini selloff is a good thing for markets  

The shake out in risky assets last week is a sign of two things: 1, a market starved of US economic data, which has been delayed due to the ongoing government shutdown, this means that investors are more likely to react to any news available, and 2, a healthy sign that the market is not getting too ahead of itself and won’t let valuations surge for no good reason.

Banks may have a delayed reaction to earnings results

Last week’s earnings highlights included banking earnings. Ironically, the US’s largest banks sold off sharply, even though they posted monster revenues and profits for last quarter, with a pick up in investment banking revenue and deal making fueling the positive earnings picture. However, the financial sector was heavily sold last week, and the S&P 500’s investment bank index fell more than 3%. If credit fears are put back into perspective, then we could see banks recover at the start of a new week.

EM benefits from the gold price rally

The gold price rally has slowed at the start of this week, but it has found good support at $4,250. The yellow metal benefitted from the sell-off in risky assets last week, but there is one big winner from the gold price rally this year: emerging markets.  Gold’s outperformance so far in 2025 is fueling a resurgence in emerging market asset prices. For example, the main South African stock market is higher by 31% so far this year, this compares with a 13% gain for the S&P 500, 14% for the FTSE 100, and 14.5% for the Eurostoxx 50 index.

The gold rally is fanning a wealth effect in emerging markets. South Africa has the world’s deepest gold mines, which is why investors are favouring it, and if the rally in the gold price is sustained it could have a major impact on the EM investing space. Typically, when gold rallies, riskier assets like EM stocks and bonds sell off. This has not been the case so far this year. Instead, the relationship has flipped, and now EM stock exchanges like South Africa’s are outperforming the likes of the S&P 500 and the Nasdaq.

Although US stocks take up a lot of airtime and media attention, the current investing landscape is not solely focused on AI or tech, and some of the lowest tech indices are thriving. This is a good lesson not to get too wedded to one idea or market theme.

Chart 1: South Africa stock index, S&P 500, the Nasdaq and the FTSE 100, normalized to show how they have moved together so far this year.

Source: XTB and Bloomberg

The gold price is also boosting the fortunes of Ghana, a major gold producer, who saw its credit rating raised  earlier this year due to the windfall from the higher gold price. This is in stark contrast to France, which is struggling under its mountain of debt. S&P, the credit rating agency, made the surprise move to downgrade France’s credit rating to A+ from AA-. The loss of its double A credit rating raises the stakes for PM Lecornu’s budget negotiations.

France has now lost its double A credit rating at two of the three major credit rating agencies, and French bond yields could shoot higher later today. Although France’s sovereign debt market remains in investment grade territory, and this move should not trigger any forced selling, it highlights the predicament that France now faces. Fiscal consolidation is almost impossible due to the fractured nature of the National Assembly. The Presidential elections take place in 2027, and fiscal consolidation is likely to be a major theme until then. We will be watching the French/ German yield spread at the start of this week. Any move back towards 100bps is a sign of stress in the French bond market.

Ahead this week, there is a plethora of economic data to assess. Below, we pick out the top 3 to watch.  

1, US CPI

The rescheduled CPI release is a data highlight for this week and comes ahead of next week’s FOMC meeting. Analysts expect annual inflation to rise to 3.1% from 2.9% in August, and for core CPI to remain steady at 3.1%.  However, some analysts expect inflation to surprise to the downside, with airfares and hotels likely to provide a deflationary impact. The inflationary pass-through effect from tariffs has been less severe than originally planned, and goods that were exposed to tariff risks and raised prices earlier this year, are now experiencing price cuts to boost demand. Overall, this CPI report should give the Fed the green light to cut interest rates next week.

2, UK CPI

This week we get a plethora of UK data that should give a timely indicator about the state of the UK economy. This includes retail sales, public finances and CPI. Inflation data is the highlight, since the September report is expected to see headline CPI rise to 4%, the BOE’s peak for price growth. Upward price pressure is expected to come from fuel prices, while service prices could remain steady at 4.7%. This inflation report is unlikely to move the dial for the BOE, who most likely won’t cut interest rates next month when headline inflation is at 4%. The next rate cut for the UK is not expected until February next year, when CPI should start to moderate, and the UK’s monetary easing cycle may not gather speed until early to mid-2026, with the terminal rate currently expected to be just below 3.5% in a year’s time.  The pound has been the second most resilient currency in the G10 vs. a resurgent USD so far this month.  The upward pressure on inflation and the prospect of no more rate cuts until 2026 could keep the pound buoyant in the coming months. A break above $1.3475 for GBP/USD, would be a bullish development in the short term.

3, Global PMI data

The first reading of global PMIs for October will be closely watched this week. The market will be watching closely to see if the US economy has maintained its lead among the major developed economies. Sentiment could get a boost due to the upcoming FOMC rate cut expected at the end of this month. There could also be further good news for Europe. Investors want to see if Eurozone activity, which expanded at its fastest pace in 16 months in September, maintained the upward momentum. However, French political concerns may have knocked sentiment, and they do not appear to be improving any time soon.

UK PMIs were weak for September, and the market will be watching to see if this can improve in October, although we do not hold out much hope due to fears about tax rises in the upcoming budget. The October PMI report could show a slightly lower rate of price growth, which may add to hopes that CPI will peak at 4% in September and then start to decline. Overall, these PMI reports should not interrupt risk sentiment, although any dip in the European index on the back of French political woes, could weigh on the euro, which has been remarkably resilient in the face of French risks.