Robust appetite for risk whilst signals continue to be mixed

We continue to see mixed messages out there, although the overarching market reaction continues to be one of buying and optimism. A truce is never easy and, whilst sparks have continued to fly, it feels as though we are in a place where the odds are as good as they have been since escalation in the Middle East that peace is both possible and sustainable. Time will tell. Away from this, we continue to see an array of diverging data, where it is currently still being reported at least.

Macro

Negotiations continue to flare up between the US and China. It’s starting to feel a little childish with arguments heating up (pardon the pun) around cooking oil and soy, neither of which make up significant trade between either party, the latest in a longer list of innocent condiments unfairly targeted by the spatting nations.

Rare earths at the centre of the dispute though and, as always, diversification of both supply and demand is where we will likely land, early movers rewarded for securing said supplies. Look no further than contracts both in Africa and parts of Latin America which have been in play for some time with China, and the considerably fresher deal the US is negotiating with Australia. The theme of rebalancing continues.

With a US government shutdown and the magnitude and health of private credit stealing some of the headlines, gold has continued to power ahead, up almost 70% in 2025 alone. Tuesday though saw an over 8% selloff with stocks pausing to take a breather too. Data from Bloomberg and Macrobond both corroborate the story that much of gold's strength has come from Chinese buying, both state and citizen. Following the blackbirds remains both fashionable and profitable. 

Risk

The usual canary in the coal mine, being the banking sector, continues to be a screaming buy for risk. Third quarter earnings are being released by the day. In no particular order, JP Morgan has seen a 9% increase in revenue, with Bank of America up 11%, Capital One up 8%, and Wells Fargo also beating significantly. Goldman Sachs saw profit surge a whopping 39%. This tells us a couple of things. It’s a good year to be a banker, and both lending and dealmaking conditions continue to remain strong and, in many instances, improving.
The S&P 500 rose 3.5% and the Nasdaq Composite gained 5.6%, marking their best September since 2010, as all three major US indices ended the month higher. 

A renewed AI rally drove megacap tech stocks higher, while the Russell 2000 – a key gauge of small-cap US companies (and thus, a proxy of investor confidence in the US economy) – rose nearly 3% and hit its first record high since November 2021. Elsewhere, European equities ended September on a positive note, posting their best monthly gain since 2019. The Euro Stoxx 50 rose 3.0%, Spain’s IBEX 35 +3.6%, and FTSE 100 +1.7%, while Germany’s DAX fell 0.7%. 

Asian equities also rallied in September, with the Nikkei 225 up 6.5%, CSI 300 +2.5%, and the MSCI AC Asia Pacific Index +4.2%. Strong foreign inflows (~ US$7.7 billion) into Japan, South Korea, and Taiwan underscored renewed investor confidence across the region. (Source: Reuters)

The International Monetary Fund (IMF) and Bank of England have flagged the rapid surge in artificial-intelligence-related stock valuations as resembling the 2000 dot-com bubble, warning that overly optimistic expectations around AI productivity gains could trigger a sharp market correction. (Source)

While the AI boom seems to share some traits of past tech bubbles (such as elevated valuations and large capital flows into a narrow set of companies), significant differences exist: today’s AI leaders are largely profitable, adoption spans multiple industries, and their business models are more resilient – suggesting the current surge may be more sustainable than the dot-com era. (Source)

Credit

Since the last note, we have seen a couple of smaller instances of things going pop. For apparently different reasons we have seen First Brands go through a classic Emperor's New Clothes scenario, with some estimating debt at ten times disclosures made prior to failure. Some forensic accounting is now underway to better understand the what and the how. For Tricolor to also face the same fate, with inability to repay leading to its demise, perhaps it is worth taking a look under the hood…more broadly the data is clear, US car repossessions are surging as more folks here are defaulting on auto loans.

How deep and how widespread might this get? The subprime auto market is not large enough to have any real impact; it does have some on Wall Street questioning whether and where other cracks might be forming that could well turn into crevasses. We are at a record high re subprime defaults in the auto sector, with loans delinquent for more than 60 days well through 6% (by comparison this was a mere 4.28 at the 2008 high, Source). 

More broadly, we have started to see primary issuance dry up this month. In part it has been led by unprecedented volumes in the first three quarters. We are also seeing the cost to borrow creep up again from almost record lows, this being observed across sovereigns, banks, corporates, and in both investment and sub-investment grade (Bloomberg). 

EUR

Another case of good and bad…The IMF revised its euro-area growth outlook upwards for 2025 to 1.2%, but cut the 2026 forecast to 1.1%, warning that resilience is coming at increasing fiscal cost (e.g., rising debt levels). EUR rate expectations were broadly unchanged over the past month. (Source) 

The European Central Bank kept policy rates on hold at its September meeting, signalling a data-dependent stance. Markets continue to see the tightening cycle as complete, with no further cuts expected in 2025 and at most one 25bps reduction priced in for 2026.

Commentary by most senior policymakers emphasises that current policy settings are in a good place and that further rate cuts are unlikely unless significant shocks emerge. For example, Martin Kocher commented that the ECB should “not over-engineer policy for small deviations” in inflation. Be good to know what the definition of deviation is! 

Last but not least, the unexpected and negative rating action taken by S&P to downgrade France to A+ (outlook negative) had some interesting side effects. Several large fund managers were quick to adjust parameters ensuring that this credit remained eligible for their strategies. Don’t believe me? Google “Funds Redraw Rules to Keep French Bonds”, courtesy of Bloomberg. Bank of America, at roughly the same time, took the view that almost EUR 100 billion was likely to be reallocated into other European government debt. In trading lingo this is known as catching a falling knife…

GBP

Nothing by way of rate announcements since the last amuse-bouche. A small reprice from seven to ten basis points of easing now priced in by the end of the year. The Bank of England, much like the government, will be looking at the data very closely. The elephant in the room here is how the heck the Autumn budget is going to drop. There will be casualties, the question is just whether it is employers, individuals, those inheriting, or all of the above and more. The market is unlikely to welcome more debt given press surrounding the potential need for UK Plc to tap the IMF for funds. Overblown and certainly early in my view.

Nonetheless, September government borrowing figures came in at £20.2bn, the highest for the month for five years. Slightly higher than the OBR forecast of £20.1bn but less than market expectations of £20.8bn. It brings borrowing over the first half of the financial year to £99.8bn, £11.5bn more than in the same six-month period of 2024 and the second-highest total since monthly records began in 1993, only topped by the pandemic-era total for April to September 2020.
Figures published on Tuesday by the ONS showed payroll employment rose by 10,000 between July and August, with provisional figures for September showing a 10,000 fall. UK unemployment rose to 4.8% in the three months to August, driven by higher joblessness among younger workers. This was higher than both expectations and prior reading of 4.7%.

UK GDP came in at +0.1% for the month of August, in line with expectations and up from -0.1% in July. The final Q2 GDP data showed 0.3% growth in the quarter, in line with the preliminary data but down from the 0.7% seen in the last period (activity picked up due to Trump tariff). The YoY figure came in at 1.4%, vs 1.2% in the preliminary data. 

USD

Not a lot of data out there for a couple of weeks. In case you missed it, government departments far and wide have been shut since 2 October. At this point the current shutdown will have lasted longer than 19 previous shutdowns and only once has one lasted longer. This was during the last Trump presidency with a solid performance of 34 days. With government and agency data non-existent (September CPI should be released 25 October, just the 10 days late…) there are a couple of other indicators compiled by Bloomberg including daily debit card spending and store sales.

To be honest, hard to gleen too much from debit and credit card spend declining and same store retail sales holding flat. Markets certainly remain open though, and for now there are still (roughly) two cuts on the table before the ball drops in Times Square. 

So what?

If profitability of the banking sector is anything to go by, and in part at least driven by technological efficiencies, we might well be in for a decent Q3 and 2025. The headwinds of tariffs and continued conflict are not enough to take wind out of the optimists sails thus far. It is clear though that Europe continues to have a growth problem, and the UK and US will be easing rates further as it currently stands, in my opinion.

Good if you are a borrower and creditworthy, provided any cuts reduce the nominal cost to service debt should premiums to borrow rise. It is certainly fair to say that where possible, capturing higher rates for longer will help drive performance no matter what your business is. 

*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.

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