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Markets in a Minute: Global Optimism Grows as Interest Rates Fall

Home | Markets in a Minute: Global Optimism Grows as Interest Rates Fall

October 2025

October was another positive month for global investment markets, as incoming data continued to point toward a ‘soft landing’ for the global economy, supported by falling interest rates. The US economy is “holding up” according to the International Monetary Fund (IMF) – the global economy’s key policy adviser. Despite them predicting slowing economic growth of 1.9% for the US in 2025, there is no sign of a recession just yet. With the US government shutdown still being in place by month end, a lack of economic data has made the next move by the Federal Reserve (Fed) unclear. In the UK, the outlook remained nuanced despite its equity market breaking all-time highs as signs of economic stability were met with persistent structural challenges. The IMF provided some good news as the body predicted the UK will have the second highest rate of economic growth in the G7 in 2025. Albeit this is still a lacklustre 1.3%.

The UK fiscal burden continues to grow, as further pressure is placed on Chancellor of the Exchequer Rachel Reeves ahead of the Autumn Budget
  • Further speculation on Autumn Budget tax rises continued to grow in October as Chancellor Rachel Reeves suggested the Office for Budget Responsibility (OBR) is planning to cut its trend productivity growth prediction by 0.3%. The Institute for Fiscal Studies think-tank suggested that each 0.1% downgrade to productivity would increase public sector net borrowing by £7bn in 2029-30. This means a 0.3% reduction could create a £21bn deficit to address.
  • Separately, UK government borrowing increased to £20.2bn in September. The figure is £1.6bn more than in September 2024 and the highest September borrowing since 2020. Nearly half of the deficit has been caused by the cost of servicing the existing national debt following a rise in inflation that pushed up the interest bill.
  • Consumer borrowing in the UK rose at the fastest annual pace since last October, according to Bank of England (BoE) figures. Consumer borrowing rose by 7.1% in August from the year before, this was up from an annual increase of 7% in July. In the last three months, borrowing increased at the fastest pace since March 2024.
  • UK headline inflation surprisingly held steady at 3.8% for a third consecutive month in September – many economists had forecast an uptick to 3.9%. Core inflation, which removes the more volatile food and energy components, eased to 3.5% from 3.6% in August. Financial markets markedly increased expectations for a BOE interest rate cut in December.
The US Federal shutdown adds to an economic ‘fog’ for the Federal Reserve, according to Chair Jerome Powell, clouding available data
  • The US federal government began a shutdown on the 1st October, caused by a congressional failure to pass appropriations legislation for the 2026 fiscal year. The shutdown resulted from partisan disagreements over federal spending levels, foreign aid rescissions, and health insurance subsidies. This has continued into November and has begun to affect the release of key economic data, impacting the Fed’s ability to effectively make their next move.
  • The Fed expectedly announced that it would reduce its target range for the federal funds rate by 0.25% to 3.75%-4.00% in the October monetary policy meeting. Two policy members disagreed, with Fed Governor Stephen Mirran preferring a 0.50% cut and Kansas City Fed President, Jeffrey Schmid, wanting to leave rates unchanged. This highlights a growing divide between members amongst stubborn inflation and a weakening labour market.
  • Despite delays caused by the federal shutdown, the Bureau of Labor Statistics released inflation data a week later than scheduled. Headline inflation rose to 3.0% in September, up from 2.9% in August but slightly below economists’ expectations of 3.1%. Core inflation also came in at 3.0%, marking a modest decline from the previous month.
  • US trade talks made progress in October, with President Trump meeting with Chinese President Xi Jinping. The two leaders agreed to a one-year truce, which includes reduced US tariffs on Chinese imports, renewed Chinese purchases of US agricultural goods, and a suspension on China’s export controls for rare earth materials. The agreement helped lift investor sentiment over the month.
A historic political win in Japan, as the Bank of Japan ponders further interest rate hikes
  • Japanese equity markets excelled in October, with the Nikkei 225 reporting a discrete monthly return of 16.6% – the highest increase since January 1994. Investor sentiment was propelled by hopes of strong and large-scale stimulus from the newly elected government, as well as the Bank of Japan (BoJ) deciding to leave interest rates unchanged.
  • The country welcomed the election of the Liberal Democratic Party’s Sanae Takaichi as Japan’s first ever female Prime Minister. She was very outspoken on her focus being on the Japanese economy and proactive fiscal policy, which is likely to be positive for company fundamentals. A coalition was formed with the Japan Innovation Party so Takaichi’s government is expected to become relatively stable.
  • Core consumer prices in Tokyo’s Ku area rose 2.8% over the twelve months to October, from 2.5% in September. This was higher than market forecasts and above the central bank’s 2% target. Meanwhile, Japanese retail sales unexpectedly rose 0.5% on an annual basis, rebounding from a 0.9% decline in the prior month. The unemployment rate remained at 2.6% in September, the highest level since July 2024.
  • The BoJ kept interest rates on hold at 0.5% in their October meeting, warning of lingering economic “high uncertainties” linked to US trade tariffs. The bank confirmed the central bank could increase interest rates again by the end of the year, but when this could happen remains uncertain.
In summary

It was another record-breaking month for global equity markets, with several indices reaching all-time highs as investor appetite remained bullish. The artificial intelligence ‘spending frenzy’ continued its momentum, which attributed to much of the US equity market’s gains. Domestic investors remained cautious in the UK, as £3.6 billion of UK equity fund outflows was recorded in the three months to September. Both Asia Pacific and Emerging Markets have significantly outperformed global equity benchmarks year to date, with US dollar weakness providing a strong tailwind. For investors seeking long-term growth Asia Pacific and Emerging Markets can certainly offer an appealing alternative for those seeking diversification from US exposure and low growth across other developed economies.

Global bond markets showed little direction in October due to uncertainty over future rate cuts. Despite the UK government borrowing £7.2 billion more than expected in the six months to September, and UK borrowing costs hitting a 27-year high, UK government bonds were the best performing of major bond markets. After the US rate cut it was no surprise to see a hardening of prices in the US bond market with the ten-year treasury going from a yield of 4.23% to finish the month at 4.15%.

In terms of commodities, gold continued the astonishing run seen in recent times. An ounce of gold hit new all-time highs again and closed the month with an ounce costing $3873 up from $3518 at the start of September. Political turbulence, concerns of ongoing dollar weakness, and falling interest rates reducing the opportunity cost of holding the precious metal all providing momentum. Elsewhere the oil price was range bound and a barrel of Brent crude ended a dollar down to close at $67.02.

As always, we continue to work closely with our trusted investment partners to ensure portfolios remain well diversified across regions, sectors, and asset classes. This approach helps us manage risk effectively while seeking long-term growth opportunities for our clients, whatever the market conditions may bring.