Market Review 20th October 2025
- Simplicity News Desk
- Oct 20
- 5 min read
Everything you need to know, Simplified!
Summary
Despite strong bank earnings, financials underperformed and were the only sector to fall over the week, as sentiment weakened and the VIX (measure of uncertainty) spiked to 28.3
Concerns over bankruptcies at Tricolor and First Brands sparked fears of stress in subprime lending (higher risk loans) and the opaque US$3trn private credit market
Larger, more robust banks outperformed as credit and equity markets showed few signs of contagion; high-yield spreads remain well below crisis levels
Global bonds rallied, with UK gilts (UK government bonds) outperforming as Labour data showed rising unemployment and slower wage growth; the 10-year yield fell 14bps to 4.53%
Chancellor Reeves signalled plans to rebuild the fiscal buffer ahead of next month’s budget, likely through higher taxes and possible spending cuts
This week, UK inflation (Tuesday) is expected to show softer monthly momentum but a year-on-year rise in annual Consumer Price Index (CPI) to 4.0%, while US CPI (Friday) should confirm further disinflation (when the rate of inflation is slowing), keeping the US Federal Reserve (Fed) on course to cut twice more this year.
Market Review
Cockroaches
Several major banks kicked off earnings season last week and, particularly among the large players, results were strong. Despite that, the financials sector lagged; in fact, it was the only sector to post a decline over the week. While markets recovered from the mild fall seen the previous Friday, sentiment hasn’t fully followed suit, with the VIX index, often referred to as the ‘fear gauge’, rising to a high of 28.3 on Thursday, its peak since trade tensions flared early in the second quarter.
The unease within financials stems from two ‘cockroaches’: Tricolor and First Brands. Tricolor, a subprime auto lender and dealer, went bankrupt last month but drew broader attention last week after JPMorgan CEO, Jamie Dimon, warned that “when you see one cockroach, there are probably more.” Shortly after, auto-parts supplier First Brands also filed for bankruptcy.
Borrowers at the lower end of the income spectrum tend to default first, and credit cards and auto loans are usually the earliest credit segments to show strain ahead of a broader default cycle. That’s what has markets worried, that these could be the ‘canaries in the coal mine’ for something larger.
The market reaction so far has been contained, concentrated mainly in smaller regional US banks, while larger, better-capitalised lenders with more defensive lending standards outperformed. Still, the bankruptcy of First Brands, which had borrowed primarily from private credit funds, has renewed scrutiny on that market and the shadow banking sector (non-bank financial institutions that provide credit or liquidity outside traditional banking channels) more broadly. As International Monetary Fund (IMF) head Kristalina Georgieva said last week, it is the shadow banking sector that keeps her “awake at night”. Private credit (direct lending away from the public bond market) is an area that has expanded rapidly but remains largely opaque, with questions about how disciplined lending standards really are.
Private credit assets have ballooned from roughly US$0.2bn in the early 2000s to close to US$3trn today. That growth has paralleled a broad de-risking of the banking system as regulators pushed banks to strengthen balance sheets post-global financial crisis (GFC). And that’s the key point: banks today, especially in Europe, are far better capitalised, more robust, and, as last week’s results showed, still highly profitable.
While further cockroaches may appear, there is little evidence yet of an infestation. Concerns around leverage in private credit are valid, but there is scant sign of systemic risk and certainly no reason to doubt the resilience built into the banking sector since the GFC, combined with a solid earnings backdrop.
This seems to be the market’s view based on credit spreads (the difference in yields between a corporate bond and a government bond). High-yield (riskier) spreads widened to a little beyond 3%, before closing the week back below 3%, far from crisis territory. Within equities too, even the shares of regional banks with more exposure to the shadow banking system recovered much of their mid-week losses. This blip seems to have caught a complacent market by surprise rather than signalling a systemic shock.
UK gilts advance
In fixed income, global bonds rallied as volatility in the financial sector drove investors toward the perceived safety of government bonds. UK gilts outperformed their developed world peers thanks to a subtle cooling of the Labour market, with Wednesday’s report showing a slight rise in unemployment and slower wage growth. The UK 10-year yield fell 0.14% to close at 4.53%.
In a speech in Washington on Friday, Chancellor Reeves signalled her intention to rebuild the government’s fiscal buffer ahead of next month’s budget, likely through a combination of tax increases and possible spending cuts, offering some early guidance on the broad direction of policy, though perhaps few surprises.
The week ahead
Tuesday: UK CPI inflation
Our thoughts: Inflation in the UK is expected to slow quite significantly month-on-month from 0.3% to 0.1%, while annual inflation is expected to rise to 4%, driven entirely by base effects, where changes in annual inflation reflect shifts in last year’s comparison point rather than new price pressures today. Economists see inflation slowing to 3.4% by year-end before easing much more sharply around April next year. The Bank of England is expected to maintain its cautious easing path before accelerating around the drop in April 2026. A fall in inflation this week may add to the current tailwind for UK gilts.
Friday: US CPI inflation
Our thoughts: CPI inflation for September has been delayed so far by the government shutdown, but it may finally be released this week. Bloomberg Economics expects a renewed deflationary impulse from hotels and airfares combined with a slowdown in tariff pass-through. This should support further easing by the Fed, and comments from Powell, Waller and Miran all suggest the committee has turned more dovish. The market currently prices in two more rate cuts before year-end, at the meetings on 29 October and 10 December.
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