Market Review 27th October 2026
Everything you need to know, Simplified!
Has spooky season arrived for investors?
Summary
UK inflation accelerated to 3.5% in September, an 11-month high and above the 3.4% consensus, driven primarily by a surge in petrol and diesel costs, with services CPI (a measure of inflation) also beating estimates at 3.7%; the data, released Wednesday, marked the third consecutive month of acceleration and cemented expectations for the Bank of England's first rate hike in more than three years at its 5 November meeting
The artificial intelligence (AI) trade remained under pressure despite some strong earnings results as fears over the sustainability of the buildout and the debt issuance it requires dominated sentiment; global equities ended the week slightly negative, masking a sharp rotation towards defensives with health care, staples and utilities all delivering positive returns
Bonds performed well on the week, triggered predominantly by the AI-related equity sell-off, driving a sharp rally in US Treasuries (government bonds); German Bunds similarly outperformed as investors sought safe-haven sovereign exposure, while French OATs were the clear laggard: the OAT-Bund spread widened 0.29% on the week to c.1.70%, around double its level from August.
Market Review
Halloween fears drive rotational stock market
The risk-off atmosphere continues to drive a rotation away from technology and AI-related stocks towards health care and consumer staples. Elevated oil prices are also casting a shadow across equities, with Brent oil closing the week at US$117 per barrel.
Beyond the rise in oil prices, the fundamentals of this market remain robust. Earnings reports have been good, expectations were revised higher last week and the global economy appears relatively steadfast.
There is a tendency among strategists to reach for ‘uncertainty’ as a catch-all explanation and it is generally too easy a point to make. Investing is, by definition, uncertain; uncertainty is inherent in taking risk and investment returns are the reward for that uncertainty. It is always present. That said, the short-term weakness across equities is compounded by a period of peak near-term uncertainty. From the trajectory of the Iran conflict and the US midterm elections to the UK Autumn Budget, corporate earnings, key interest rate decisions across the US and Europe, AI funding fears and social unrest in Europe, the next few weeks are particularly fraught. This is driving prices lower and the uncertainty/risk premium higher, even as fundamentals remain solid.
This dynamic is partly why index-level performance has been relatively resilient, masking the rotations under the bonnet. In October thus far, seven of eleven global equity sectors have delivered positive returns. Technology is the outlier, falling more than -6.5% month-to-date, with tech related communication services also down -6.5%. Energy is at the top of the pack thanks to higher oil prices, up 10.8%, while consumer staples (+9.1%) and health care (+6.0%) are the other standout performers, a classic defensive rotation.
There is an interesting seasonal element to this too. Midterm election cycles are typically volatile periods for equities. The average US equity market drawdown during midterm election years since 1962 is -19.4%. The average one-year return following the drawdown is +31.0%. While a statistical pattern alone should not form the basis of an investment decision, it is nonetheless a worthy point.
A final, live illustration of uncertainty being priced into markets: the CBOE Volatility Index, the VIX, sometimes called the ‘uncertainty index’, closed Friday at 19.45, up nearly 19% in October alone but well away from a level that implies any systemic concern. According to Laurent Laskowski of Strategas, asset managers’ short positioning in VIX futures is at the 3rd percentile. In simple terms, a large proportion of managers are actively hedging their equity risk. This VIX and positional data reflects a rotational and uncertain market but not one with any major fault lines.
The week ahead
UK budget
We expect a pedestrian budget this Wednesday, which may be prudent in the current environment. Healey wants to support households while abiding by the fiscal rules and assuaging bond investors. While Gilts have receded into the background relative to French OATs in recent weeks the risk is that by delaying difficult spending decisions the mounting fiscal pressure puts the UK back in the sights of the bond vigilantes.
Federal Reserve (Fed) rate decision
The FOMC is expected to hold rates at 3.75-4.00% this week with the next hike coming in December. Data in the last month has provided evidence for both sides of the interest rate debate, with hotter than expected inflation offset by a slowdown in employment. Chairman Kevin Warsh still sees the Fed’s current policy as accommodative and the probability of a surprise hike should not be discounted, particularly given Warsh’s aversion to forward guidance. The Fed may want to hold given the proximity of the mid-terms and the market pricing puts the probability of a hike this week at 10%.
European Central Bank (ECB) rate decision
Given the turmoil in the European bond market and slowing growth policymakers are unlikely to stir the pot by hiking this week. The rise in bond yields has tightened financial conditions in itself. The ECB is almost certain to hold off until December.
US Q3 GDP
The US economy likely grew at an annualised 3.2% rate in the third quarter, driven predominantly by AI investment and resilient consumer spending. The focus will also be on productivity with stronger underlying productivity growth expected to become increasingly apparent.
US PCE inflation
Higher energy prices are expected to have pushed PCE inflation to 3.6% up from 3.4% in August. Core PCE inflation is also expected to rise to 3.1%.
Peak corporate earnings
Earnings season heats up this week with 36% of US500 companies reporting including a number of the mega cap technology companies. Analysts’ consensus estimates imply Q3 operating earnings per share growth of 24% year-on-year in the US (from Ed Yardeni).
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Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. Where investment is made in currencies other than the investor’s base currency, the value of those investments, and any income from them, will be affected by movements in exchange rates. This effect may be unfavourable as well as favourable. Past performance and future forecasts figures are not a reliable indicator of future results.
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