In February 2027, and thus around nine months before the scheduled end of her term, Christine Lagarde will step down from her position as President of the ECB. This comes at a challenging time: rising energy prices and initial signs of second-round effects may keep inflation elevated, while tensions in European bond markets are increasing. In particular, France’s public finances are attracting growing scrutiny from investors. Compared with the eurozone sovereign debt crisis of just over a decade ago, current market movements appear relatively moderate. At that time, countries such as Greece, Portugal, Spain, and Italy faced significantly higher risk premiums, credit rating downgrades, and, in some cases, a loss of access to capital markets. France remains far removed from such conditions. In the United States, the Federal Reserve left its policy rate unchanged. It continued to describe economic activity as robust and indirectly pointed to overheating risks that could be reinforced by the ongoing AI investment boom and higher energy prices. US inflation remains above the Federal Reserve’s 2% target, and recent data suggest a renewed and broader-based increase in price pressures. According to Federal Reserve Chair Kevin Warsh, further rate hikes at a later stage cannot be ruled out. In Brazil, the surprise election victory of President Luiz Inácio Lula da Silva triggered considerable concerns about the future direction of fiscal policy. The Brazilian real came under pressure, while Brazilian equity markets recorded significant declines. Investors fear that the social spending and support programs promised during the election campaign could further increase the country’s already substantial budget deficit and public debt. The future performance of the currency, bond market, and equity market will now largely depend on whether Lula and his economic team can present a credible fiscal consolidation plan. However, it remains uncertain whether austerity measures will be sufficient to restore investor confidence on a lasting basis.
Current nervousness in equity markets is primarily being driven by three factors: the upcoming US midterm elections, growing doubts about the sustainability of the AI investment boom, and persistent geopolitical risks. As a result, October was marked by heightened volatility in equity markets. While at the beginning of the month there were still strong indications that US equities would once again outperform other markets, by month-end Swiss stocks as well as equities from Canada and the United Kingdom were among the best performers. At the sector level, this meant that, alongside the defensive sectors that are heavily represented in the Swiss equity market, energy stocks ranked among the top performers. Major European oil companies, for example, took advantage of higher oil, gas, and refining margins to share more of their success with shareholders. Shell, TotalEnergies, and Repsol announced larger share buyback programs and dividend increases. This development highlights the extent to which the oil industry has so far benefited from geopolitical tensions in the Middle East.
A remarkable development is currently unfolding in bond markets: some large corporations can now finance themselves more cheaply than the French government. France’s long-term borrowing costs have risen from around 4% to more than 5% within just a few months. According to estimates, more than one-third of French companies are now able to raise long-term capital at lower rates than the French state. However, this trend is not limited to France. Government bond yields are facing upward pressure worldwide, driven by high levels of public debt, persistent inflation risks, and growing concerns about the long-term sustainability of public finances. Corporate bonds, by contrast, are benefiting in many regions from solid balance sheets and robust fundamentals. That said, this does not imply that companies are safer borrowers than sovereign states. Bond yields reflect not only default risk but also factors such as liquidity, market structure, and prevailing investor sentiment. In commodity markets, the price of Brent crude oil approached its 2022 highs during the month. European natural gas prices also rose above 100 EUR per megawatt-hour for the first time in nearly four years. Since the outbreak of the Iran conflict at the end of February, European gas prices have almost tripled. While the United States continues to benefit from low-cost natural gas production, the relief available to Europe remains constrained by limited LNG liquefaction capacity and high transportation costs. Although Europe’s energy system has so far proven remarkably resilient, available reserves and safety buffers are increasingly being put under strain.
The outcome of the upcoming US midterm elections, the ongoing AI investment boom, and geopolitical tensions are currently the key drivers of financial markets. What these factors have in common is that their future trajectory cannot be forecast with any great degree of reliability. For investors, this reinforces the importance of maintaining a robust asset allocation, broad diversification, and disciplined risk management. The benefits of such an approach were clearly visible over the past month: broadly diversified portfolios were able to benefit from performance contributions across a range of asset classes and market segments. At the beginning of the month, we selectively realized gains in equities as part of a portfolio rebalancing exercise and took advantage of the sharp rise in yields to maturity in certain areas of the bond market to modestly increase our allocation to fixed income.