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As the US-Israeli war with Iran entered its eighth month, October brought little respite for markets. Brent crude climbed to its highest levels in months, above $115 a barrel, as Iran attacked ships in the Strait of Hormuz and a separate conflict between Saudi Arabia and the Houthis escalated. The IMF warned that the global economy's resilience could be tested as energy inventories dwindle. Fighting the next crisis is harder when you've already spent the emergency fund!

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Energy costs continue to feed through to inflation which sits stubbornly between 3.5% and 3.8% in the UK, Europe and the US. With inflation well above target and moving in the wrong direction, Central banks kept their powder dry in October, but the tone remains hawkish. Whilst the US Federal Reserve held, two policymakers dissented and markets now see around an 80% chance of an increase in December. The ECB also held rates at 2.50% although the bigger news from Frankfurt was Christine Lagarde’s resignation. The Bank of Japan held their rates at 1.25% on 30 October, although the Bank also raised its inflation forecast and most economists now expect a hike in December. In the UK, the Bank of England meets on 5 November and, following the inflation surprise, markets see a 0.25% rise (the first since 2023) as all but certain. Higher for longer interest rates are now expected, although in the UK the long-term average has been around 4 to 5% so maybe they are defaulting to the norm. But anyone coming off a fixed rate mortgage set back in Covid days will be feeling the pain.

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Chancellor John Healey delivered his first Budget on 28 October. With rising borrowing costs having already eaten into his fiscal buffer, he delivered what one bond manager described as ‘the boring Budget that bond markets demanded’.  Gilts barely moved which, in this climate, counts as a success, but the OBR painted a gloomy picture for the UK economy and cut its 2027 growth forecast to 1% from 1.6% and does not expect inflation to return to target until 2028.

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As we head towards the year end, the key questions for investors are largely unchanged: whether energy flows through the Strait of Hormuz can be restored, whether the AI spending boom can keep generating returns that justify its ever-growing cost, and how far central banks will need to go to bring inflation back under control.  With the US midterms on 3 November and the Bank of England two days later, November is set for a busy start!

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Stockmarket news in October was dominated by results season for technology stocks which provided the latest test of the AI story, and it appears that investors are becoming more discerning.  A sharp sell-off in AI and semiconductor stocks rattled investors amid growing concern over how the AI build-out is being financed at a time of rising borrowing costs. Microsoft impressed, but Alphabet fell more than 10% in a day despite cloud revenues doubling, they have more than doubled their long-term debt this year. The message from the market appears to be that the AI boom isn’t over, but investors want to see how all this spending will earn a return. Anthropic’s IPO filing will provide the next test of AI enthusiasm. The MSCI World index finished 0.76% lower in October and although the S&P 500 still managed to set a new all-time high during the month, a final week sell off saw it down 0.9% over the month with the more tech-heavy Nasdaq down 2.5%.

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Asia was hardest hit by the AI sell-off, with semiconductor stocks in Korea and Taiwan falling sharply. The MSCI Asia ex Japan index dropped 7.9% and the MSCI Emerging Markets index fell 7.45%, underscoring the heavy weighting of AI chip stocks in both benchmarks. Brazil’s election added to emerging market losses. Investors had anticipated a Bolsonaro victory; but President Lula’s unexpected fourth-term win sent Brazilian stocks down almost 14% in a single day.

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Depsite gloomy domestic economic predictions UK equities were an unlikely bright spot, with the FTSE All Share gaining 1.2%, helped by the index’s heavy weighting in energy and relief from the banks over the level of the bank tax announced in the budget. European markets were weaker, with the Euro Stoxx down 1.51% as French political turmoil weighed on sentiment.

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After September’s excitement, bond markets enjoyed a calmer month, and yields eased as investors sought safety during the tech sell-off. The ten-year Treasury yield fell from 5.28% to 4.93%, and the ten-year gilt yield eased from 5.42% to 5.28% as the Budget passed without incident. In Japan, the ten-year JGB yield dropped back to 2.84% from 3%. The exception was France, where the ten-year yield breached 5% for the first time since 2002 amid riots and concerns over the public finances ahead of next year’s presidential election. Bond vigilantes, it seems, have simply moved across the Channel.

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In commodity markets, the oil price continued to climb, and Brent crude rose around $10 to finish just over $113 a barrel. Middle East crude exports have largely recovered towards pre-war levels, but record freight costs and limited tanker capacity are keeping prices elevated. UK natural gas surged from 183p to 257p per therm, its highest level since December 2022, so much for energy bills becoming less of a headache. Gold had another poor month, shedding almost $300 to finish at $3,898 an ounce, as the prospect of further rate rises increased the cost of holding a non-yielding asset.

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In currency markets, sterling gained around 1% against the dollar and 2.5% against the euro, as the single currency fell to its lowest level since May following Lagarde’s resignation and renewed French political worries. Last month we asked whether the yen’s extended period of weakness was ending; for now, the answer appears to be not yet, with the pound also gaining around 1% against the yen.

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What might we expect going forward?

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Legendary investor, Howard Marks of Oaktree Capital Management, has questioned the “bubble” narrative of AI . “A bubble is irrational exuberance, it’s imprudence. If enough people are cautiously wondering if there’s a bubble in a given area, then it makes absolute sense to think that if it is a bubble, it’s probably constrained.” He said on Bloomberg.

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Marks, who called the top of the Dot-Com market, states that a month before the market peaked in 2000, the top five tech firms were trading at an average forward p/e of about 65 times – today the top five tech firms are around 23. He sees the re-rating of tech firms today as healthy. People are being more thoughtful as to whether the current prices of some of these firms can be justified, not whether AI will continue.

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At the time of writing the mid-term elections are underway. To end on a positive note, history has shown positive returns in the S&P 500 every year since 1950. *Fingers crossed.

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The numbers…

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Monthly performance figures 30/9/26 to 31/10/26 source FE Analytics.

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Important Information

This document is produced by EXE Capital Management in conjunction with Fairview Investing Ltd, an independent research consultancy. The content is for information purposes only and does not constitute financial advice. The commentary or research provided do not constitute a personal recommendation to deal. Any statements, opinions, forecasts, and figures are those of the authors at the time of writing but may not be appropriate for your individual portfolio and may be subject to change. Advice should be sought from your financial adviser.

Fairview are independent investment consultants sitting on the Investment Committee of EXE Capital Management.

The above does not constitute a recommendation to buy specific funds or assets. The value of investments can fall as well as rise. Past performance is no guarantee of future returns.‍‍

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