Insights &Commentary.

U.S. equities were mixed last week as Treasury yields, oil prices and AI-related stocks remained volatile. Larger cap indices advanced with the S&P 500 up 1.2%, the Dow higher by 0.9% and the Nasdaq Composite advancing 0.6%. However, the Russell 2000 struggled and declined 0.9% while the S&P MidCap 400 was essentially unchanged as investors remain concerned over smaller companies' ability to withstand higher financing costs. The market remains concentrated with more than 40% of index constituents are down for the year and fewer than half of index constituents currently trading above their 200-day moving averages despite the fact that the S&P 500 index is up 14% YTD.

Leadership did broaden away from AI-related stocks which experienced volatility after a report suggested OpenAI's annualized revenue was roughly $20 billion below figures that had previously circulated. On the news, Nvidia fell 2.9%, AMD declined 3.9%, Broadcom dropped 4.3% and Micron lost nearly 5%. However, on the positive side, TSMC's Q3 revenue rose 50% y/y reinforcing evidence that underlying demand for advanced AI chips remains very strong. Importantly, the broader market absorbed the AI scare relatively well driven by rotation into near term laggards such as Consumer Discretionary, Consumer Staples, Utilities and Healthcare all of which rallied more than 2%.

The Federal Reserve's September meeting minutes confirmed that most policymakers expect another rate increase before year-end but showed little agreement on when that move should occur. Officials emphasized that future decisions would remain dependent on incoming economic data while Fed Governor Waller indicated that further tightening is likely but that policymakers have flexibility around timing.

Economic data continued to send a mixed inflation message as the September ISM Services PMI eased to 54.9 from 55.4, still remaining firmly in expansion territory. More concerning for the Fed, the prices-paid component increased to 74.0, its highest reading since July 2022. The New York Fed's one-year consumer inflation expectation rose to 3.9%, while the University of Michigan survey showed year-ahead inflation expectations increasing to 4.7%. Consumer sentiment, meanwhile, dropped to 46.3, its lowest level in five months.

The 10-year yield briefly reached 5.36%, its highest level in more than 24 years, before retreating to about 5.24% by Friday. Strong demand at Treasury auctions helped stabilize bonds late in the week, but the broader trend remains upward as investors contend with persistent inflation, high oil prices, expanding government debt and heavy capital requirements associated with AI infrastructure spending.

Middle East developments remained volatile and Brent crude briefly traded above $105/barrel Thursday following renewed attacks on tankers in the Strait of Hormuz. WTI crude ended slightly above $90 impacted by hurricane Isaias in the Gulf of Mexico which temporarily shut down approximately 1.3 million barrels per day of U.S. offshore production. Gold rebounded after falling to a two-month low earlier in the week finishing near $4,194/oz and gained, up 1.3% for the week while silver gained more than 2% on Friday.

Europe: European equities were broadly unchanged as a more hawkish ECB outlook offset generally resilient economic activity. The STOXX Europe 600 was flat, while Germany's DAX declined 0.6%, France's CAC 40 fell 1.2% and the UK's FTSE 100 gained 0.9%. Minutes from the ECB's September meeting showed that policymakers unanimously supported the bank's first rate increase since 2023. Officials judged inflation risks to remain tilted to the upside and emphasized that the full impact of higher energy prices had not yet passed through to the economy. German factory orders plunged 10.6% m/m in August, while exports declined 0.8%. Industrial production provided a bright spot, rising 2.0% m/m. French industrial production declined 0.3%, while the UK composite PMI eased to 52.0 from 52.5 but remained in expansion territory.

Japan: Japanese equities advanced as the Nikkei 225 gained 1.1% and the broader TOPIX rose 0.3%. AI and semiconductor-related shares led the market early in the week before some of those gains reversed as investors questioned valuations across the global technology complex. Japan's 10-year JGB yield fell to approximately 3.01% from 3.09%, although yields remain historically elevated. PM Takaichi attempted to reassure investors about fiscal discipline, pledging to control bond issuance even as the government plans tax relief and additional support for lower and middle income households. The yen remained weak near 158 per USD.

China: Chinese equities fell following the Golden Week holiday. The CSI 300 declined 0.9% and the Shanghai Composite fell 0.7% from their September 30 closes. Technology shares were particularly weak as higher global yields, elevated oil prices and concerns about potential U.S. restrictions on Chinese optical communications equipment weighed on investor sentiment. Golden Week tourism data showed continued growth but also evidence that Chinese consumers remain cautious. Domestic tourist trips increased 6.3% y/y to 826 million, while tourism revenue rose only 4.3%. Spending therefore grew more slowly than travel volumes, reinforcing concerns that China has yet to generate a broad-based recovery in domestic consumption. Hong Kong's Hang Seng index gained 1.0%.