Markets push ahead despite US shutdown

Global | Following the US-China deal, are trade tensions behind us?
Trump turned his Asia tour into a series of trade deals. Four ASEAN countries (Malaysia, Cambodia, Thailand, and Vietnam) will see lower tariffs, mostly in exchange for better access to critical minerals. South Korea pledged USD 350 billion in US investments for lower tariffs too. And with China, Trump struck a framework deal. He traded tariff cuts for two key concessions: a one-year postponement of China’s rare-earth export restrictions and commitments to purchase US agricultural products.

These moves reduce trade uncertainty, and markets like that. US equities tied to industrials, agriculture and tech should benefit. We are overweight US stocks, including the equal-weight index, which provides broader exposure to sectors beyond mega-cap tech.

Asia gains too, as export-driven economies get a boost. Manufacturing and trade flows in electronics, textiles, and critical minerals should pick up. Broader Asian equity markets, especially industrials, exporters and logistics, stand to benefit from improved sentiment. This supports our overweight position in emerging-market equities, which lean heavily towards Asia. It’s also because of other key drivers: a lower US dollar, China’s support its private sector and consumers, the world of AI needing Asian hardware.

US | Will the US Federal Reserve cut interest rates again?
The US Federal Reserve (Fed) lowered rates to 3.75–4% last week, from 4–4.25%. It also announced it will stop the so-called quantitative tightening (QT), i.e. the reduction of assets it holds in its balance sheet, from December. From then on, the Fed will replace maturing assets with Treasury purchases. Both decisions were widely anticipated. However, Fed Chair Powell saying that a December cut isn’t guaranteed was a bit of a surprise. It seems the Fed is looking to keep its options open for the coming months.

Why? Because the Fed sees a complex economic picture. Financial markets are buoyant, consumer spending and business investment are solid, the US is making new trade deals, and inflation is still above target. But the job market is softening, and the government shutdown is making it harder to interpret the data clearly.

Still, we think the bar for not cutting in December is relatively high. It would take a sharp acceleration in both job creation and inflation, neither of which seems likely. Powell’s balanced message cooled some of the market’s enthusiasm, while setting the stage for tougher decisions next year. That said, by mid-2026, there will be a new Chair, and the outlook could change. But that’s a concern for another time.

In fact, the monetary policy outlook for the coming months hasn’t changed much. We still expect a December cut. The data will remain patchy, with the shutdown adding more uncertainty. Short-term risks to growth are still front and centre.

From a market angle, ending QT might ease some pressure on bond yields, especially with the US running a wide budget deficit. But we’re still underweight Treasuries. Indeed, the Treasury market already reflects expectations that the Fed will stop cutting interest rates at around 3%. The downside for Treasury yields (and upside for Treasury prices) looks limited from here.

Europe & Japan | Where are interest rates going?
The Fed cut rates last week, but the European Central Bank (ECB) and the Bank of Japan (BoJ) kept theirs unchanged—and for different reasons.

In Europe, inflation hovers near target and the ECB sees growth around 1%. It’s a comfortable spot for the ECB and has no plans to leave it, unless there’s a major unforeseen shock. We expect rates to stay at 2% for now.

Japan is a different story. Inflation is still above target, but the new prime minister, Sanae Takaichi, hasn’t laid out her policy agenda yet. Fiscal stimulus is likely, which could be inflationary. But we think Takaichi will likely include measures to keep inflation under control. That means the case for higher rates remains, but timing is anyone’s guess. Mirroring Powell's not committing to a December cut in the US, Kazuo Ueda at the BoJ avoided any signal about future increases. 

We continue to hold European and Japanese government bonds to diversify away from US Treasuries.

This week | Central banks meetings, US government shutdown and economic activity 
We expect the Bank of England to keep rates unchanged (Thursday). September’s softer inflation raised market expectations of a cut, which could come in December or early 2026. Central banks in Sweden (Wednesday) and Norway (Thursday) also meet this week. Both should keep policy rates steady.

In the US, the government shutdown is still clouding the picture. Key data releases are delayed (we won’t get the traditional labour data from the Bureau of Labor Statistics), so markets will lean on private sector data like the purchasing managers’ indices (PMIs) for activity and ADP (a survey of the labour market) for clues on jobs and inflation (both on Wednesday).

Global PMIs for manufacturing and services are coming too. They’ll show how firms are coping with the higher tariff regime. Consensus for data out of the US and Europe suggests activity is improving.

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