Global markets briefing
UNITED STATES: Inflation, bond yields and AI under pressure
US drives much of the world as the world’s largest economy and global AI powerhouse
US markets are balancing resilient corporate earnings expectations against renewed inflation concerns and rising borrowing costs. September CPI inflation came in above forecasts at 3.7% year on year, while core inflation reached 2.6%. Higher energy costs and the potential inflationary effects of tariffs have complicated the Federal Reserve’s task. Investors are reassessing the prospect of further monetary tightening, with the Fed’s next meeting due on 28 October.
Equities and AI: Technology shares have suffered a sharp correction. The Nasdaq 100 fell 5.5% in the week to 16 October, its largest weekly decline since April 2025. Investors are questioning whether enormous AI-related expenditure on chips, computing infrastructure and data centres will generate adequate returns. Highly leveraged businesses such as CoreWeave have come under particular pressure. The correction reflects both stretched valuations and rising financing costs, rather than necessarily signalling the end of the longer-term AI growth story. US equities rebounded modestly on Monday as investors looked ahead to further technology earnings.
Government bonds: Treasury yields have risen sharply in recent weeks, with the 10-year yield reaching approximately 5.3%, its highest level since 2002, before easing towards 5.1%. Three forces are important: persistent inflation and higher oil prices; expectations that interest rates may remain higher for longer; and concerns about the volume of US government borrowing and future Treasury issuance. Heavy corporate borrowing to finance AI infrastructure adds to competition for capital. Last week, however, demand for safe-haven assets helped Treasury prices recover and yields retreat. Remember that bond prices and yields move inversely.
FOREIGN EXCHANGE
The US dollar strengthened after the hotter-than-expected inflation figures, although currency movements remain sensitive to changing rate expectations and risk appetite. Sterling has held above $1.30, but remains exposed to UK fiscal concerns and the outlook for interest rates. The yen remains weak amid the wide interest-rate differential with the US. A sustained rise in US yields could support the dollar, although safe-haven flows and shifting expectations can complicate this relationship. Note: The biggest driver of a currency’s strength is the level of interest rates in that country versus other countries.
UNITED KINGDOM AND EUROPE
UK government bonds have experienced significant selling pressure. The 30-year gilt yield briefly reached 6% in early October, its highest level since 1998. Persistent inflation, higher energy costs, substantial government borrowing requirements and uncertainty about future gilt supply have all contributed. Higher yields increase government debt-servicing costs and can feed through into mortgage rates and corporate financing.
