Monthly report

CIO Report - October 2025

Markets

Global equity markets advanced again in October, in some cases quite strongly. Only the Chinese markets paused, despite massive liquidity injections by the PBoC. This upswing occurred despite mounting stress in the US money markets, triggered by a sharp decline in bank reserves. The Federal Reserve has been withdrawing liquidity from the banking system for some time to offset the potentially inflationary effects of its recent rate cuts. However, toward the end of the month, the stress in money markets forced the Fed to reverse course. It announced the end of its Quantitative Tightening (QT) programme and signaled the possibility of liquidity-enhancing open-market purchases. Overall, this marks a clear return to a more accommodative monetary stance. Equity markets were further supported by a solid global economic backdrop — robust in the US and at least stabilised in Europe and China — despite persistent uncertainty surrounding US tariffs and a potential trade war. In this environment of positive equity performance, resilient economic growth (driven by high government spending), and continued expansion in global liquidity, the moderate uptick in inflation in the US and globally came as little surprise. Notably, this did not lead to higher interest rates; on the contrary, long-term yields declined further. Remarkably, yields on 10-year French government bonds fell even amid surging public debt. Gold and copper posted modest gains, while liquidity-sensitive Bitcoin prices reacted negatively to the drop in US bank reserves.

Outlook

Despite the Goldilocks environment and booming stock markets, the Fed lowered its policy rate by a further 0.25% to a target range of 3.75-4% at the end of October. The move was once again justified with a cooling labor market. However, it only appears weak at first glance – the significant decline in new jobs is primarily related to the US government's strict immigration policy. It is currently important for global financial markets that global liquidity continues to rise, particularly thanks to strong money supply growth in China. However, Fed liquidity (i.e., bank reserves), which has fallen into the danger zone at 2.85 trillion US dollar, must be closely monitored. This has been evident in recent weeks in the increased spread between money market interest rates (SOFR) and the Fed Funds rate. The Fed is attempting to counteract this with its announced end to quantitative tightening. However, a further decline in bank reserves below the 2.8 trillion US dollar mark would be a strong warning signal for risky assets. Liquidity creation by the US Treasury through T-Bill issuance more than offsets the Fed’s still mildly restrictive stance. Overall, we expect this to support the economy, lead to slightly higher inflation, and exert upward pressure on long-term yields. Accordingly, we remain neutral to slightly short in duration. Corporate bonds, particularly in the high yield and emerging markets segments, continue to benefit from the robust global economy despite higher US tariffs and the still high level of liquidity in the financial markets. At the same time, valuations are high and credit spreads are tight. We are therefore maintaining a neutral to slightly positive positioning. Potential reasons to reduce risk exposure would include a further widening of SOFR–Fed Funds spreads, a sharp decline in the US dollar, or a rapid increase in long-term government bond yields in the US and Japan. For now, these appear as warning signs rather than sell signals.

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