Q3’s market highlights

Following President Trump’s ‘Liberation Day’ trade policy announcements earlier this year, the US entered a 90-day pause period on new tariffs, which ended in July. During this window, negotiations with major trading partners intensified. The UK-US trade deal was signed at the G7 summit, and a framework with China was announced. However, the introduction of a 10% universal tariff and the passage of the One Big Beautiful Bill Act (OBBBA), a major tax-and-spending package, raised concerns about long-term fiscal sustainability, with the US deficit projected to reach 7% of GDP.

Central Bank policy, the divergence continues

Monetary policy continues to diverge across regions. With inflation in Europe at target, the European Central Bank (ECB) held rates at 2% over the quarter and there is even talk of the next move being a hike. In contrast, the Bank of England (BoE) faced a dilemma: inflation remains stubbornly high within the UK, unemployment is rising, and GDP growth stalled in August. In Japan, Bank of Japan (BoJ) Governor Ueda faced his first dissent as chair of the central bank as two committee members voted to increase rates in the September meeting, though the bank held firm at 0.50%. The BoJ also announced plans to sell the ETFs and J-REITS positions they had built up over the Covid period, which could put pressure on Japanese risk assets.

Has the FED blinked?

For the first time in 2025, the Fed cut rates in September (by 0.25% to 4.00-4.25%). The vote was unanimous, except for the newly instated Governor Stephen Miran who was advocating for a 50bps cut. FED Chair Jay Powell described the decision as a “risk management cut”, driven by weak August labour data (as few as 22,000 jobs added) and a sharp downward revision of job creation figures for the year to end of March (-911,000), based on the Bureau of Labour Statistics. Inflation remains above target, however cracks in the jobs market are clearly making FED nervous.

No de-escalation of conflicts in sight

The ongoing military operations between Ukraine and Russia and between Israel and Hamas continues to escalate. President Trump’s meeting with President Putin in Alaska yielded little progress, and Russian drone attacks have intensified – including repeated airspace violations over NATO territory, most recently in Estonia. In Gaza, Israeli forces continue offensive operations in Gaza City, with many Palestinians fleeing south towards Egypt. The landmark move to recognise the Palestinian state by the UK, Canada, Australia, Portugal and then latterly by France seems to have deepened the Israeli resolve, with threats to annex the occupied West Bank now being demanded by hardline element of the Israeli Government.

US Government shuts down amid budget dispute

As many political commentators predicted, the US Federal Government shut down at midnight on the 30 September after the Senate failed to pass a funding bill approved by the House of Congress. The bill, which would have extended funding to 21 November, needed 60 votes but lacked bipartisan support, which was withheld by the Democrats due to unresolved Medicaid cuts. The shutdown has furloughed around 850,000 to 900,000 non-essential federal employees (i.e. workers outside of Medicare, Medicaid, social security, and debt interest payments), roughly 35-40% of federal employees. Economists estimate each week of shutdown could reduce Q4 GDP growth by 0.15%-0.2%, on a quarter-over-quarter annualised basis. While the median length of previous shutdowns is four days, they have run as long as five weeks in 2018.

Asset allocation highlights

Risk assets enjoyed a strong quarter

Despite global uncertainty, risk assets rallied in Q3. A more stable tariff environment, a loosening bias from the UK & US central banks, and an increase in stimulatory policy in areas such as China has helped drive equity markets higher. Asia ex Japan and Emerging Market equities led the charge, while US equities also delivered strong returns. More value orientated areas of the world such as Europe and the UK have delivered positive, but more modest returns.

UK Government bond markets are showing signs of stress

Despite the rate cut from the BoE, normally a good thing for fixed interest assets, UK Gilts delivered negative returns in Q3. Investors’ concern stems from the persistent inflation and stalled growth. Chancellor Rachel Reeves faces mounting pressure to “balance the books” but is constrained by strict rules. Rising Gilt yields are feeding a cycle whereby increased pressure on government finances reduces fiscal flexibility, leading to increased investor concerns and further upward pressure on gilt yields.

Mixed fortunes of global Government bonds

Outside of the UK, Government bonds have fared better. This is largely driven by weaker US labour data coupled with lower than expected inflation as the impact from tariffs has been more limited than feared. However, political uncertainty in France sharply increasing spreads between French and German government bond yields. This divergence means that 10-year Italian bonds are now trading at tighter spread to German Bunds than French OATs for the first time since before the Eurozone crisis.

Solid performance from corporate debt

Global investment grade bond delivered positive returns over the quarter, helped by falling rates and tightening spreads. UK investment grade bonds have faced more of a headwind from the domestic rate environment, although still posted modest positive returns. Global high yield bonds performed strongly, benefiting from the performance of shorter dated government bonds and tightening in credit spreads.

Alternatives shine

Global Real Estate Investment Trusts (REITs) have performed strongly over the quarter, supported the Fed’s rate cut. These assets remain sensitive to interest rates, and the shift in policy has been a tailwind. Global Infrastructure, which held up during tariff uncertainty earlier in the year, continue to offer downside protection and portfolio diversification.

Market outlook

Selective optimism in equities

Although we are seeing a slowing in earnings growth it does continue to be positive and is supported by fiscal policy in the US and Europe. Lower interest rates should also provide a tailwind. While valuations are stretched in some regions, there are compelling opportunities especially within some specific areas of the market, such as UK small caps.

Short term bonds in the spotlight

We expect interest rate cuts in the US and the UK to favour shorter duration bonds, which should outperform as the growth slows in these regions. In contrast, longer dated bonds may face headwinds as governments face difficult decisions concerning spending cuts or the rising budget deficits.

Credit still holds it edge

Credit spreads remain tight, however there is little sign of any significant pick up in the credit default cycle. Unless growth slows significantly, we don’t anticipate any major changes in the medium term. The additional yield from owning these assets over government bonds continues to make credit an attractive proposition.

Infrastructure in focus

Global Infrastructure assets continue to benefit from long-term structural shifts, whilst trading at attractive valuations. These assets also provide diversification from more traditional asset classes and play a key role in building resilient portfolios.

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