Market overview – Richard Carter, Head of Fixed Interest Research
Last time round, it was a tariff tantrum. One week on and it was the turn of US regional banks to trigger a market wobble after Western Alliance Bank (WAB) and Zions Bank disclosed they had both been hit by a case of bad loanitis. WAB is launching a lawsuit alleging fraud, while Zions is writing off US$50m after two loans went sour. Not the biggest number but enough to raise concerns over the state of banks’ loan portfolios. Trouble is, markets were still digesting the much bigger failures of car parts maker First Brands and auto lender Tricolor to which larger banks, such as Jefferies, are exposed. US regional banks dropped 6.3% and the wider banking sector 2.98% on Thursday.
It’s likely these are isolated incidents (certainly WAB’s fraud case, one would hope) and normal late-cycle credit quality issues - lower quality companies getting into cash flow difficulties a year or so after peak interest rates. Oh, for the big US banks to come forth and give some reassurance. Cue JPMorgan, Citigroup, and Wells Fargo not only reporting better-than-expected Q3 numbers but confirming asset quality too. Encouragingly, US stocks rebounded on Friday on hopes that regional bank difficulties will stay…well regional.
Three weeks and counting
With US economic data still hard to come by courtesy of the US government shutdown entering its fourth week (if it extends to Wednesday 22 October it will be the second-longest ever), possible clues on policy direction are being found elsewhere. Step-up the catchily named Federal Reserve’s (Fed) standing repo facility (SRF), a short-term lending facility that provides banks with twice-daily access to liquidity in return for collateral, typically government debt. The facility helps cap borrowing rates in the short-term funding market when they go uncomfortably high.
What caught the eye was that, as reported in the Financial Times, banks borrowed a combined US$15.10bn from the facility on Wednesday and Thursday, the highest two-day amount since the pandemic. This is a sign liquidity pressures in the repo market are building. The repo market is where institutions sell securities (the collateral) to each other and agree to repurchase the collateral at a later date at a higher price. Normally, banks can borrow in the repo market at better rates than the SRF but with repo rates hitting 4.25+%, the SRF found itself in demand.
One reason put forward, the Fed’s quantitative tightening (QT) programme. Under QT, the central bank is allowing treasuries and other securities it mopped up during the pandemic to mature without buying replacements, resulting in a liquidity drain. It follows then that should liquidity pressures in the repo market persist, the Fed could end QT early. SRF one to keep an eye on, particularly in the continued absence of economic data, although markets will (hopefully) have US inflation numbers to chew on this upcoming week. Due to the importance of the inflation report, work is underway to get the numbers out.
Weekly economic announcements:
The MSCI All Country World Index gained 1.2% last week with year-to-date (YTD) gains now standing at 18.8%.
United States:
Main US stocks were up 1.7% (14.5% YTD) over the week with markets buoyed by a good start to the earnings season. As of Friday, 12% of the US’ top 500 publicly traded companies had reported with 86% of these beating consensus estimates. The strong earnings went some way to helping markets shake off Thursday’s regional-bank blues. Growing risk concerns in the credit market helped US Treasuries have a good week. 10-year notes ended the week yielding 4.01% compared to 4.03% (down 56 basis points YTD). Similar story with two-year notes which finished four basis points lower at 3.46% (down 79 basis points YTD).
Noises coming out of the Fed were supportive of lower yields. Fed chair Jerome Powell highlighted how “downside risks to employment” have shifted the balance of risks in the economy. This was interpreted as a hint that short-term interest rates will be cut again before the year is out. Meanwhile, the Fed’s Beige Book noted economic activity across the country remains generally mixed.
United Kingdom:
UK stocks finished the week lower with the largest companies (-0.7%) underperforming the medium/smaller end of the market (-0.1%). Large caps still way ahead of their smaller peers YTD – up 17.9% compared to 8.8%. Quiet week for the pound which was unchanged against the dollar at US$1.34. The 10-year UK gilt yield moved lower, declining 14 basis points to 4.53% (down 4 basis points YTD).
Gross domestic product (GDP) continued to move by the tiniest of margins on a month-by-month basis. GDP was up 0.1% in August, having been 0.1% lower in July. Over the three months to August, the UK economy expanded 0.3% sequentially. August’s GDP tick up was helped by an improvement in industrial and manufacturing production – separate data showed a seasonally adjusted rebound in August after a drop in July.
Elsewhere, unemployment rose to 4.8% from 4.7% although the statistics office indicated that the decline in hiring may be levelling off. Wage growth excluding bonuses between June and August was 4.7% year-over-year (YoY) slightly down from the 4.8% recorded over the preceding three-month period.
Europe ex UK:
The MSCI Europe ex UK Index put on 0.8% (14.9% YTD) but performance was mixed at the national level: Germany’s main index fell 1.7% (19.7% YTD) while France’s market, boosted by the reappointment of Prime Minister Sébastien Lecornu, soared 3.3% (14.4% YTD). Standard & Poor’s (S&P) wasn’t quite so positive, downgrading France’s credit rating from AA- to A+. Lecornu’s decision to suspend pension reforms no doubt a concern here. Elsewhere, Italy’s main market was off 0.7% (26.9% YTD), while Switzerland’s finished 1.3% higher (12.5% YTD). The 10-year German bund yield fell 6 basis points to 2.58% (up 22 basis points YTD). The euro gained slightly against the US dollar, closing the week at US$1.17 compared to 1.16.
Approver: Quilter Cheviot 21 October 2025
