Monthly market update

Equity markets were generally weaker in October, with performance varying across sectors. Technology-related markets were among the weakest performers as enthusiasm for artificial intelligence (AI) stocks faded. Equities also faced headwinds from a renewed rise in oil prices driven by heightened geopolitical tensions.

Bond markets, however, delivered strong returns, brushing aside higher energy prices and ongoing inflation concerns. New Zealand bonds were some of the strongest performers, supported by the surprise decision by the Reserve Bank of New Zealand (RBNZ) to leave interest rates unchanged.

In this update we look at some key drivers of October’s market performance.

AI-related companies came under pressure in October as investors grew increasingly cautious about whether the substantial investment flowing into AI will ultimately generate sufficient returns. According to some estimates, the hyperscalers, the large technology companies driving much of the AI buildout, are expected to spend around US$600 billion on AI this year.

Among the hyperscalers, Meta and Alphabet were two of the weakest performers in October, with both companies’ shares down more than 15%. Meta’s share price fell after the company was downgraded by S&P Global Ratings, with the agency saying its ability to monetise its AI spending is “more limited than that of its peers”. Meanwhile, Alphabet shares weakened after it reported a negative free cash flow for the first time in its history, highlighting the significant amount of cash being spent on AI infrastructure and data centres.

The weakness also spread to semiconductor companies that supply the chips and computing power behind AI. Many of the sector’s largest companies, including Nvidia, Advanced Micro Devices and Intel, came under pressure during the month.

The sell-off also weighed on broader equity markets. The Nasdaq 100 Index fell 6.7%, Japan’s Nikkei 225 Index declined 5.2%, while South Korea's KOSPI Index, one of the world's most AI-exposed equity markets, dropped 16.2%.

Australia was one of the few equity markets to end October higher, with the ASX 200 Index rising 1.4%, supported by companies like Woodside Energy, Santos and Origin Energy, which all benefited from higher energy prices.

In New Zealand, October was marked by the RBNZ’s surprise decision to leave the Official Cash Rate unchanged at 2.75%. Markets had widely expected a 25 basis point increase, but in a narrow 4-3 vote, policymakers said the impact of higher oil prices on consumer prices had been less significant than expected. “Impacts on short-term pricing behaviour appear to have been contained and medium-term inflation expectations remain well anchored”, the central bank said in its statement. 

Despite leaving rates unchanged, the Reserve Bank signalled that further increases may still be needed depending on how the economy evolves. Policymakers noted the uncertainty in the outlook, with the risk of a global economic slowdown on one hand and inflation proving more persistent in New Zealand on the other.

The unexpected decision to leave interest rates unchanged prompted a sharp rally in New Zealand government bonds. Meanwhile, the New Zealand dollar weakened following the announcement, ending lower against both the Australian and US currencies.

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