The Month Ahead

October was a mixed month for global financial markets, with performance varying considerably across regions and sectors. While the Dow Jones gained 1%, technology-focused markets came under pressure, with the Nasdaq 100 Index falling 6%. Investors became increasingly selective towards some of the market's strongest performers, reflecting a combination of weaker-than-expected results from some tech companies, concerns around the significant capital expenditure required to support ongoing AI infrastructure investment, and questions around the timing and scale of future returns.

Outside of the US, returns were generally weaker. European and Japanese equities lost ground, while South Korea's technology-heavy market recorded particularly sharp declines. In contrast, UK and Australian equities delivered positive returns, supported in part by strength in energy-related sectors. Meanwhile, New Zealand shares were little changed over the month.

Bond markets were better supported, with the yield on the US 10-year Treasury falling from 5.29% to 4.93% over the month. It reflected a combination of increased demand for defensive assets as investors reduced exposure to tech-oriented sectors, as well as a generally cautious tone ahead of key central bank meetings. In fact, major central banks, including the Federal Reserve and European Central Bank, ultimately left interest rates unchanged.

As October progressed, investor attention increasingly shifted towards a busy political and policy calendar. The US midterm elections and New Zealand's general election added to uncertainty, with markets focused on the potential implications for growth, inflation and interest rates.

The US midterm elections delivered a decisive victory for the Democrats, who regained control of both the House of Representatives (the House) and the Senate. With votes still being counted, Democrats had secured at least 237 House seats and 54 Senate seats, with expectations they could gain a further 10 or more seats in the House and potentially one or two additional ones in the Senate.

The scale of the victory was widely interpreted as reflecting voter dissatisfaction with several aspects of President Donald Trump's policy agenda, including tariffs and the conflict with Iran, both of which have contributed to higher costs of living and increased uncertainty for households.

Soon-to-be Speaker of the House, Hakeem Jeffries, said addressing cost-of-living pressures would be one of the Democratic Party's priorities. "We ran on affordability. We won on affordability. And now it's our job to govern on affordability," he said following the election result.

The outcome has fuelled expectations that Democrats will seek to moderate some trade policies, particularly tariffs, while placing greater constraints on US involvement in the Middle East. Both issues have had a direct influence on inflation and consumer prices.

Financial markets initially welcomed the result. Equities rallied, while oil prices moved lower as investors anticipated a more favourable backdrop for growth and a reduced inflationary impulse. However, these moves reflect only the immediate post-election reaction and remain subject to change.

Despite the positive market response, periods of volatility are likely as Democrats seek to find common ground with President Trump on key policy issues.

Closer to home, New Zealand's election had not taken place at the time of writing. With polling suggesting a tightly contested race and both major blocs likely requiring support from smaller parties, there is a possibility that coalition negotiations could delay the formation of a new government for several weeks.

Election campaigns in both the US and New Zealand highlighted the extent to which cost-of-living pressures remain front of mind for households. While inflation has eased from the elevated levels seen over recent years, rising prices continue to influence consumer sentiment and remain an important consideration for policymakers.

That challenge was reflected in recent central bank decisions. The US Fed and European Central Bank left interest rates unchanged at their most recent meetings, whilst emphasising a data-dependent approach going forward. While policymakers acknowledged the progress made in reducing inflation, they were careful to avoid signalling that the job is complete, reinforcing the view that interest rates may need to remain restrictive for some time yet.

Looking ahead, investors are likely to scrutinise inflation, employment and consumer spending data for clues on the future path of interest rates. While November's central bank calendar is relatively light, attention is already turning to December, when the Fed, ECB, Bank of England and RBNZ are all scheduled to hold their final meetings of the year. Those decisions may provide important signals on how policymakers balance persistent inflation pressures against a gradually slowing global economy.

Recent market volatility has led to a number of adjustments, with several positions being closed during October as market conditions evolved. As a result, our positioning is now broadly neutral across asset classes.

While there has been no shortage of market-moving events in recent weeks, including central bank decisions, elections and ongoing geopolitical developments, we believe it remains important to balance potential opportunities against the heightened level of uncertainty facing investors. The sharp divergence in asset class and sector performance during October also highlights the need for a disciplined approach to portfolio positioning.

Looking ahead, we remain focused on identifying opportunities where market pricing becomes out of step with underlying fundamentals. With key economic and policy developments still unfolding, we believe maintaining flexibility is appropriate and expect periods of market volatility to create more attractive opportunities over the months ahead.