Easing Tensions, Shifting Trends

Macro

October 2025 was a volatile month with trade tension between US and China increased after China’s announcement of rare earth export controls but recently agreed to postpone it and have a one-year trade truce between them in the South Korea summit. [1]

In the U.S., it is currently experiencing a government shutdown after Republicans and Democrats could not agree to pass a bill funding government service past 1^st October. This has led to the suspension of key releases of economic data such as the monthly job report, adding uncertainty to the state of the U.S economy. [3]  One exception made was the release of September CPI data which showed a 0.3% increase, putting the annual inflation rate at 3%, below the estimated 0.4% and 3.1% respectively.  This has provided a glimpse in the state of the U.S. economy suggesting that currently, the impact of President Donald Trump’s tariffs appears to  be limited based on available data.

In the eurozone area, business activity rose at the fastest pace in 17 months in October. The Eurozone Purchasing Managers’ Index (PMI) increased to 52.2 from 51.2 in September. The largest economy in the eurozone, Germany has registered a solid increase in output while second-largest economy, France posted a fourteenth consecutively monthly reduction in output as political uncertainty remains. [4] Despite the strong growth, business confidence has waned to a five-month low and was weaker than the series average with sentiments in Germany and France still remain relatively muted. [5]

China’s 15th Five-Year Plan (2026–2030) represents a significant recalibration in policy priorities, shifting from the previous focus on science, technology, and innovation toward renewed emphasis on industrial development and modernisation. The latest Party communiqué indicates that innovation will now serve industrial objectives, reflecting Beijing’s intent to strengthen strategic manufacturing, upgrade traditional sectors, and build advanced industrial clusters, particularly in semiconductors, green technology, and smart manufacturing, as the main drivers of high-quality growth. [6]

In parallel, the plan highlights domestic demand expansion and consumption upgrading as structural supports to offset export and investment slowdowns. This forms the next phase of the “dual-circulation” strategy, aimed at deepening household income reform, improving social services, and nurturing high-value consumption sectors to stabilise internal demand. [7]

China’s economy is expected to expand at an average of 3.8% in 2025-2034, as growth shifts from innovation-led expansion to state-directed industrial upgrading. Heavy investment in advanced manufacturing and green technology will enhance self-reliance but generate slower returns than past infrastructure or property cycles. Combined with tighter regulation and cautious fiscal policy, this results in stable but slower momentum rather than rapid acceleration. [8]

Domestic consumption may  stay subdued as income and welfare reforms take time to lift household spending. High savings rates, a weak property sector, and limited credit appetite constrain short-term demand. Until social safety nets and wage growth improve materially, consumption may stabilise growth but not drive it, keeping overall expansion expected to be moderate through the next 5Y. [9]

October 2025 was a volatile month with trade tension between US and China increased after China’s announcement that foreign companies must obtain government approval to export products with rare earth mineral but subsequently eased. [11]

Equities

The S&P 500 hit another new record high in October as investors looked forward to the earnings season and with the easing of the U.S. and China trade war tension. The increased expectations of the U.S. interest rates cut has also contributed to the rise in the index. [12]

However, the strong performance of the S&P 500 index is driven by the Mag 7 companies. Investors should be mindful of the elevated valuations of these companies and may want to consider diversifying some exposure from Mag 7 into the next top 20 market cap companies in the index. [14] Current market conditions suggest a more defensive and slightly cautious stance on the market, supported bythe recent outperformance of defensive companies against cyclicals companies; as a result defensive stocks may be positioned  to grow in the short term. [15]

Broader market trends have indicated that European equities have generally underperformed U.S. markets during this year. [17] However, European equities are poised to grow in the coming months amid improving economic growth and strong returns of cash to shareholders. Additionally, they are still at a considerable discount to US stocks even when adjusted for sector exposure or different economic growth expectations. Cyclical stocks such as bank are expected to perform well during this improving economic growth. [18]

In Asia, the Hang Seng Index has outperformed the market driven by factors such as easing regulatory pressure on Chinese tech stocks, increased foreign investment, and more. [19] The Chinese technology is expected to continue to deliver strong returns as the Communist Party of China (CPC) focus on substantial improvements in scientific and technological self-reliance and strength for its 15^th Five-Year Plan. [20] Consumption stocks are also attractive as China focus on raising its percentage of household consumption of GDP significantly over the next 5 years. [21]

Fixed Income

The Fed delivered the expected 25 bps rate cut to 3.75-4.00% at the end of October 2025, reinforcing the supportive monetary environment for Developed Markets Investment-Grade (DM IG) credit. However — and importantly — the Committee’s forward guidance was more cautious: a December cut is not guaranteed, and policy is data-driven rather than on autopilot. For IG credit, this means the carry story is still strong, but the duration upside may be more limited than previously assumed. As we head into the final months of the year, IG remains well-positioned as a portfolio hedge and income asset, particularly if macro risks (labour, inflation, shutdown) play out.

Sticking with defensive premia Developed Markets Investment-Grade (DM IG), proxied by the Bloomberg US Corporate Bond Index, delivered a total USD return of +7.7% YTD (as of 30 October 2025).  Sino-US trade tensions should support diversification demand into quality beta. We are of the opinion that  DM IG may be well positioned to benefit as a portfolio stabiliser as we are cautious of market bumps ahead over the next 6 months.

Emerging Market Asia Investment-Grade (EM Asia IG) has rebounded strongly from the initial volatility following Liberation Day. Bloomberg EM USD Aggregate Index delivered a YTD return of +10.37%, outperforming the return of Bloomberg US Aggregate Index of +6.80% (as of 3 Nov 2025) Diversification away from US-centric risks have likely contributed to EM Asia IG’s relative resilience. [23]

However, given the very tight spread levels, future upside from spread compression is limited; performance going forward will rely more on carry/roll and modest spread resilience rather than large compression. Furthermore, the tariff-/trade-risk backdrop remains non-trivial for export-heavy Asian corporates; any adverse shock could widen spreads. [25]

Foreign Exchange (FX)

In the FX market, global major currencies have trailed the performance of gold by a wide margin driven by the increasing government’s fiscal debt and speculation that central banks will face political pressure to hold down interest rates to offset what government owes, triggering the debasement trade. This trend is expected to continue as fiscal pressures build globally. [27]

Looking at specific currencies, the greenback is expected to continue to weaken as the Federal Reserve embark on its rate-cutting cycle while many of its G-10 counterparts are already nearing its end and with the ballooning U.S. debt. [29]

In Europe, the EUR is expected to strengthen against the USD as EU’s expansive fiscal initiatives may bolster the EUR’s yield advantage, potentially fuelling expectations of stronger regional growth and higher interest rates. [30]

In Asia, the CNY remains one of the lowest volatility currencies against the dollar this year and has generally traded in a tight range. However, CNY could enter a gradual strengthening trend against the dollar as US-China yield spreads narrow further and with the People’s Bank of China’s fixing continue to prioritise currency stability with tolerance for a stronger CNY. [31]

The USD/JPY has spiked above 150 in October fuelled by speculation that a renewed bout of reflationary policy will weigh on the yen. However, USD/JPY is expected to decrease as the weaker dollar trend continue to dominate even though political headwinds to rate hikes have grown. [32]

Source:

[1] U.S. Will Impose New 100% Tariffs Against China, Trump Says and US and China agree to one-year trade truce after Donald Trump-Xi Jinping talks
[2] CPI inflation September 2025: Inflation rate hit 3%, lower than expected
[3] Why has the US government shut down and what does it mean?
[4] Eurozone business activity growth hit 17-month high in October | Euractiv
[5] PMI by S&P Global
[6] China’s new five-year plan sharpens industry, tech focus as US tensions mount | Reuters
[7] A New Blueprint for the 15th Five-Year Plan Period A New Journey for Chinese Modernization–Keynote Speech by H.E. Ambassador Xie Feng at the “Innovation, Openness, Shared Development” Global Dialogue U.S. Session_Embassy of the People’s Republic of China in the United States of America
[8] China’s Long Term Outlook – NBS, Bloomberg Economics
[9] NBS, Bloomberg Economics
[10] NBS, Bloomberg Economics
[11] U.S. Will Impose New 100% Tariffs Against China, Trump Says
[12] Wall St scales fresh highs on tech earnings, US-China trade optimism | Reuters
[13] Tradingview
[14] UOB 4Q 2025 Investment Outlook
[15] J. Safra Sarasin Cross-Asset Weekly 24 October 2025
[16] Tradingview
[17] Tradingview
[18] European Stocks Are Forecast to Rise 5% After ‘Stellar’ Start | Goldman Sachs
[19] Why Hong Kong’s Hang Seng Index is Outperforming Global Markets
[20] CPC plenum concludes, adopting recommendations for China’s 15th Five-Year Plan
[21] China vows to raise household consumption ‘significantly’ | Reuters
[22] UOB 4Q 2025 Investment Outlook
[23] Bloomberg
[24] Bloomberg
[25] UOB 4Q 2025 Investment Outlook
[26] The Great Debasement Debate Is Rippling Across Global Markets – Bloomberg
[27] The Great Debasement Debate Is Rippling Across Global Markets – Bloomberg
[28] Tradingview
[29] UOB 4Q 2025 Investment Outlook
[30] UOB 4Q 2025 Investment Outlook
[31] Asia FX Talking: Renminbi stable, but rest of the region lags | articles | ING Think
[32] Why we’re raising our USD/JPY forecasts | articles | ING Think