Muzinich Weekly Market Comment: All is fine
Insight
November 3, 2025
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October was anything but a straightforward month for investors. As reflected by our preferred market sentiment index, the VIX, volatility spiked to 25 intra-month - the highest level since Liberation Day. Investors had to contend with a series of challenges including ongoing posturing between China and the US ahead of the scheduled meeting in South Korea, and concerns over the health of the small to mid-sized US banking sector following several surprise defaults in household names. Investors additionally had to navigate markets without government safety nets: Japan began the month without a prime minister, France seemed to be in chaos and unable to form a stable coalition government, while the US government remained in shutdown.
Equity bulls, meanwhile, waited for Q3 earnings and fresh AI updates. It’s mind-blowing that AI-related stocks have accounted for 75% of S&P 500 returns, 80% of earnings growth, and 90% of capital spending growth since ChatGPT launched in November 2022.[1]
And as we close out October - it turns out, all is fine!
In October, most major government bond curves experienced a mild bull-flattening as pricing data showed no signs of acceleration, global activity remained robust, both China and Eurozone Q3 growth exceeded estimates and central banks delivered policy decisions largely in line with expectations. The notable exception was the UK, where Gilt yields fell 20–30 basis points (bps) along the curve, with the long-end outperforming. The catalyst was an unexpected drop in core inflation to 3.5%, prompting investors to reassess the likelihood of a Bank of England rate cut in December.
Meanwhile, Euro Area HICP (Harmonised Index of Consumer Prices) inflation decelerated to 2.1% year-over-year (YoY) in October from 2.2% in September, reinforcing the consensus that tariffs are proving disinflationary outside the US. In contrast, the anticipated inflation spike in the US from tariffs has not materialized.
One of the few notable data releases showed both headline and core US inflation printing at 3.0% YoY, below expectations. With four months of data since the “liberation tariffs” were implemented, the evidence consistently indicates that for every US$1 increase in tariff costs, firms have passed on only about US$0.26 to consumers.[2]
Given that core goods represent 18% of the headline inflation and 23% of the core inflation baskets, the temporary tariff-related effect on inflation – taking 17.9% [3] as an average tariff rate and a 26% pass-through - equates to an uplift of 0.86% for headline, and 1.08% for core inflation. This suggests that once these one-off effects roll out of the index next year, US inflation will likely be close to the Federal Open Market Committee’s (FOMC’s) 2% objective.
Among the three major central bank meetings this week – the Bank of Japan, the European Central Bank and FOMC – it was the Federal Reserve that injected a ripple of excitement. While the Committee’s policy decisions were in line with expectations, the FOMC lowered the target range for the federal funds rate by 25bps to 3.75%–4.00% and effectively ended quantitative tightening (QT) by stopping the shrinkage of its asset holdings beginning 1st December.
The surprise came during the press conference, where Chair Powell struck a notably hawkish tone, stating that “a further reduction in the policy rate at the December meeting is not a foregone conclusion”.[4] He was upbeat about economic growth, sanguine on the labour market and noted that the impact of tariffs on PCE (Personal Consumption Expenditures) inflation appears to be in the range of 0.5–0.6%, below earlier forecasts. 4
Overall, Powell’s remarks appeared aimed at preserving policy flexibility rather than signaling a predetermined path, particularly amid heightened uncertainty from limited data caused by the government shutdown. In response, the overnight interest rate market has revised the probability of a December rate cut sharply lower, from 98% to 60%.[5]
Corporate credit had a strong month, with all sub-asset classes (US, EU, and emerging market (EM) credit) generating positive total returns. EM credit was the standout performer, outperforming in both investment-grade and high-yield segments. EM is back in favour, supported by consistent fund inflows since the summer, totaling US$16.6 bn year to date.[6] The macro backdrop of easing global financial conditions, coupled with a string of positive geopolitical developments, has prompted investors to reassess positioning; with EM credit returns outperforming their US and EU peers, the urgency to cover possible underweights has intensified.
It was a great month for geopolitics. Japan appointed a new Prime Minister, Sanae Takaichi, who is expected to pursue an Abenomics-style agenda centered on monetary easing, fiscal stimulus and structural reform. In Argentina, President Javier Milei’s libertarian party scored a major victory in the midterm legislative elections, providing renewed momentum for his free-market reform programme.
However, President Trump was the primary driver of positive headlines and market sentiment in October. He first secured a ceasefire agreement between Israel and Hamas, which took effect on 10th October. This was followed by a dramatic pivot away from Russia, with new sanctions imposed on Russian oil giants Rosneft and Lukoil, citing Moscow’s lack of genuine commitment to peace in Ukraine.
Next on the agenda for the US administration was the APEC Summit in South Korea, where President Trump announced a series of major trade and investment agreements with Japan and South Korea. The formal conclusion of the trade deals included Japan’s pledge of up to US$550 billion in US investments through government-linked funds, while South Korea committed US$350 billion, including US$150 billion for shipbuilding and US$200 billion within a broader investment framework. In return, the US agreed to lower reciprocal tariff rates for both nations to 15%.[7]
This left the main event of the month, the highly anticipated meeting between President Trump and President Xi – their first face-to-face encounter in six years. The meeting, by all accounts, could not have gone better. Ahead of the talks, Xi remarked, “I have always believed that China’s development goes hand in hand with your vision to make America great again”.8 Trump, in turn, was ebullient, describing the discussions as a “12 out of 10” [8].
The meeting concluded with a comprehensive trade agreement under which the US agreed to cut fentanyl-related tariffs on Chinese goods by half – effective immediately – bringing the overall tariff rate on China back to 20%, the level in place prior to Liberation Day. In return, China committed to resuming large-scale soybean purchases, pledging to buy a minimum of 25 million tons annually for the next three years, and to suspend its rare-earth licensing regime for at least one year. Additionally, both leaders agreed to enhance cooperation on issues related to Ukraine.[9]
Currency and commodity markets moved accordingly. The US dollar appreciated against major global currencies, driven by unexpectedly hawkish central bank commentary and optimism surrounding the recent trade deals, which are expected to attract substantial foreign direct investment into the United States. The Japanese yen, meanwhile, underperformed, weakening broadly in line with the new prime minister’s Abenomics-style agenda.
Energy prices ended the month slightly lower as rising signs of oversupply heading into 2026 outweighed the impact of sanctions on Russian suppliers. Metals, however, continued to rally – precious metals were supported by a demand surge (with palladium up 14% for the month), while industrial metals rose on supply constraints, led by copper gaining 6%.
Finally, equity markets extended their “melt-up” in October, with the Bloomberg World Large & Mid Cap Index rising 2%, led by strong performance in Asia. The Nikkei 225 gained over 14%, only to be surpassed by South Korea’s KOSPI Index, which jumped 15.7%. In the US, technology stocks continued to lead, with the Nasdaq advancing more than 4%.
As for AI, at the APEC Summit, NVIDIA CEO Jensen Huang highlighted that ongoing improvements in AI models are driving increased investment in the technology, creating a “virtuous cycle” of innovation and growth. He noted that we are at the start of a decade-long build-out of a new technological era.[10]
As a final thought, market capitalization of NVIDIA + Microsoft is larger than Japan’s entire equity market! (See Chart of the Week).
Chart of the Week: NVIDIA + Microsoft rule the world?
Source: Bloomberg, as of 31st October 2025. For illustrative purposes only.
Past performance is not a reliable indicator of current or future results.
References to specific companies is for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account.
This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Reference to the names of each company mentioned in this communication should not be construed as investment advice or investment recommendation of those companies. The opinions expressed by Muzinich & Co. are as of October 31, 2025, and may change without notice. All data figures are from Bloomberg, as of October 31, 2025, unless otherwise stated.
References
[1] JP Morgan, Eye on the Market, “The Blob: Capital, China, Chips, Chicago and Chilliwack,” September 24, 2025
[2] Bloomberg, “US REACT: CPI Seals Deal for Half Point of Fed Cuts This Year,” October 24, 2025
[3] The Budget Lab at Yale, “State of US Tariffs: October 30, 2025,” October 30, 2025
[4] Deutsche Bank Research, “October FOMC recap: Dec not a done deal,” October 29, 2025
[5] Bloomberg, as of October 31, 2025
[6] JP Morgan, “EM Corporate Weekly Monitor,” October 24, 2025
[7] Bloomberg, “How Trump Got a $900 Billion Promise From Japan and South Korea,” October 29, 2025
[8] Bloomberg, Australian Financial Review, “Albo cashes in on Trump’s 12-out-of-10 deal that plays for time,” October 30, 2025
[9] UBS Research, October 31, 2025
[10] Bloomberg, CNBC, “Nvidia CEO Jensen Huang says AI is in a ‘virtuous cycle.’ Here’s what he means,” October 31, 2025
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