Muzinich Weekly Market Comment: Deals done, and not
Insight
October 20, 2025
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This past week, market saw increased volatility, but also optimism, driven by deals done and in progress. On the diplomatic front, the Israel-Hamas ceasefire appears to have given President Trump some bandwidth to seek resolutions for the Ukraine-Russia war. President Trump announced he will meet once again with President Putin in two weeks in Budapest, following a meeting with President Zelinski at the close of last week. The possible use of long-range missiles provided by the US to Ukraine will almost certainly be at the centre of the discussion and could increase pressure on Putin to approach an agreement.
Meanwhile, in France, Prime Minister Lecornu survived two non-confidence motions, cutting a deal for Socialist Party support with a promise to suspend the pension reform of 2023—a high price to pay for a sustained government and the opening of the budget discussion in parliament. French bond market spreads versus Bunds retraced (from the high 80’s to around 75), while French equities outperformed European equities after lagging for a few weeks. The starting point in the budget discussion is a 4.7% deficit target (as a percentage of GDP) for 2026 after a likely 5.4% in 2025. The budget draft projects EUR 17bn of spendings cuts, with a higher tax for EUR 14 bn. With the discussion at the Assembly only just starting, we would expect numerous amendments to the initial project, with a more probable outcome closer to 5%, a target still compatible with EU recommendations as France is under an Excessive Deficit Procedure to converge towards 3% over time. We expect a “noisy” debate over the next two months.
S&P downgraded France rating from AA- to A+, stable outlook, based on arguments very similar to Fitch when it recently cut the country’s credit rating. The absence of political stability put into question the debt dynamic and the ability of any government to keep the deficit trajectory on the necessary reduction path. The suspension of the 2023 pension reform, and the promise not to use the now infamous article 49.3 to pass the budget, convinced S&P to reduce France’s rating into the single A club.
German legislators published a revised Draft Budgetary Plan for 2026, as well as a multi-year plan for 2027-2029 after receiving EU commission support for expanded Germany infrastructure spending. This document showed some differences compared with previous plans. While 2025 shows an increase versus 2024, it is trailing initial expectations, possibly due to spending delays which are anticipated to be more than caught up in 2026, forcing an increase in the federal borrowing requirement[1]. This did not affect Bund yields, in keeping with the week’s general trend of lower bond yields which helped compensate for higher equity volatility and wider spreads. Most European governments are well advanced in their funding programmes so far in 2025, so while this news is unlikely to derail the powerful Bund rally at this time, it could come back to haunt budget discussions and markets alike in early 2026 when funding needs will be updated with final budget plans.
Budget deals were harder to come by within the US itself, where the continuing US government shutdown wears on without any movement to resolve political party differences, seemingly keeping markets happy enough in the assurance that with less government spending, bond yields should fall. Indeed, Federal Reserve (Fed) Chair Powell confirmed that a 25-basis point (bps) cut was a decent possibility for the meeting later this month on the back of further signs that employment seems fragile despite the absence of a jobs report publication. Many other Federal Open Market Committee members appear to be aligned with this option.
The US has also seen tension resurface in its trade dealings with China. After China tightened its export controls on rare earths (see Chart of the Week)—critical materials for US ship makers—President Trump threatened to raise tariffs on Chinese imports to the US by to 145%. By the end of the week, however, it was reported that President Trump and President Xi would meet in several weeks with the intent to revisit the matter. Is this a deal that can be finessed, again?
Credit spreads were also tested in the US during the week by actual credit events. While markets seemed to recover from September default events at subprime auto lender Tricolor and at auto parts maker First Brands, two regional US banks, Zions Bancorp and Western Alliance Bancorp, appear to have reported fraud to loans investing in commercial mortgages. Their equity prices fell significantly, taking many US regional bank share prices down as well. These events raised some fears of a credit episode that could impact the US banking system, such as the one that previously affected Silicon Valley Bank and the regional bank complex. As often happens when volatility rises well above 20 on the VIX index (on our preferred gauge of volatility), credit spreads widened. However, in terms of total returns for the week, the fall in bond yields mitigated negative excess returns. Strong published Q3 results from the largest US banks and corporates helped stabilize the broader credit markets.
While markets generally recovered and stabilized over the course of the week, there is an undercurrent of unrest and uncertainty as evidenced by the meteoric rise of nearly 10% in the price of gold since the start of the month to US$4200 per oz (even if that price backed off on Friday as credit markets firmed up). At the same time, the value of USD is mostly stable, according to the ICE DXY index. The combination of central bank buying and speculation is likely boosting the demand for precious metals, specifically gold. We note that Bitcoin saw a meaningful correction over the past two weeks, despite the news flow concerning US regional banks. More than ever, metals play a role of refuge these days.
Looking ahead, the US Bureau of Labor Statistics is expected to release the US CPI for September on Friday 24th October. Headline inflation is expected to rise by 0.4% month-over-month, with the core price index rising by 0.3%. This would put both year-over-year numbers at approximately 3.1%. Although not insignificant, such a rise would be unlikely to derail market expectations for an October cut but might limit that cut to 25bps.
Japan will name a new Prime Minister as the National Diet meets in extraordinary session on 21st October. The LDP and Ishin coalition, if maintained, is likely to make Mrs. Takaichi in charge of quickly forming a new cabinet.
Finally, China Q3 GDP is expected to be released early in the week with consensus expecting some deceleration, taking into account both soft consumption and capital expenditure. Overall, the expectations are for 4.5% growth (from 5.2%). This data will come just before the start of the Fourth Plenum, where the 15th Five-Year plan is expected to be discussed. October’s PMI will be released by the end of the month, following a surprisingly solid September print.
Chart of the Week: The World’s Rare Earths (by Country)
Source: Statista, Data from the United States Geological Survey as of April 15, 2024. 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.
References
[1] Freshfields, ‘Inside Infrastructure: Germany braces for the boom,’ October 16, 2025
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 17, 2025, and may change without notice. All data figures are from Bloomberg, as of October 17, 2025, unless otherwise stated.
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