Last week markets were relatively well behaved amidst the data black out imposed by the U.S. government shutdown and U.S./China trade tensions while the U.S. reporting season got off to a relatively strong start.

Gold hits an air pocket

The week's most dramatic price action occurred in precious metals. Gold surged to record highs above $4,350 per ounce mid-week, with year-to-date gains exceeding 60%, while silver climbed even more aggressively with 74% YTD returns. However, Wednesday brought a sharp reversal with gold plummeting 5.5% and silver down 7% in their largest single-day declines since 2020. The correction highlighted the increasingly speculative nature of recent precious metals buying, with Western investors and ETFs driving $26 billion of inflows this year – a marked shift from the central bank accumulation that characterized previous rallies.

U.S.-China Trade Dynamics

Trade tensions between Washington and Beijing dominated sentiment throughout the week. Initial concerns about potential 100% tariffs on Chinese goods in response to Chinese rare earth export restrictions eased somewhat after President Trump indicated a preference for negotiation, stating "we're going to do fine with China." The scheduled APEC summit meeting between Trump and Xi at month-end remains uncertain, though lower-level discussions continue. Notably, Chinese rare earth magnet exports to the U.S. plunged 29% in September, underscoring supply chain vulnerabilities that drove Australia and the U.S. to announce an $8.5 billion critical minerals partnership.

Australian Labour Market Surprise

Australia's unemployment rate jumped to 4.5% in September, exceeding all forecasts including the RBA's 4.3% projection. The surprise stemmed from increased participation rather than job losses, with employment actually rising. Markets immediately repriced RBA expectations, fully pricing a December rate cut. Australian 10-year yields dropped 22 basis points over the week, substantially outpacing moves in other developed markets.

Regional Banking Concerns

U.S. regional banks faced renewed scrutiny after fraud-related loan losses at two smaller institutions triggered sector-wide concerns. The KRE regional banking ETF fell 5%, with financials becoming the worst-performing S&P 500 sector. While major banks like Morgan Stanley and Bank of America posted strong earnings driven by robust trading revenues, questions about credit quality in the regional banking sector persist and the outlook statements have been more guarded.

Central Bank Divergence

The Federal Reserve appears headed for another rate cut at month-end, though members remain divided on pace. The Bank of Canada faces upward inflation pressure with CPI rising to 2.4%, complicating its easing trajectory. Japan appointed its first female Prime Minister, Sanae Takaichi, who pledged Bank of Japan independence while her new Finance Minister suggested the yen should strengthen toward 100-120 versus current 150 levels.

Market Performance

Despite volatility, U.S. equities proved resilient with the Nasdaq gaining ground while the Russell 2000 was on the back foot to a degree. Chinese markets struggled, with the Hang Seng exhibiting some volatility when Q3 GDP showed export strength but weak domestic consumption before recovering as trade tensions dissipated again. Other emerging markets fared better from being well out of the limelight. 

Looking ahead, markets face continued uncertainty around trade policy implementation, the pace of Fed easing, and whether China's export-led growth model can be sustained amid rising global protectionism or whether the US can afford too import inflation. The dramatic reversal in precious metals also serves as a reminder that correlations can break down rapidly when positioning becomes stretched.