Key Highlights

• Investor sentiment split amid policy uncertainty
• USD stability reshapes global earnings outlook
• ECB prefers to remain a sideshow, at its own risk
• Summit season in APAC as Trump arrives

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What you need to know

Investor sentiment is split as we end the month, with some investors fearful of a trick while others expect a treat from monetary and fiscal policy in the days ahead. Will rate cuts boost equities or drag down bond yields? Will holds help currencies or harm growth as the world rethinks global supply chains and trade? The lack of hard economic data to back up the models showing that stable growth and sticky inflation have not led to stagflation has resulted in positioning that is barbell-shaped. However, rebalancing and rotational pressure are difficult to calculate given the ongoing uncertainty.

Clocks changed in Europe and the U.K. this week, which will also see rate decisions by the BoJ, ECB and FOMC, more Q3 earnings reports, with a focus on the Magnificent Seven, and the APEC Summit, where Trump and Xi are expected to meet. Geopolitical concerns will continue with midterm elections in Argentina, a confidence vote in France, the ongoing government shutdown in the U.S., new sanctions on Russian oil and, potentially, more tariffs against China.

There are three specific risks in the week ahead. First, the Fed may end quantitative tightening (QT), with the market viewing this as further easing and, depending on FOMC guidance, more than just insurance against liquidity concerns in the money market. Second, we may see less demand for bonds as markets weigh month-end rebalancing pressure against risk budgets headed into year-end equity returns. Finally, there is risk that the Bank of Japan will hikes rates, and any hawkish guidance could move the JPY significantly, impacting the volatility and return profiles for APAC assets. Trade talks and hopes for deals with China, South Korea, Canada and India are also important but will likely be more drawn out as we learned in April. Month-end in October brings the Halloween holiday and possibly more tricks than treats for investors as they, along with the Fed, head into year-end without hard economic data to guide them

The dollar’s role in Q3 sets up Q4 expectations

_{EXHIBIT #1: TOP 20 LARGE CAP SHARES OUTSIDE THE U.S. VS. USD INDEX}

_Source: BNY

Our take: Share performance outside the U.S. has been the big story in 2025, with larger USD returns in Europe (30%), Japan (27%), the U.K. (25%), Canada (25%) and China (21%) than for the NASDAQ (20%) or Dow Jones Industrial Average (11%). Much of the debate in the U.S. about value, bubbles and U.S. exceptionalism has revolved around the Magnificent Seven. Microsoft, Google and Meta will disclose their earnings on Wednesday, while Apple and Amazon are due to report on Thursday – representing $16tn in U.S. market capitalization. Most of these companies earn as much revenue outside the U.S. as they do domestically. The role of the USD is important. The dollar has been largely stable in Q3, remaining at or above 99 on the U.S. Dollar Index, so earnings abroad will be driven less by currency translation and more by organic growth.

Forward look: Tariffs dramatically changed the role of the dollar in driving growth at foreign companies. The focus this week will be on how EMEA companies that serve U.S. consumers – like carmakers and pharmaceutical companies – fare given these circumstances. The relative stability of the dollar has leveled off some of the outperformance we’ve seen in the rest of the world. However, there is a risk that earnings will surprise to the upside because of this stability and the resilience of U.S. consumers. The performance of non-U.S. equities is also another way of gauging the health of the U.S. economy, given the dearth of economic data because of the government shutdown. In the longer term, the asset allocation risk in 2026 is that U.S. investors will look abroad for returns if shares of the Magnificent Seven fall to more average numbers. The week ahead will be important for the guidance provided by CEOs on investments in the new year.

What we’re watching

U.S. focus on Fed rate cuts and guidance along with more survey data

_{EXHIBIT #2: U.S. CONFERENCE BOARD CONSUMER CONFIDENCE INDEX}

Source: BNY, Bloomberg

Our take: Even without government-produced data this week, we’ll have plenty to focus on. Top of mind is the FOMC meeting, where a 25bp reduction in the funds rate is nearly assured. We also think the central bank, facing ever-tighter funding rates as reserves decline, will curtail quantitative tightening. Data that will be published include the Conference Board Consumer Confidence Index. We’re keeping an eye on the number of respondents saying jobs are plentiful versus those who say they’re not plentiful or they’re hard to get, which has deteriorated markedly lately.

The Bank of Canada (BoC) announces its latest monetary policy decision on Wednesday. We expect the central bank to cut the overnight target rate by 25bp and provide new economic forecasts in its Monetary Policy Report, which it did not do in its previous release. We will also see Canadian payroll employment and GDP for August on Thursday and Friday, respectively. These will be critical in assessing the future interest rate path in Canada.

Forward look: We continue to expect further rate cuts from the FOMC after next week, particularly if the U.S. private economic data suggest ongoing labor market weakness. The guidance from Chair Powell on the direction of further cuts will clearly be crucial as well to the shifting outlooks for 2026 policy. As for Canada, the trade tariff issues from last week and the likely meeting of U.S. and Canada leaders at APEC in South Korea make clear that more volatility in FX is likely.

EMEA: PMIs keeping ECB in a good place

_{EXHIBIT #3:  CURRENT EUR PERFORMANCE VS. LAST FOUR FORECAST ROUND CENTRAL TENDENCY LEVELS}

_{Source: BNY}

Our take: Any lingering hope for the ECB’s doves to make their case for a December cut have been dashed by the preliminary October PMI prints. The reported noted that growth was recorded across both key sectors, and led by services where the latest increase in business activity was the strongest since August 2024. However, the inflation outlook was mixed: input price growth softened for both goods and services, while “manufacturers increased their selling prices for the first time in six months, joining the services sector in recording inflation. Service providers raised charges at a solid pace that was sharper than seen in September.” This would be seen as a good environment for corporate earnings, as lower costs, but increased output prices can help with ongoing margin expansion. The ECB will clearly take the output view more seriously and stress the need to anchor price expectations. Meanwhile, if input costs are also falling or not registering strong growth, central bankers may also argue that there is little need for relief through easier financial conditions via the interest rate channel. President Lagarde’s post-decision press conference will likely reiterate the notion of the Eurozone being in “a good place,” but for now there is only a need to pay some lip service to downside risks from supply shocks and domestic demand.

Forward look: Despite the good run of data and further validation of a dovish Fed view, the market appears to be increasingly comfortable with the view that the EUR has peaked around these levels. The ECB should at least acknowledge that current EURUSD levels remain well ahead of technical assumptions and stabilizing at 1.16 is essentially bringing forward the staff foreign exchange projection by a year and well into the highest percentiles for 2025 (Exhibit #3). Softer pass-through is likely one of the channels through which input prices are being reduced, and if savings are not being passed onto households then the ECB may warn of distortions impacting transmission. This could lead to more serious consequences for the Eurozone’s financial conditions further down the line. For now, our data also indicate that EUR hedges have been gradually reduced by cross-border investors and the currency has benefited from the carry unwind, especially having navigated political matters in France relatively smoothly. The ECB decision aside, the week ahead will see a host of key releases out of Germany, including the Ifo survey, preliminary October CPI and Q3 GDP. On a seasonally-adjusted basis growth is expected to be flat, and given the contraction from Q2 the risks of a technical recession again, only three quarters after exiting the previous one, remain high.

APAC: Summits galore but asset allocation stays defensive

_{EXHIBIT #4: APAC CURRENCIES, WEEKLY HOLDINGS AND FLOWS}

_Source: BNY

Our take: The world’s attention will turn to APAC this week as key summits are held across the region. The ASEAN and APEC gatherings offer crucial opportunities for bilateral talks, with the Trump-Xi summit at the forefront of risk drivers. Beijing has not yet fully confirmed the meeting is taking place and given the U.S. president’s previous musings, the path toward the encounter may yet be a bumpy one, while the recent round of trade talks in Malaysia indicates that the de-escalation mechanism at the highest levels remains in place. Even if the leadership meeting – which Beijing says plays an “irreplaceable strategic guiding role in China–U.S. relations” – does manage to buy sentiment more time, we continue to see a strong prospect of the current rolling agreement framework becoming more permanent. However, establishing dialogue is crucial and with the recent China Communist Party Central Committee Plenum out of the way, external affairs can take precedence in Beijing between now and the National People’s Congress next year. Another crucial summit which Seoul believes will take place is between President Trump and his North Korean counterpart, Kim Jong-un. Although of limited economic consequence, re-establishing the dialogue first established during Trump’s first term will be of import, especially with North Korea’s current role in the Ukraine conflict. APEC also represents an opportunity for new Japanese Prime Minister Takaichi to make her debut on the global stage and provide some early glimpses of her foreign policy stance.

Forward look: The “missing” summit is between Indian Prime Minister Modi and President Trump at the ASEAN summit, which Modi has committed to attend only virtually. The recent ratcheting up of sanctions against Russian crude oil prices will have material consequences for India, but so far there is little sign of either side giving ground. However, this has not affected INR’s holdings position, which remains the standout among APAC currencies (Exhibit #4). Nonetheless, with iFlow Carry still in risk-off mood, the high/low-yield divergence is becoming very clear on a cross-border basis. The currencies without strong goods or services export surpluses and considered as having carry status are being net sold from an overheld position, while the funders with heavy savings underpinning low yields are seeing clear recovery and leading the carry unwind globally. They are even disregarding the moves in the JPY, whose ongoing weakness normally would trigger some window guidance on APAC currencies in response to the weight of the JPY in regional exchange rate baskets. As JPY moves are currently seen as a derivative of political decisions rather than monetary policy, regional central banks will likely apply some tolerance for now and wait for Thursday’s BoJ decision to assess whether the new government will lead to a material shift in the BoJ’s stance.

Bottom line

As investors navigate the final quarter of 2025, global markets appear delicately balanced between opportunity and fragility. The interplay of monetary policy adjustments, fiscal responses and geopolitical crosscurrents will drive volatility into year-end. The Federal Reserve’s expected rate cut, and potential QT curtailment highlight a shift toward liquidity support, yet investors must remain wary of interpreting easing as a panacea for slowing growth. Outside the U.S., stable dollar dynamics could amplify earnings surprises in Europe and Asia, offering diversification potential for investors rebalancing away from U.S. mega-cap concentration. Meanwhile, the ECB’s cautious optimism contrasts with APAC’s defensive stance amid currency divergence and trade uncertainties. As the policy narrative evolves, disciplined portfolio construction, cross-border diversification and a focus on real earnings drivers – rather than sentiment swings – will define successful positioning. Forward-looking investors should stay nimble, emphasizing global balance and flexibility as monetary and geopolitical developments unfold into 2026.

Calendar for October 25–November 1

Central bank decisions

Chile, BCC (October 28, Tuesday) – The BCC is expected to keep rates unchanged at 4.75%, which still makes the CLP one of the relative funding currencies in the region. This will likely help the currency avoid additional unwinding as it didn’t benefit much from carry status, but the current real rate buffer is still relatively small and sequential inflation is expected to remain robust. However, activity levels are showing signs of strain but without much impact on inflation dynamics yet. We expect a cautious tone on the currency to prevail in the home stretch toward the presidential election and if there is realignment coming through along the lines of Argentina or Bolivia, asset performance could strengthen based on recent experience.

Canada, BoC (October 29, Wednesday) – Despite the most recent hotter-than-expected CPI in Canada, we still believe the Bank of Canada will cut rates 25bp on Wednesday. The November Monetary Policy Report will feature explicit forecasts after having eschewed them in its previous report in July. This may indicate what to expect for December, although we think there will be another cut, even if the market is less certain.

U.S., FOMC (October 29, Wednesday) – It’s almost certain the FOMC will cut rates 25bp this Wednesday, especially after Friday’s better-than-expected CPI release for September. We don’t expect much guidance for future meetings at the press conference, given the continued lack of official data, but markets are fully expecting a December cut as well.

Eurozone, ECB (October 30, Thursday) – The ECB is expected to keep rates unchanged at 2.0% and President Lagarde will likely confirm that the Eurozone economy remains “in a good place.” Recent communication by Governing Council members has been clear on the downside price risks but there doesn’t appear to be a heavy skew toward any preemptive action. It would take another set of weak activity data and clear sign of deceleration in prices for the December meeting to turn “live,” but as inflation prints remain at or above target and with the EUR’s levels seemingly peaking, we doubt there will be any urgency, even if the difference in financial conditions between the Eurozone and the U.S. is widening sharply.

Japan, BoJ (October 30, Thursday) – The BoJ is expected to keep its target rate unchanged at 0.50%. Repeated comments by BoJ member surrounding the need for further hikes have gone unheeded as the market continues to digest the policies of the new government and how it interacts with the central bank. We expect such discussions to dominate the post-decision press conference with Governor Ueda. Although the new finance minister has expressed a preference for a stronger JPY, squaring such hopes with her call for a “big” stimulus could prove difficult. Commentary on BoJ independence and policy has been limited for now but tensions could arise down the line.

Colombia, BdlR (October 31, Friday) – No change is expected in the overnight lending rate as the central bank will likely continue to advocate for a high real-rate buffer until trade tensions with the U.S. ease. Inflation is slowing on a sequential basis and some room for monetary easing should materialize in the medium term. However, demand remains high in the economy with robust double-digit growth in retail sales, while the labor market is marginally tightening. iFlow has been showing strong flows into domestic asset markets but the currency will likely remain under pressure as carry trades continue to unwind.

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Event Calendar

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