Financial markets extended their recovery in the third quarter, supported by resilient corporate earnings, moderating inflation and strong capital investment related to artificial intelligence. The report described investor sentiment as improving despite geopolitical tension and fiscal uncertainty, as central banks adopted a more patient, wait-and-watch stance. Inflation continued to cool across major developed economies. In the euro area, price growth settled close to the European Central Bank's 2% target and the ECB held rates steady through September. In the US, economic data pointed to modestly slower growth and a softening labour market, with inflation slightly above target.
In emerging markets, India's GDP growth was 7.8% in the latest quarter, and the report noted that exports to the US accounted for only 3% of its GDP. Global equities had another strong quarter. The S&P 500 and Nasdaq reached new highs, and breadth improved as small and mid-cap stocks began to participate. In euro and sterling terms, returns were muted because dollar weakness offset much of the nominal gains. The report identified artificial intelligence and cloud infrastructure as the defining themes, noting that heavy spending by the largest technology firms had put pressure on margins in some segments.
US Treasury yields fluctuated but ended the quarter near mid-year levels. Credit markets were active, with strong issuance linked to infrastructure, energy transition and AI-related financing, and spreads on investment-grade and high-yield bonds tightened modestly. The US dollar softened through the quarter, the euro extended its year-to-date gains, and the yen remained under pressure amid the Bank of Japan's accommodative stance. Gold surged to multi-decade highs, while oil prices eased from mid-year peaks as supply expectations rose and inventories built.
On geopolitics, diplomatic efforts on Gaza gained tentative traction late in the quarter, the conflict between Russia and Ukraine continued without a decisive shift, and tensions between China and Taiwan persisted. The report also discussed the outlook for the final quarter, including the pace of growth and inflation, financing costs, and regulatory scrutiny of AI and technology.
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