Oil shock and AI-spending jitters test markets as rate hikes return to the agenda
This week at a glance
Oil and AI spending set the tone. Brent crude jumped to about US$117 a barrel, its highest level in months, after Houthi strikes on Saudi Arabia revived fears of a wider Middle East conflict. Meta lifted its 2026 capex guidance to US$135–145bn, reigniting AI-spend worries and sending the Nasdaq down 2.6% on Thursday. Investors rotated into defensives and bonds, with US 10-year yields falling 9 basis points to 5.00%. At home, Q3 CPI on 28 October will help decide whether the RBA lifts rates on 3 November, with markets pricing roughly a 60–65% chance. Markets expect the Fed to hold on 28 October but price a December hike.
Our view: Stay diversified, keep duration in high-quality bonds with yields near 5%, and use volatility in quality growth names rather than chasing energy after a sharp run.
Australia Market
ASX: The S&P/ASX 200 closed Friday at 8,795.2, down about 0.1% for the week — its first weekly loss in four weeks. The index drifted lower from Wednesday’s 8,831 as hawkish RBA commentary lifted the odds of another rate rise. On Friday, banks rallied (Financials +1.7%) while Materials fell 3.7% as gold slid and BHP’s copper output disappointed.
Sectors: Defensive and rate-sensitive income sectors held up best, with Financials, Consumer Discretionary and Utilities leading on Friday. Materials was the clear laggard: a third lithium bear market in a decade (Pilbara Minerals, Liontown and Mineral Resources down 19–34% over a month), Fortescue’s guidance warning and gold’s 4% weekly fall all weighed.
Corporate activity: Takeover interest returned. EQT agreed to buy Cleanaway at AUD 3.095 a share (about AUD 9.3bn including debt), and Japan’s Daiichi Life made an indicative AUD 11.80 a share offer for Challenger, in which it already owns 20.4%.
RBA & macro: The cash rate is 4.60% after four rises this year. Deputy Governor Hauser said on 21 October that the inflation outlook was worse than in August, with oil about a third above RBA assumptions. Markets now price roughly a 60–65% chance of a fifth hike on 3 November, and fully price one by February 2027. Flash October PMIs were weak, with services falling to 47.8 from 51.9, and Domain reported a record 4.7% fall in capital-city house prices in the September quarter.
US Market
Indices: A choppy week ended mixed. The Dow rose 0.4% to 52,215 despite a 650-point fall on Friday, while the S&P 500 lost 0.5% to 7,624 and the Nasdaq fell 0.7% to 25,955. The S&P 500 is still up about 13% over the past year.
Drivers: Stocks rose through Wednesday after strong results from SpaceX and Super Micro, but Meta’s higher capex guidance sparked Thursday’s AI sell-off (S&P ‑1.2%, Nasdaq ‑2.6%). Friday’s oil spike on Middle East escalation added pressure.
Breadth & earnings: Under the surface, the average S&P 500 stock rose 1.1% while the Magnificent 7 fell 2.0% — a sign that money is rotating rather than leaving the market. Of the 24% of S&P companies that have reported Q3, 83% beat estimates, and blended earnings growth is running near 30%.
Fed: The FOMC decides on 28 October. Markets expect a hold at 3.75–4.00% but price a roughly 76–80% chance of a December hike, with September CPI at 3.7% y/y and oil adding to inflation risk.
Fixed Income
Australia: Australian government bond yields fell only modestly — 3Y to 4.85% and 10Y to 5.21% — lagging the US rally because hawkish RBA comments lifted near-term hike expectations. Australian 10Y yields are up about 1 percentage point over the past year, and the AU–US 10Y spread is about +21bps. This week’s Q3 CPI is the key risk for the front end.
US Treasuries: Yields rose early in the week (10Y peaked at 5.15% on Wednesday), then fell 17bps on Thursday — the biggest one-day drop in more than a year — as investors sought safety during the AI sell-off and Middle East escalation. Over the week the 2Y fell 5bps to 4.69%, the 10Y 9bps to 5.00% and the 30Y 10bps to 5.33%, flattening the curve.
Credit: US investment-grade spreads widened 4bps to 89bps and high-yield 9bps to 340bps, with most of the move on Thursday’s risk-off day. Spreads remain tight by historical standards, so we prefer quality over yield-chasing in high yield.
Our take: With US and Australian 10-year yields both above 5%, high-quality bonds again offer meaningful income and a buffer if growth slows. We would add duration gradually rather than all at once, given hike risk from the RBA and Fed.
FX & Commodities
Energy: Oil surged on Friday after Houthi attacks on Saudi Arabia and expectations of renewed US strikes on Iran; Saudi Aramco reportedly told staff to evacuate its Dhahran headquarters. Front-month Brent closed near USD 117 a barrel, up roughly 5–6% on the week, and WTI rose about 4% to USD 103. US crude inventories fell 3.1m barrels, more than expected, and the US Energy Department announced a 315,000-barrel loan from its Northeast heating-oil reserve as heating-oil futures neared record levels.
Gold & metals: Gold fell 4.1% to about USD 4,008 an ounce, its lowest since mid-July, as hotter US inflation and the oil spike pushed out rate-cut hopes. Copper slipped 1% to a five-week low during the AI sell-off. Iron ore was steady at about USD 91 a tonne.
FX: The US Dollar Index was flat at 101.8. AUD/USD rose about 1.3% to 0.7036, near a five-week high, as hawkish RBA comments widened the expected rate gap with the Fed. That also lifted the AUD against the CNY by about 1%. The yen firmed 0.7% to 156.9 per US dollar on safe-haven demand.
Also reporting this week: Boeing, Coca-Cola, UPS, Eli Lilly, Starbucks, Chevron and ExxonMobil, among 179 S&P 500 companies.
Questions about how this week’s moves could affect your portfolio? Speak with your BOA Private Wealth adviser.
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