The conflict in the Middle East was a source of persistent uncertainty, with hopes of a settlement and renewed escalations alternating several times. The oil price served as a barometer: a barrel of Brent rose from just under USD 75 at the end of June to over USD 100 at times in September, ending the quarter at USD 98. The energy sector was the main beneficiary. Nevertheless, the global economy proved resilient. In September, purchasing managers' indices reached their highest level since mid-2021 in the US and since early 2023 in the eurozone. Heavy investment in AI infrastructure provided important support for the economy.
The rise in energy prices caused inflation to pick up again in many places and, together with high levels of government debt, increased the pressure on bond markets. In August, US government debt exceeded the USD 40 trillion mark for the first time. The growing supply of bonds weighed further on the market, as large technology companies are increasingly financing their AI investments with debt. After Fed Chair Kevin Warsh declared fighting inflation his top priority at Jackson Hole, the Fed, the ECB and the Bank of Japan raised their policy rates in September. The yield on 30-year US Treasuries rose to 5.60%, its highest level since 2002. France also increasingly came into focus, with the yield on 10-year government bonds climbing from 3.55% to 4.84% over the course of the quarter.
Artificial intelligence remained the key driver of equity markets. July was initially dominated by disillusionment: the Magnificent 7 delivered mixed performance, the low-cost Chinese AI model “Kimi K3” called the high levels of investment into question, and a credit-fuelled memory chip bubble burst in South Korea. In August, strong corporate results, particularly from Nvidia, triggered a powerful recovery. In September, Meta's new AI assistant sparked a fresh wave of euphoria and drove the Nasdaq 100 to a record high. It is worth noting that earnings expectations rose faster than share prices, so forward valuations fell in most regions despite the price gains. The extent to which the rally was concentrated in a few heavyweights was evident in the US market: the S&P 500 Equal Weight Index lagged its capitalisation-weighted counterpart by just under 4.5 percentage points in the third quarter.
