Froth, Fear, and Friday Falls
Author: Tom McGrath, CIO, 8AM Global
Market overview
Friday’s sharp sell-off marked the first serious test of investor confidence in several months. Valuations had become stretched, positioning was heavily one-way, and the combination of renewed tariff threats and China’s move on rare-earth exports provided the catalyst for a long-overdue correction. What followed was as mechanical as it was fundamental, a sharp reversal of trend-following and leveraged flows that amplified the decline.
At this stage, it looks more like excess being unwound than a structural shift in direction. Both Washington and Beijing have little incentive to let the confrontation escalate, and history suggests such bouts of brinkmanship are usually followed by tactical stabilisation. Markets remain liquid, cash levels are high, and there is no shortage of investors willing to buy weakness. For now, this still feels like an orderly repricing rather than the start of disorder.
The immediate cause of Friday’s rout was the renewed escalation in trade tensions between Washington and Beijing. China’s announcement of sweeping new export controls on rare earths, materials central to semiconductor and defence production, prompted President Trump to threaten a ‘massive’ 100% tariff on Chinese goods and fresh curbs on critical software exports. The timing, just weeks ahead of a planned Xi–Trump meeting in Asia, suggested brinkmanship rather than final policy, but markets reacted poorly to it. Semiconductor shares and AI-linked stocks bore the brunt, while Treasury yields dropped eleven basis points as investors rushed for safety. The dollar, after its best week of the year, eased slightly as risk assets sold off. For all the drama, this remains a confrontation fought through signals and leverage, not yet through enacted measures.
Compounding the unease was the continuing government shutdown in Washington, now beginning to restrict the flow of official data. Several agencies have suspended publication, and the Bureau of Labour Statistics has recalled only a skeleton staff to deliver next week’s CPI, ensuring that Social Security adjustments can proceed. The temporary blackout has introduced an information vacuum at a delicate moment for policy and markets alike. Investors, already uneasy about the tariff rhetoric, are now navigating without the usual economic compass, a reminder of how quickly political dysfunction can become a macro variable in its own right.
Yet the broader picture is not uniformly bleak. Both sides have incentives to temper the rhetoric: Trump faces the political cost of market instability heading into an election year, while Beijing’s manufacturing base has little appetite for another export shock. Global liquidity remains ample, and positioning has already lightened. History suggests that such surges in volatility often fade once the initial policy shock is digested. With substantial cash waiting on the sidelines, the next move is likely to come from investors buying weakness rather than capitulating to it. For me (and I know I may yet eat my words), the episode reads as a recalibration of confidence, not the start of a broader contraction.
Ordinarily, this would have been the week of the September CPI release, a key data point for markets and policymakers alike. However, the government shutdown has delayed the BLS publication until later in the month, removing what would have been a crucial guide to inflation momentum. In its absence, attention will pivot firmly to the banks, whose results should offer the first substantive read on the US economy since the data blackout began. Credit quality, deposit trends and spending patterns will all be scrutinised for signs of stress, but expectations remain broadly constructive. A stable read across the major lenders could help to steady sentiment and remind investors that the underlying economy has, so far, proved resilient to the political noise.
Beyond earnings, much will depend on how Washington and Beijing choose to communicate in the days ahead. Both sides have strong incentives to de-escalate, yet the rhetoric remains unpredictable. Weekend price action in cryptocurrencies, often a high-beta barometer of risk appetite, suggests the sell-off may extend into early trading, with Asia and Europe likely to play catch-up before Wall Street opens. How deep that initial decline runs, and how quickly buyers re-emerge, will set the tone for the remainder of the week. For now, the path of least resistance still looks lower, but any sign of stabilisation from either policymakers or the banking sector could quickly turn sentiment.
US government shut down continues and peace in the Middle East
Ordinarily, without the drama of Friday’s sell-off, the continuing US government shutdown and the ceasefire in the Middle East would have dominated the headlines. The shutdown has now entered a more serious phase, with hundreds of thousands of federal workers furloughed and services curtailed. Farmers, small businesses and contractors are feeling the strain, and public frustration is beginning to build. The political blame game is intensifying, with the administration using selective spending freezes to increase pressure on Democrats, while both sides accuse the other of fiscal irresponsibility. The risk is less about immediate economic damage and more about the growing perception of dysfunction, another factor eroding confidence at the margin.
The Gaza ceasefire, by contrast, offers a glimmer of stability in an otherwise unsettled landscape. The truce appears to be holding, aid flows are increasing, and energy markets have responded with lower prices. It is a welcome reprieve, though unlikely to change the broader mood. The combination of fiscal paralysis in Washington and renewed geopolitical tension elsewhere ensures that the policy risk premium remains elevated. Against that backdrop, attention now turns to how Asia and Europe absorb the fallout from Wall Street’s decline.
Europe
If the US spent the week wrestling with political gridlock, Europe was dealing with a different kind of instability. In France, President Emmanuel Macron reappointed Sébastien Lecornu as prime minister after his resignation earlier in the week, a move widely seen as a last attempt to restore order to a deeply fragmented parliament. Lecornu now faces the unenviable task of steering a 2026 budget through a divided National Assembly by Monday, or risk forcing an emergency funding bill that would all but confirm the paralysis of French politics. Markets were unimpressed: the CAC 40 fell, bank shares led declines, and the spread between French and German ten-year yields widened to more than 80 basis points, the highest since last summer’s snap-election misstep.
France’s predicament is as much fiscal as political. The budget deficit, already the largest in the euro area, could push back toward 6% of GDP if austerity measures stall. Yet the appetite for further belt-tightening is minimal. Socialist deputies want a wealth tax and the rollback of Macron’s pension reform; the centre-right wants spending restraint but no new taxes; and the far left and far right see advantage in collapse and early elections. It is a tableau of competing interests and electoral calculation, one that mirrors, in many respects, the challenge that awaits Keir Starmer’s Labour government in the UK. Austerity is unpopular, but fiscal arithmetic is unforgiving, and credibility with markets can evaporate quickly once confidence in budget discipline fades.
For now, European markets remain broadly stable, helped by easing energy prices and a slightly weaker dollar, but the political undertone has shifted. France’s travails are a reminder that even within Europe’s core, fiscal credibility is now a live market variable. Investors are watching not just growth or inflation, but whether governments can still impose the kind of discipline that once defined the post-Maastricht order.
The UK has good…news?
After a week marked by global turmoil, it may seem like searching for good news is a futile effort, but the UK may have quietly produced some positive developments. Fresh analysis from Pantheon Macroeconomics suggests that productivity is improving at a much faster rate than official figures indicate. By using tax records instead of the increasingly unreliable Labour Force Survey, Pantheon estimates that productivity rose by approximately 2.1% over the past year. This rise is the strongest growth rate since 2018, once the distortions caused by the pandemic are accounted for. If this assessment is accurate, it would represent a rare point of optimism for Chancellor Rachel Reeves, who is facing a challenging fiscal situation ahead of the Budget scheduled for November 26th.
The Office for Budget Responsibility’s next assessment of productivity will be crucial, as it will determine whether Reeves must tighten further to meet her self-imposed fiscal rule of balancing day-to-day spending. A more positive trend could materially ease that pressure. Even allowing for the quirks of the data, the findings challenge the assumption that the UK’s productivity malaise is deepening. They hint instead at an economy that, while sluggish, may be adapting more effectively than feared. For a government wrestling with the unpopularity of spending restraint, that’s a rare and welcome reprieve.
This week…
The coming week will be an essential gauge of whether investors see last Friday’s sell-off as a healthy reset or the start of a broader loss of confidence. Asian and European markets will open under pressure, with the focus firmly on whether buyers re-emerge or retreat. In the US, attention turns to the first wave of earnings, led by the major banks, and to any guidance they offer on credit conditions, loan growth and consumer strength. In the absence of key data, these corporate signals will carry greater weight than usual.
Politics will continue to shape the backdrop. The US government shutdown enters its third week with both sides hardening positions, and the fiscal and data consequences becoming more visible by the day. The Israel–Hamas ceasefire, though fragile, offers the first real prospect of stability in a region that has consumed headlines for two years, while in Europe, France’s renewed political uncertainty keeps the question of fiscal credibility alive.
For markets, the question is whether any of this amounts to more than noise. Global liquidity remains ample, earnings have been resilient so far, and inflation, while sticky, is trending in the right direction. After an emotional week, investors may rediscover their composure. There is still room to believe that what we saw on Friday was not the start of disorder, but a temporary shaking out of excess.
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