Market Snapshot is a weekly view from our portfolio managers, offering sharp, thematic insights into the trends shaping markets right now.
This week in numbers
Last week’s one-day decline of the SPDR S&P Regional Banking ETF.
Sterling money market assets in September.
Market expectations of a 25bps cut by the Fed on October 29.
Past performance is not an indicator of future performance.
Quote of the week
We expect more banks – both in the US and Europe – to begin revealing the skeletons in their cupboards, as these developments are likely to encourage deeper loan book reviews.
Filippo Alloatti, Head of Financials, anticipates a broader reckoning within the banking sector.
This week’s Market Snapshot
Are (private credit) cracks widening?
Recent hairline cracks in the private credit sector have revived fears of wider systemic risk.
- Fraud disclosures have raised fears of weak lending standards in private credit.
- Unsettling comparisons to the banking turmoil of 2023 have given some investors a sense of déjà vu.
- The question remains: are these idiosyncratic cases or canaries in the coalmine?
A red flag, or a one-off?
The twin collapse of two leveraged US auto firms, Tricolor and First Brands, which led to renewed stresses in the US regional banking sector last week, has raised fresh fears about the health of global credit markets.
The failure of the two private credit-backed US companies was driven by alleged financial misreporting and excessive leverage, and exposed leading lenders – such as Barclays and JPMorgan Chase – to sizeable losses.
Investors are questioning whether these lending failures are isolated incidents within the private credit sector or early signs of broader risks across the industry.
During JP Morgan’s third quarter earnings call, CEO Jamie Dimon put it bluntly: “When you see one cockroach, there are probably more.”
As stress risks increase in credit markets, comparisons have been drawn to the implosion of Silicon Valley Bank (SVB) in 2023.
Zion Bancorp and Western Alliance, two US regional banks, disclosed exposure to possible credit fraud on October 16, sending the SPDR S&P Regional Banking ETF – a proxy for the US regional banking sector – tumbling by 6.2% in its largest one-day drop since the SVB fallout (Figure 1) amid a broader sell off in banking stocks.1
“The credit underwriting process itself lies at the heart of investors’ concerns,” says Karen Manna, Vice President, Client Portfolio Manager for Fixed Income at Federated Hermes.
“With billions of dollars in pursuit of yield, loans are increasingly being originated through opaque structures often by entities known as Non-Depository Financial Institutions (NDFIs), which include private credit funds,” Manna says.
The shift [towards NDGIs] raises questions about transparency, risk oversight, and the resilience of the system under stress,” she adds.
Figure 1: Bad loans spark worries… what comes next?
The reckoning
Filippo Alloatti, Head of Financials at Federated Hermes, argues that the recent lending failures are likely to prompt a broader reckoning within the banking sector.
“These events have reignited scrutiny of NDFIs, particularly in private credit and its ties to private equity, even though the sector has dominated financial press coverage for over two years,” he says.
“We expect more banks – both in the US and Europe – to begin revealing the skeletons in their cupboards, as these developments are likely to encourage deeper loan book reviews.”
However, Alloatti adds that the impact of any fresh revelations will probably depend on timing and market conditions, “It’s too early to tell if any new revelations will spook the market – although last week’s provision news and borrowing increases from the Fed’s standing repo facility (SRF) did just that.”
Outside of the US, several key factors could provide crucial support to European financial groups as they navigate the uncertainties caused by this situation, Alloatti adds.
These factors include: a positive interest rate environment (versus pre-Covid levels) and cleaner asset quality; as well as the drivers of adverse selection into private credit – led by not underwriting certain borrowers and significant risk transfers (SRTs).
In addition, Alloatti says, the EU benefits from a strong regulatory regime in comparison with the US (where regulatory focus is on larger banks).
Continue reading this month’s Market Snapshots
Irrational exuberance Mk II?
Markets remained unruffled this week even as investors weighed the risk of an AI-induced market meltdown. But do the sceptics have a point?
- IMF and leading banks sound warning on AI market risk.
- Other cited risks include a deepening US/China trade war, unexpected Fed action and an extended US government shutdown.
- Collapse of First Brands and Tricolor Holdings offers credit markets pause for thought.
Investors this week pondered the risk of an AI-driven market meltdown. This followed a warning from International Monetary Fund (IMF) economist Pierre-Olivier Gourinchas of “a significant AI-related, tech-related investment surge”, which, he said, is creating echoes of the early 2000s dotcom boom.
Earlier in the week, the chief executives of Goldman Sachs, JPMorgan Chase and Citigroup also raised the prospect of financial markets entering bubble territory – even as their banks announced record results.
Nonetheless, markets remained largely unruffled. The S&P 500 declined slightly, falling 1.6% for the week to Thursday’s close. This was partly in response to the bankruptcies of two auto industry-related companies, First Brands and Tricolor Holdings, and fears of contagion in private credit markets. Treasuries rose, with the yield on the benchmark 10-year US bond falling to 3.967%, its lowest level since April.1
Figure 1: Forever blowing bubbles?
AI-related investment, real and forecast 2020-2030
The equity CIO’s view
Steve Auth, Federated Hermes CIO, Equities, highlights the bursting of an AI-driven bubble as one of six possible sources of future volatility for global markets. These include an extended US government shutdown, unexpected policy action from the US Federal Reserve, a US Supreme Court ruling against President Trump’s tariff programme, a deepening trade war with China and an earning seasons ‘wobble’.
On AI, Auth notes how much this sector has contributed to the market rally following April’s lows. “Any sudden shift of sentiment on whether AI will ‘work’ or not would be treated poorly by investors, and would likely lead to at least as large a drawdown as a deepening trade war with China,” he says. “Our own read from our teams’ dozens if not hundreds of company meetings across the economy is that a sudden shift here is unlikely. Too many really smart people have invested too many hundreds of billions of dollars to be utterly wrong on this call.”
In addition, says Auth, many companies are already achieving productivity gains from early AI innovation, across multiple sectors of the economy. “So any newsflow here, in our view, would be noise at worst and if the market reacts, a buying opportunity,” he says.
The global equity manager’s view
Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes Limited, notes how this year’s stock rally has been primarily sentiment driven, with fundamentals an afterthought. This is understandable, he says, since there are reasons to argue that this “this time it’s different”, not least how the rally has been led by established, well capitalised, mega-cap companies.
Even so, he adds, fundamentals and valuations can only be ignored for so long. “The IMF’s warning of a bubble will embolden those proclaiming a market top,” he says. “Such intense capital expenditure, with payoffs uncertain in terms of quantum and timeframe, leave the AI rally vulnerable to sudden shifts in risk appetite.”
He adds: “We remain bullish on the long-term investment case for AI, but with such a high concentration in the market we see attractive overlooked opportunities across the market that are more driven by the fundamentals. Whilst tariffs add uncertainty to growth, we believe that there are plenty of under-loved stocks set to benefit from a broadening out – watch out for US GDP growth, interest rate decisions, and earnings as catalysts. We also see opportunities in Europe as the industrial machine begins to turn, although, admittedly, that may take time to get into full swing and comes with its own set of potential challenges.”
1 Bloomberg as of 17 October 2025.
Japanese stocks rally on election result
Markets anticipate an increase in government spending now a fiscal dove is one step closer to the highest office.
Sanae Takaichi is on track to become Japan’s first female prime minister, after winning the election to become president of the ruling Liberal Democrat (LD) party. The benchmark index set a record high following the result, while the yen weakened.
Takaichi, who won with 31.07% of the vote, has previously described her economic policy as “New Abenomics”, in reference to the three-pronged approach espoused by the late former prime minister Shinzo Abe. The three arrows of “New Abenomics” or “Sanaenomics1” are monetary easing, flexible fiscal mobilisation, and investment in crisis management and growth.
A public and private sector forum will be established to set out new spending priorities2. Various areas of investment have been earmarked as crucial to economic security, including AI, semiconductors, nuclear fusion and biotechnology. Takaichi has also outlined commitments to defence spending and food security.
The newly-appointed LD president reportedly softened her dovish stance on fiscal stimulus and monetary easing during the campaign3. She has previously described the issuance of government bonds as an important source of funds for necessary expenses and said the government should not hesitate to draw on this facility for investment purposes4.
Japan is currently burdened with one of the highest debt-to-GDP ratios in the developed world at 235%5. While this may prove restrictive in terms of spending ambitions, Japan has made notable progress in terms of combatting deflation and implementing corporate reforms in recent years6.
Markets react
Figure 1: Japanese stocks get a boost
Meanwhile, the yen weakened sharply against the US dollar following the election result, breaking the 150 yen-to US dollar threshold. The yen also softened to levels not seen since the 1990s against the euro.
Figure 2: Yen weakens following Takaichi victory
Takaichi is a decades long seasoned politician. She is conservative; an admirer of Margaret Thatcher and an adherent to ‘Abenomics’. A critical component of Abenomics is dovish monetary policy. Another leans on government spending as a catalyst to growth, which implies more borrowing,” says Mitch Reznick, Group Head of Fixed Income – London, Federated Hermes Limited.
“Consequently, anticipation of Takaichi’s leadership has caused a reduction in the probability of a rate hike by Bank of Japan (BOJ) from nearly 60% to 25%. This led to the unexpected weakening of the yen,” he says.
“There is a government to form; a coalition to manage; and most importantly a finance minister to select. If the monetary and fiscal expansion ways take the day, perhaps there is more of the same to come,” he adds.
Emerging markets outperform
Elsewhere, emerging market equities have surged this year, outpacing gains made in the world’s largest economy, and advanced economies more broadly.
“Emerging markets have rallied 28% year to date8, comfortably outperforming the MSCI World by over 850bps, and the S&P 500 by over 1000bps. Emerging markets have also outperformed the Nasdaq by a healthy 700bps over the same period,” says Kunjal Gala, Head of Global Emerging Markets at Federated Hermes Limited.
A number of tailwinds have boosted the performance of EM equities relative to developed markets (DM) in 2025.
“Firstly, emerging markets are significantly under owned by global investors and were trading at a 40-50% discount to developed markets at the start of this year. Added to this, questions over the trajectory of the US dollar, due to US President Donald Trump’s trade and foreign policies presents a further tailwind to the prospect of emerging market re-rating,” Gala says.
“We are also seeing a significant reversal of investor sentiment towards lagging markets such as China and South Korea – which are respectively up around 40% and 50% this year. Lastly, the rally in precious commodities is helping markets such as South Africa and prospects of global rate cuts are further fuelling several markets across Europe, Middle East, and Africa (EMEA) and Latin America, where real interest rates are still very high,” he adds.
1【Our Administration Initiative】Japan Economic Resilience Plan|Sanae Takaichi | Hanada Plus
3 Sanae Takaichi: Japan’s Likely New Leader.
4 【Our Administration Initiative】Japan Economic Resilience Plan|Sanae Takaichi | Hanada Plus
5 https://www.mof.go.jp/english/policy/jgbs/reference/gbb/e202503.html.
6 Japanese reforms ignite investor optimism | Federated Hermes Limited.
7 Source: Bloomberg.
8 Ibid.
Chinese stocks soar on resurgent tech sector
Global investor sentiment towards China has shifted amid signs of further rapid developments in AI.
Chinese equities have rallied strongly in the second half of this year led by the soaraway performance of technology stocks and buoyed by a shift in global investor sentiment towards the world’s second-largest economy.
Investor excitement about China’s tech sector – which began with DeepSeek’s AI breakthrough at the start of the year – accelerated in September amid the development of further globally competitive artificial intelligence (AI) models, announcements of increased spending on AI infrastructure, and progress in Beijing’s push to achieve self-sufficiency in the manufacture of advanced microchips.
“Valuations in Chinese equities remain very attractive and the rapid development of the country’s huge tech sector has generated a lot of interest,” says Sandy Pei, Senior Portfolio Manager, China Equity at Federated Hermes.
The Hang Seng Tech index – of the 30 biggest Hong Kong-listed technology companies – has soared 50% YTD, compared to a 18% gain in the US tech-heavy Nasdaq Index over the same period1.
Tech multinational Alibaba has risen 122% YTD – while fellow tech giants Tencent and Baidu are up more than 60% – and all three groups have invested heavily in AI. In September alone, Alibaba and Baidu saw their share prices rise 29% and 38.2%, respectively2.
The tech rebound follows a torrid period that saw a crackdown on the technology sector, which led to a sharp fall in share prices and an exodus of foreign investors. However, a high-profile meeting between Chinese President Xi Jinping and leading tech groups earlier this year signalled a shift in government policy and has bolstered investor confidence in the sector.
Growth and deflation fears
Nonetheless, concerns remain about the health of China’s economy amid ongoing deflationary pressures and signs of slowing growth, despite the impact from trade tensions with the US being less severe than had been feared. China’s consumer price index contracted 0.4% year on year in August and export growth slowed3.
China’s GDP growth is forecast to slow to about 4% year on year in the second half of 2025, after expanding by 5.3% in the first half, according to S&P Global4.
The CSI AI Index – which tracks up to 50 A-share companies involved in AI – has returned 68.7% YTD, compared to 18% for the benchmark CSI 300 index5.
“There is evidence that some of the structural issues in the country – such as the problems in China’s property sector – are abating, while it is clear that many Chinese companies have continued to prosper despite the trade tensions with the US,” adds Pei.
1 Bloomberg as at 2 October 2025.
2 Ibid.
3 China slips back into deflation as economy shows signs of cooling
5 Bloomberg as at 2 October 2025.
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