Markets rally despite US shutdown, UK housing softens, and Europe edges higher

Financial markets navigated another week of political uncertainty and mixed economic signals. In the US, a government shutdown failed to rattle equities, while falling bond yields offered some relief to investors. In Europe, markets extended their rally as optimism over lower borrowing costs outweighed concerns about inflation, and in the UK, housing data hinted at a late-summer cooling.

This week we begin at home before turning to Europe, the US, and broader global developments.

UK - Mortgage approvals ease, but house prices stabilise

The latest Bank of England data showed a modest slowdown in mortgage activity, with approvals for home purchases dipping to 64,700 in August from 65,200 in July, ending three consecutive months of increases. The slowdown came despite tentative signs of stabilisation in prices - Nationwide reported a 0.6% rise in September, following a small decline in August.

Overall, the picture remains one of subdued momentum. Activity has been supported by lower mortgage rates and resilient employment, but affordability constraints and uncertainty ahead of November’s budget continue to weigh. For investors, the housing data underline the broader theme of steady but unspectacular recovery across the UK economy.

The FTSE 100 performed strongly last week, rising 2.2%, helped by a rebound in energy and materials stocks. Sterling was broadly unchanged, supported by the Bank of England’s continued cautious stance and expectations that rate cuts will remain gradual through 2025.

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Europe - Inflation uptick unlikely to derail optimism

European equities posted their strongest week since early summer, with the STOXX Europe 600 up 2.9% to fresh record highs. Technology and consumer-cyclical names led the advance, buoyed by optimism that US rate cuts later this month will ease global funding costs.

In macro news, headline eurozone inflation ticked up to 2.2% in September from 2.0% in August, driven by higher services costs and smaller declines in energy prices. Core inflation held steady at 2.3%. European Central Bank President Christine Lagarde described inflation as “quite contained” and reiterated that policy rates - unchanged at 2% - leave the ECB “well placed to respond” to shifting risks.

Labour market data showed a slight increase in the eurozone unemployment rate to 6.3%, while consumer confidence improved for a second month. The rise in confidence, albeit from low levels, reflected stronger intentions to make major purchases - an encouraging sign for domestic demand heading into year-end.

Across the region, national differences remain. Germany continues to lag, while France and Italy have benefited from recovering industrial sentiment and rising consumer spending. Smaller central banks remain active: Sweden’s Riksbank cut rates again to 1.75% last week, while Switzerland’s SNB held at 0%, confident that inflation at just 0.2% is back within its comfort zone.

United States - Markets shrug off shutdown, yields fall

In the US, a partial government shutdown began on Thursday after Congress failed to pass a funding bill, halting “non-essential” services and furloughing an estimated 750,000 federal employees. Yet markets were largely unfazed.

The S&P 500 gained on the week, led by technology and small-cap stocks, as investors focused instead on weaker labour-market data that increased confidence in near-term rate cuts. The Nasdaq outperformed, while the Russell 2000 surged more than 2%, reflecting optimism that smaller domestic firms could benefit most from cheaper borrowing costs.

With key government reports delayed - including September’s non-farm payrolls - investors turned to private data for clues. The ADP employment report showed the economy losing 32,000 jobs, compared with expectations for a 50,000 gain. The surprise weakness reinforced market conviction that the Federal Reserve will ease policy again at its October meeting.

Fed officials, however, offered a more measured tone. Chair Jerome Powell described the economy as in a “challenging situation,” balancing upside inflation risk with a softening labour market, and warned that equity prices appear “fairly highly valued.” Other policymakers struck a similar note, emphasising caution rather than urgency.

Bond markets responded positively. US Treasury yields fell across the curve, with shorter maturities leading the move as investors priced in a greater probability of rate cuts. Investment-grade and high-yield credit both outperformed Treasuries amid strong demand and limited new issuance.

Oil prices retreated sharply - down over 7% - after OPEC+ signalled plans to increase output in November, while gold and copper both rallied. The divergence reinforced the theme of easing inflationary pressure alongside renewed appetite for industrial metals as growth stabilises.

What It Means for You

For UK private investors, several themes stand out this week:

1. UK resilience, but muted momentum. The housing market is stabilising but not accelerating. Domestic growth remains modest, supporting the case for selective exposure to quality UK equities and gilts.

2. Europe gaining traction. Inflation remains contained, and improving confidence hints at a soft landing. European equities continue to benefit from easing expectations.

3. US yields moving lower again. Weaker data have revived optimism around rate cuts, offering opportunities in fixed income - but equity valuations, particularly in large-cap technology, remain stretched.

Overall, global markets appear comfortable with a “slow and steady” outlook: modest growth, gradually falling rates, and selective opportunities across asset classes. As ever, staying diversified and disciplined remains the best approach in navigating a late-cycle environment.