Daily Market Outlook, October 26, 2026

Daily Market Outlook, October 26, 2026

Patrick Munnelly, Partner: Market Strategy, Tickmill Group

Munnelly’s Macro Missive - Oil Eases, But Central Bank Week Keeps Markets On Edge

Global markets opened the week cautiously as oil retreated from six-month highs, but investors remained reluctant to add risk ahead of a heavy week of central bank decisions, macro data and major technology earnings. The temporary easing in crude prices has reduced the immediate pressure on inflation expectations, but it has not removed the broader macro problem: energy prices remain elevated, geopolitical risk is still embedded in commodities, and policymakers are facing renewed cost pressures just as growth signals become more uneven.

Brent crude fell 1.6% to $114.88 after reports that Qatari mediators were in Tehran on Sunday, working with the US to ease regional tensions. US crude futures dropped 1.9% to $101.29. The decline follows a sharp 6.2% weekly rise in Brent, which lifted futures to their highest weekly close since mid-2022 as markets priced a larger geopolitical risk premium after Houthi attacks on Saudi energy infrastructure. The pullback in oil is welcome, but it is not yet decisive. Brent remains at a level that can disturb disinflation paths, particularly if it persists. The market is therefore treating the diplomatic headlines as a reason to reduce near-term hedges rather than as proof that the energy shock has passed. The distinction matters. Lower oil for one session can calm markets; sustained oil above $100 keeps central banks cautious and consumers under pressure.

Asian equities reflected that caution. Japan’s Nikkei slipped 0.5% after losing 4.0% last week, while South Korea’s main index fell 1.1% and remains under heavy pressure after declining nearly 20% so far this month. The Kospi continues to trade as one of the cleanest public-market proxies for the AI hardware cycle, and its weakness signals that investor confidence in the AI trade remains fragile. The MSCI Asia Pacific ex-Japan index edged down 0.1%, suggesting some stabilisation but little conviction.Chinese blue chips fell 1.0% as the Communist Party began its fifth plenum in Beijing. The market has now been under pressure for 11 consecutive weeks, with investors still concerned about domestic demand despite resilient export performance. The plenum will be watched for policy signals on consumption, industrial strategy, technology self-sufficiency and property stabilisation, but markets are likely to require more than strategic language to reverse the downtrend.

The AI trade faces another critical test this week. After the recent selloff in chipmakers, data-centre stocks and Korean technology names, earnings need to do more than beat consensus. Investors want evidence that AI-related demand is translating into durable revenue, that margins can withstand rising input and power costs, and that capex plans remain financially credible. The market has shifted from rewarding AI exposure to interrogating AI economics. That shift is visible in the broader de-risking pattern. Last week’s Treasury rally, widening Asian credit spreads and weakness in semiconductors all suggested that investors were reducing crowded risk exposure rather than simply rotating within equities. If this week’s technology results restore confidence, the rebound can be sharp given the extent of recent positioning cuts. But if earnings guidance disappoints, the correction could broaden because leadership remains narrow.

The flash October PMIs reinforced the uneven global backdrop. The overarching message from the data is that global growth is becoming more K-shaped. The UK was one of the relative beneficiaries, with activity strengthening further as the composite PMI rose to 53.1, its highest level since February. The improvement was supported by the strongest increase in new orders in more than two years, adding to a run of data pointing to a more resilient UK economy than the Bank of England had assumed earlier in the year. Germany also remained in expansion territory, though growth eased modestly from September. France was the clear weak spot, slipping back into contraction as firms reported weaker demand, delayed investment decisions and heightened political uncertainty. As a result, the Eurozone composite PMI softened to 51.9 from 53.1. That is still consistent with growth, but it points to a slower pace than at the end of Q3 and highlights the divergence within the currency bloc.

The inflation signal was more uniform and less comfortable. Across the UK, Eurozone, Germany and Japan, firms reported renewed pressure from higher energy, fuel and transport costs. Manufacturing input prices accelerated almost everywhere, reflecting the recent rebound in energy prices and ongoing supply-chain disruption. Companies generally remained reluctant to pass costs fully through to customers, meaning output price inflation either eased or rose by less than input costs.That mix creates an awkward central-bank trade-off. Activity is no longer accelerating broadly, but inflation pressures are not fading as quickly as policymakers had hoped. If firms absorb higher input costs, margins come under pressure and earnings risk rises. If firms pass costs through, inflation persistence worsens. Either way, the combination of elevated energy prices and slower growth complicates the soft-landing narrative.

This is why this week’s central bank meetings matter so much. The Fed and ECB are both expected to leave rates unchanged, while attention shifts to guidance. For the Fed, the decision comes alongside Q3 GDP and September core PCE inflation. Those releases will help determine whether resilient US activity is still compatible with a credible return to target inflation. A strong GDP print alongside sticky core PCE would keep the Fed’s tightening bias alive even if policymakers choose to wait this week. The Fed also faces a complicated market backdrop. Equities have weakened, duration has rallied and parts of credit have shown strain, indicating some tightening in financial conditions. But oil remains high, inflation expectations are not clearly benign, and AI-linked equity strength could quickly reverse the tightening if earnings impress. The Fed may therefore prefer to retain optionality rather than validate aggressive rate-cut expectations or rule out future hikes.

The ECB meets Thursday, with Eurozone GDP and October inflation releases arriving around the meeting. The Eurozone problem is different from the US one: growth is softer, political and fiscal risks are more visible, and energy pass-through remains a threat. France’s weaker PMI and ongoing political uncertainty add to the concern that the bloc’s growth engine is uneven. The ECB is likely to hold, but it will be difficult for policymakers to sound dovish while energy costs are rising and services inflation risks remain unresolved. The Bank of Canada also meets Wednesday. Markets are pricing a hike even though consensus expects a hold, after the Bank’s survey recorded a notable rise in inflation expectations. Canada faces a particularly challenging mix of high household leverage, energy-linked inflation, and uncertainty around external demand. A hike would signal that inflation expectations are again becoming a dominant policy concern; a hold would require firm guidance to prevent markets from interpreting patience as complacency. The Bank of Japan rounds out the week on Friday. Updated forecasts and Tokyo inflation data will be watched for signs that policymakers are growing more confident in the durability of domestic inflation. Japan is no longer a passive anchor in global rates. Any step toward further normalisation would matter for the Yen, JGBs and global carry trades, particularly at a time when risk appetite is already fragile.

The UK Budget on Wednesday is the domestic focal point. Chancellor John Healey’s presentation comes after public finance data showed borrowing running above the OBR’s March profile. The broad policy direction may not surprise, but markets will focus on the financing remit, gilt supply outlook and the OBR’s updated assessment of whether stronger growth is being offset by higher debt-servicing costs and spending pressures. The UK’s growth backdrop has improved, but the fiscal arithmetic remains tight. Stronger PMIs and better activity data help revenues at the margin, yet borrowing has continued to run above profile and debt interest remains elevated. The key question for gilts is whether the Budget delivers credible consolidation without damaging the growth momentum now showing in the data. Markets will also watch whether any change in issuance composition increases pressure on the long end.

The Budget may be relatively technocratic compared with recent fiscal events, but that does not mean fiscal sustainability risk has disappeared. Some of the bigger questions may simply be deferred. The Prime Minister’s forthcoming ten-year plan is expected to address public-sector reform, while decisions on defence spending, social care funding, welfare reform and potentially nationalisation remain ahead. Each of these could absorb a meaningful share of projected fiscal headroom. For the Bank of England, the PMIs add to the hawkish case already built by last week’s labour and inflation data. Employment was stronger than expected, unemployment fell, regular pay growth surprised on the upside, headline CPI rose to 3.5%, core CPI increased, and services inflation moved higher. With the composite PMI at 53.1 and new orders at a two-year high, the MPC has less evidence of demand weakness to justify patience. A November hike remains the base case unless incoming data deteriorate sharply. That said, gilt pricing is no longer driven only by rate expectations and fiscal supply. The Bank of England’s Short-Term Repo facility has changed the post-QT plumbing. The old assumption that falling reserves would mechanically cheapen gilts versus swaps has weakened because banks can replace drained reserves through STR usage. As a result, front-end gilt asset-swap spreads depend increasingly on repo pricing, STR uptake and marginal funding conditions, not simply the pace of QT.

The broader market message is one of tactical relief but strategic caution. Oil’s pullback helps, but Brent near $115 still poses inflation risk. Equity markets are stabilising, but AI leadership remains fragile. PMIs show growth resilience in some economies, especially the UK, but cost pressures are returning. Central banks are likely to hold in several cases this week, but a “hold” does not mean a dovish pivot when inflation expectations and energy prices remain uncomfortable.

Macro to Micro, the market enters a decisive week with little room for error. Diplomacy has taken some heat out of oil, but energy prices remain high enough to challenge disinflation. Asian equities remain under pressure, with Korea and China signalling weak risk appetite. The UK economy looks more resilient, increasing the probability of further BoE tightening, while the Budget will test gilt supply assumptions and fiscal credibility. For traders, the key markers are Brent, Hormuz and Saudi risk, AI earnings guidance, Korean tech, China plenum signals, US GDP and core PCE, Fed and ECB guidance, BoC inflation-expectations language, BoJ forecasts, UK gilt remit and whether the recent Treasury rally reflects a healthy hedge or the start of a broader risk-off repricing.

Overnight Headlines

• Trump Says Decision Nears On Iran Deal Or Renewed Military Strikes

• Iran’s Pezeshkian Blames US For Failed Interim Deal, Calls For Fresh Talks

• US Orders Middle East Departures Amid Iranian Plots And Houthi Attacks

• US Sec Rubio Plans Trilateral Negotiations Over Ukraine, Johnson Says

• Europe’s Five Biggest Defence Powers To Name Russia As Top Threat

• US-Canada Trade Talks ‘Very Close’ To Deal, Hassett Says

• China Warns Of Countermeasures Over US Investment Curbs On Biotech

• China’s Xi Poised To Tighten Grip At Discipline-focused Fifth Plenum

• RBA’s Hunter Says Central Bank Is ‘Not Quite Yet’ Done Fighting Inflation

• Brazil’s Lula Wins Record 4th Term; Bolsonaro Seeks Election Annulment

• France’s Le Pen Launches Presidential Bid Amid Nationwide Protests

• Oil Slips From Near Six-Month Highs Despite Supply Concerns

• Goldman Sachs Cuts Kospi 12-Month Target By 25% As AI Trade Unravels

• SpaceX Raises $40B In Debt To Finance GPU Purchases, Musk Says

• Audi To Build $4B Factory In Georgia, Trump Says

• Airbus To Hold Talks With BAE Over GCAP Fighter Jet Programme

• Bitcoin Slides Below $80,000 As Crypto Sell-Off Deepens

FX Options Expiries For 10am New York Cut 

(1BLN+ represents larger expiries and is more magnetic when trading within the daily ATR.)

• EUR/USD: 1.1100 (EU1.35b), 1.1250 (EU1.13b), 1.1200 (EU1.01b)

• USD/JPY: 158.00 ($2.32b), 152.00 ($1.33b), 158.50 ($1.3b)

• AUD/USD: 0.6950 (AUD794.7m), 0.6800 (AUD570.3m), 0.6980 (AUD503.7m)

• USD/CAD: 1.4250 ($690.1m), 1.3950 ($460.2m), 1.3960 ($434.1m)

• USD/MXN: 18.20 ($823.2m), 17.60 ($614m), 18.70 ($493.8m)

• USD/BRL: 5.4500 ($371.9m)

• GBP/USD: 1.3300 (GBP354.1m)

• USD/CNY: 6.7070 ($493.5m), 6.7300 ($393.8m)

CFTC Positions as of 16/10/26

• EUR/USD: 1.1100 (€1.35bn), 1.1250 (€1.13bn), 1.1200 (€1.01bn); USD/JPY: 158.00 ($2.32bn), 152.00 ($1.33bn), 158.50 ($1.30bn); 

• AUD/USD: 0.6950 (A$794.7m), 0.6800 (A$570.3m), 0.6980 (A$503.7m); 

• USD/CAD: 1.4250 ($690.1m), 1.3950 ($460.2m), 1.3960 ($434.1m); 

• USD/MXN: 18.20 ($823.2m), 17.60 ($614m), 18.70 ($493.8m); 

• USD/BRL: 5.4500 ($371.9m); 

• GBP/USD: 1.3300 (£354.1m); 

• USD/CNY: 6.7070 ($493.5m), 6.7300 ($393.8m).

Technical & Trade Views