A lot of things to worry about, but the market is still in BTD mode.

October 20th, 2025

Americans have some unique characteristics, one of which is their propensity to create acronyms for phrases which then become formal. In this week's newsletter we are not interested in the LOL (laughing-out-loud) or the OMG (oh-my-god) acronyms, but we will focus on the BTD (buy-the-dip), which means use every correction in an asset to add to positions. This is typical of a bull market, especially one that is also driven by FOMO (fear-of-missing-out). Investors and traders have flocked into equities since the April crash and especially in a handful of themes like AI, electrification, European defense and banks. The outsized moves in specific companies and themes have lured more and more investors into the market, as it is clearly seen by the huge flows into funds that follow these themes and every correction is seen as a buying opportunity. Until we get into an STR mood (sell-the-rallies) where any attempt for an asset to move higher after an initial correction is met with more willing sellers. But for now, this seems like a distant scenario.

And last week was a perfect example of the ultra-positive sentiment that still exists in markets. The market woke up Monday morning with the intention to characterize the large correction on the previous Friday as a great buying opportunity, ignoring the fact that the US-China situation seems to be worsening than improving (which was the reason behind the sudden drop). Then the collapse of two start-ups, First Brands and Tricolor, which is going to impact many investors in private credit funds as well as banks, was seen as a one-off event. JP Morgan's CEO said that "when you see a cockroach, there are usually many more" but the market usually ignores what he says. It was Thursday that suddenly the market realized that US regional banks have real issues as Zions Bancorp and Western Alliance announced losses tied to private credit borrowers, bringing back memories of 2023 with the collapse of major regional banks, not to mention the demise of Credit Suisse. But the drop did not last long but a few hours and markets rebounded handsomely on Friday.

Private credit can be a time-bomb, nobody is thinking about today. In theory the fact that corporations do not rely anymore just on banks for their borrowing needs is positive for both of them. Banks are assuming less risk and corporations have more options, and competition for their loans business can lower their borrowing costs. As with everything in financial markets, greed and ample liquidity lead to excesses and potential danger ahead. Many market participants have recently noted that the private credit funds which lend the investors' money to usually small, start-up companies have now lowered their lending standards as well as shortened their due diligence process in order to immediately place the billions pouring into these funds. If the current frenzy continues we could be in a similar situation with the 2006-2008 period where loans and mortgages were given to anyone with a pulse. But both the bond and equities markets have ignored this risk for now. BTD !

In Europe, the rotation into consumer-related stocks and away from previous winners continued. The positive results of the likes of LVMH, Nestlé and Pernod Ricard convinced the market to buy more into the laggard sectors of consumer discretionary and food & beverages, while selling aggressively primarily the overcrowded defense sector. Financials were also under pressure as the troubles of US regional banks private credit funds came into the surface, while Insurance was also weak as the good years of ever-increasing premiums seem to be behind us, for now. We had flagged back in mid-summer the possibility of a sharp rotation into consumer stocks from Financials and Industrials (part of which is the defense sector) and this has been confirmed, for now. As a reminder, we had also flagged the fact that Industrials and Financials had reached more than 40% of the Euro Stoxx50 index, which is not sustainable, according to history.

One week after Trump's tweet about new import tariffs on China, the situation remains fluid, but there is hope for a resolution. The markets slumped initially, as mentioned last week, but they recovered in just one day with no real news or developments even if as the 1st November approaches, in yet another sign of "buy-the-dip". The US Treasury, Mr. Bessent, kept blasting the Chinese during the week through posts and interviews, saying that they wish to "take everyone down with them", although he also said that there has been no cancelation of a potential meeting between the two Presidents, which is supposed to take place in South Korea at the end of this month. In particular President Trump will arrive in South Korea on October 29 for a two day visit to attend the Asia-Pacific Economic Cooperation summit (APEC). On the other hand, the Chinese Premier is expected to arrive on the 30th, a visit that will be his first since 2014. Trump's previous visit in 2019 was when he met North Korea's Kim Jong Un in the demilitarized zone.

In France, the newly re-appointed Prime Minister Lecornu managed to survive two non-confidence votes. In a dramatic turn of events, President Macron re-appointed him as Prime Minister only one week after his resignation, but this time he was ready to make compromises. He gave the green light to Mr. Lecornu to offer the socialists the carrot of postponing until the presidential elections of 2027 the pension reform which would have raised the retirement age and had been the main issue that drove the left-leaning parties to bring the people to the streets. With this out of the way, a sufficient number of socialist supported the Prime Minister together with the center-right and France has been given the chance to have a government. The equity market cheered and the bond market was indifferent to the fact that the fiscal deficit is still pushed under the carpet. So, all good.

Trump is planning to meet Putin in Budapest, for another push to stop the war. Nobody knows the outcome of such a meeting and whether another fiasco is in the cards, after Alaska. What is more interesting to watch is whether the Hungarian authorities will arrest President Putin under the warrant issued by the International Criminal Courts on November 17th, 2023 and which is still valid. Of course the choice of Budapest is not random, as Mr. Orban is a close friend of the two comrades and ICC warrants can be scrapped.

Bonds and Gold rallied as the market was focusing on the US financial sector issues described above. The US 10yr Treasury yield dropped to a low of 3.90%, the lowest level since last October before returning to 4%. As a reference, the last time that the 10yr was at 4% was at the peak of the April equity market crash, when sentiment was at a nadir. Now it is back at 4% with sentiment at almost a zenith. Go figure. The German 10yr dropped to a low close to 2.50% before rebounding to 2.60%. Gold spiked higher to reach a new record high north of 4350$, before losing 3% on Friday and returning to 4250$ as equity investors were feeling safer.

Chart of the Week : Today is the anniversary of the October 1987 crash.

The above chart shows the performance of the S&P500 three years prior to the 1987 crash until the end of that year. It was Monday the 19th of October 1987, that investors saw their equity portfolios dive almost 30% in a single day. As we can see, the index had almost tripled since the low of 1982. That rally had come after a a two year drop, which was the result of the deep recession induced by the FED under Mr. Volcker who raised interest rates relentlessly to fight inflation. President Reagan's pro-business policies (lower taxes, less government spending etc.) produced the relentless bull run until October 1987. The index was up already 32% since the beginning of that year and it is really unknown to this date what caused the crash. Many blame the derivative products which were at their infancy and of course huge leverage played its role, as speculative buying was thriving. Things have changed since then and no such crash can take place again, unless a nuclear war erupts or Martians attack earth (...of course with Musk wishing to inhabit the planet this scenario has an increased probability lately...).

Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : FactSet, Phto: Ala Skazava, dreamtime.com