What is causing the current market volatility and how far can it go?

Highlights: Some investors have been worrying for a while about the sharp rally in AI and tech stocks. On Friday, the US announcement of an additional 100 per cent tariff on Chinese goods and export controls on ‘any and all critical software’ starting from 1 November provided a good excuse for profit taking. While President Trump signalled that his meeting with Chinese President Xi Jinping is still possible in late October and China reiterated its willingness to negotiate, the political uncertainty could extend the volatility in coming weeks. But we think that the surprise effect is now much less than around Liberation Day – the market impact should therefore also be less pronounced (implied volatility is less than half the April level). Markets should be further supported by the US Q3 earnings season, where we expect to see positive surprises, and by the October Fed rate cut. In the short term, volatility needs to be managed and our overweight positions on gold and investment grade bonds should continue to benefit. Given our confidence in US economic growth, earnings expansion, AI innovation and Fed cuts, we would take any pronounced tactical market pullback as a longer-term buying opportunity.

• There has been much discussion about whether the Al rally is in a 'bubble', and this concern created the background for the current market volatility. But the 2025 rally of US equities, including Mag7 and Tech stocks, is almost entirely driven by earnings growth. This is much healthier than in many other parts of the world, where it is mostly an expansion of valuation multiples. So we stay overweight US stocks and expect the Q3 earnings season will reaffirm the market's positive fundamental outlook. We see the most scope for positive surprises in the Mag7 but also see positive earnings momentum broadening into other sectors. Many companies are expanding their margins despite cost pressures, which is another positive sign. We see US Financials and Industrials as attractive complements to the tech exposure
• The 1 November deadline set by President Trump for the new 100 per cent tariff on China indicated the latest re-escalation of trade tensions could be negotiation tactics ahead of the potential Trump-Xi – meeting during the APEC Summit on 31 October. News headlines surrounding the US-China trade negotiations and the Trump-Xi meeting will likely drive two-way volatility in coming weeks. We expect China's upcoming Fourth Plenum on 20-23 October to provide better clarity on growth supportive structural reforms and policy stimulus, supporting our overweight on China equities and earnings acceleration in 2026. Our China equity strategy manages the tariff risk by our continued barbell approach, favouring the domestically focused technology leaders and quality companies that improve ROE by paying high dividends and share buybacks
• Amid the volatility, gold and silver are clear beneficiaries of safe-haven flows. We reiterate our tactical overweight on gold to hedge against trade and political uncertainties. High quality bonds are attractive portfolio diversifiers amid the current equity market volatility, and we maintain our clear preference for investment grade over high yield. We further mitigate portfolio drawdown risks through multi-asset strategies, hedge funds and volatility strategies
• We do not share some investors' concerns who see the bankruptcy of First Brands (linked to accounting practices) as an early warning sign for credit markets. In fact, data on bank loans show that defaults are stabilising and even falling a bit in the case of consumer loans. We therefore continue to diversify our diversifiers through private credit, private equity and infrastructure, focusing on strong manager selection