October Newsletter

It has been two months since our last letter, and September did not sit quietly while we were away. Four things happened that set up everything you are about to read.

September 3. Bank Negara held the OPR at 2.75% for the fifth time this year, but the tone changed. The statement leaned hawkish, and the bank lifted its 2026 growth view to around 5%. File that away — it matters in Chapter Six.

September 8. Canada did exactly what Mark Carney promised. Retaliatory tariffs of 15% to 50% on roughly US$20 billion of American goods took effect — steel, dairy, appliances, farm equipment, electronics, more than 800 product lines. Washington said no new talks were planned and threatened another round. The “war” Carney declared in August is now a two-sided one.

September 16. The big one. After nine straight meetings of doing nothing, the Fed raised rates by a quarter point to 3.75–4.00%. The vote was 12–0. It was the first hike since 2023, and Kevin Warsh sold it as a “timelier return” to 2% inflation. The projections that came with it were blunter still: 16 of 18 officials pencilled in at least one more hike before the year ends.

And the markets? Stocks shrugged. The S&P 500 and the Nasdaq kept climbing and both set fresh records on October 6. Gold did not shrug: after August’s 16% surge, September was its first red month since June. Oil drifted higher as Hormuz stayed shut. In other words, the Fed finally moved, and the only asset that really noticed was gold.

The October meeting ended at 2am Malaysian time on October 29, and the headline was as dull as expected: rates held at 3.75–4.00%. The line beneath the headline was not dull at all.

The vote was 10–2, and both dissenters wanted to hike again. Governor Lisa Cook and Cleveland Fed President Beth Hammack voted for another quarter point — the first time since 1992 that a Fed governor and a regional president dissented on the same side. The statement also quietly dropped the suggestion that September’s hike would be enough.

Then Warsh spoke. “Inflation is too high. Energy and related prices have moved higher again in recent weeks.” US headline inflation was 3.7% in September; core, which strips out food and energy, was 2.6%. The gap between those two numbers is oil, and American petrol is up 34% in a year. Asked whether December would bring a hike, he gave an answer no Fed chair has given in a generation: “I don’t believe in forward guidance, absent exigent circumstances, absent a crisis.” Powell told you what was coming. Warsh won’t.

He did offer one phrase that traders will be quoting for months. Financial conditions, he said, are “tighter, but not tight.” The bond market agrees with the first half: the 10-year Treasury yield is back above 5% (5.04% after the meeting), the 30-year is at 5.36%, and the 2-year sits near 4.7%. The dissenters’ point is the second half — if money is not yet tight while inflation is 3.7%, the Fed has more to do.

Markets read it as a pause before another hike. Futures pricing for a quarter-point rise on December 9 moved from about 78% before the meeting to about 82% after it. The dollar index, which had slipped below 100 in August, is back around 102. Gold fell. The ringgit felt it (Chapter Seven).

In August we wrote that “there is no middle scenario anymore.” October proved it, in the wrong direction.

It started on October 1, when the Kuwaiti supertanker Kazimah III was struck in the Strait and caught fire. On October 4 a Liberian-flagged tanker, the Lipsi, was hit. Between October 6 and 14 the UK’s maritime agency logged another 15 attacks. Oil flows through the Strait, which had crept back up over the summer, crashed again to about 11.6 million barrels a day. Since October 2, Iran-backed Houthis have been hitting Saudi-linked shipping in the Gulf of Aden at a rate of at least one attack a day.

By October 17 two more vessels had struck naval mines, and the two sides were arguing about who was in charge of the water. The head of US Central Command said the Strait “is controlled by the United States and our regional partners, not Iran.” Tehran said the opposite. On October 23 Reuters did the count: 28 attacks on commercial shipping in October — the worst month since the war began in March. On October 30 Oman pulled 25 crew off a burning crude tanker while the Revolutionary Guard announced it had “halted” two tankers that tried an unapproved route.

Oil did what oil does. Brent swung between roughly $97 and $112 through the month and finished near $116 — a six-month high and a gain of more than 10% for October. The odd footnote: exporters have learned to route around the chaos, and by mid-October Middle East crude exports were actually above pre-war levels. The market is not pricing a shortage of oil. It is pricing the fear that the next tanker is the one that changes everything.

And there is a flicker of diplomacy. Qatari officials were in Tehran at month-end trying to revive the ceasefire deal that died in July. As this letter went out, Brent dropped 7.6% in a single day on talk of US–Iran contact. One day. It tells you how much war premium is sitting in that $116.

Two months ago we wrote that Nvidia’s $96 billion quarter had silenced every doubter in the room. The doubters have a new question now, and it is a better one. Not “is the AI money real?” — it clearly is. The question is: who pays for it?

Four companies reported in nine days, and every one of them grew revenue by 12% to 26%. Every one of them is also spending record sums on AI data centres. The market sorted them by a single test: is the spending producing cash?

Meta (October 21) had the best advertising quarter of the four — ad revenue up 26% to US$63.1 billion, because AI now writes, targets and ranks the ads and nearly 10 million advertisers used those tools. It also spent US$34.9 billion on capex, more than its entire operating cash flow, and the shares fell 7% the next day. For the month, Meta was down 14%, its worst since 2022.

Alphabet (October 28) grew revenue 25%, more than doubled Google Cloud to US$30.7 billion, and is sitting on US$561 billion of contracted future work. Then it said it would spend US$195–205 billion this year and “significantly” more in 2027, and that free cash flow had gone negative: minus US$9.1 billion. The next day the stock fell 12.6%, the worst day since it listed in 2004. About US$480 billion of value disappeared in one session — roughly every company on Bursa Malaysia, combined.

Microsoft (October 28) spent almost as much, US$45.2 billion. Its shares held up. The difference: Azure grew 48% against guidance of 44–45%, and the company is still generating cash while it builds. Amazon (October 29) grew AWS 39%, its fastest pace in five years, and chief executive Andy Jassy said the quiet part out loud: “Even at $220 billion, we will not have enough capacity to meet demand.” Free cash flow over the last 12 months: minus US$42.4 billion. The stock fell 7%.

Add it up and the big four plan to spend well over US$600 billion a year — about four times Malaysia’s GDP — and three of the four are now spending more than they bring in. Yahoo Finance tallied the damage: 47 AI and chip stocks lost about US$5 trillion between the October 6 record and month-end, while the rest of the US market went up.

That is the strangest part of October. The S&P 500 finished down just 0.9%. The Dow rose about 1.5%. Nine of eleven sectors gained. The equal-weighted S&P 500, where Nvidia counts the same as a regional bank, rose about 5% — its widest outperformance of the normal index since April 2009. Meanwhile the Nasdaq-100 fell 6.7%, the Composite 5.2% (its worst month since March 2025), and technology and communication services dropped more than 8%. The chip index is 21% below its June record. It was not a crash. It was a rotation — out of the five stocks everyone owns and into the 495 nobody talks about.

August’s “comeback tour” is over for now. Gold lost about 7% in October, its second straight losing month, and finished around US$4,000 an ounce — some 27% below January’s record and a long way from the US$4,600 we wrote about in August. JPMorgan’s $6,300 year-end target looks very far away.

The reason is arithmetic, not sentiment. With the US 10-year yield at 5% and inflation at 3.7%, the real yield — what a bond pays after inflation — is positive and rising. Gold pays nothing. When cash pays you to wait, gold has to fall until it is cheap enough to compete. Add a dollar index back near 102 and a Fed that is still hiking, and you have the tug-of-war we described last month resolved in the Fed’s favour. Gold needs the Fed to stop before oil does. Neither has.

Bitcoin had the same month, then a much worse week. It opened October at about $83,500, touched $87,249 on October 2, and faded as spot ETFs saw US$515 million of outflows. Then, at five past four in the morning Malaysian time on October 30, money started leaving Binance’s wallets.

Twenty minutes later about US$6.3 billion was gone, across ten blockchains. It is the largest theft in the history of cryptocurrency — four times Bybit’s US$1.5 billion record from February 2025. Binance froze every withdrawal. Tether froze US$971 million of stolen USDT and Circle froze US$823 million of USDC within the hour, so roughly US$3 billion is locked. About US$2.4 billion in bitcoin and ether is beyond anyone’s reach. Binance, which holds roughly US$155 billion of customer assets, says it will cover all losses from its emergency fund and its own balance sheet. Bitcoin fell as much as 5% to about US$76,500, US$1.5 billion of leveraged positions were liquidated, and BNB dropped 6% to 9%. Bitcoin closed the month at about $77,400, down 7.3%.

While Wall Street was arguing about capex, Malaysia had its own October ritual. On October 9 the Prime Minister tabled Budget 2027: RM459.84 billion in total, RM376.8 billion of it operating spend and RM83 billion development. The headline for households was the cost-of-living wall: more than RM80 billion for subsidies, assistance and incentives, with fuel subsidies alone expected to stay near RM40 billion. Sumbangan Tunai Rahmah rises to RM16 billion. SMEs get a tax cut — 14% on the first RM150,000 of chargeable income and 16% on the slice up to RM600,000. Civil servants in Grade Utama B and below get a one-off RM1,500; pensioners RM750. The government projects 4.2–5.2% growth next year and a deficit narrowing to 3.3% of GDP from 3.6%.

A week later the economy backed it up. The advance estimate for the third quarter, released October 16, came in at 5.3% — slower than Q2’s 6.0% but better than anyone forecast, with services up 5.4% and every sector except mining growing. Nine months in, Malaysia has grown 5.5%, against 4.8% over the same stretch last year. The Finance Minister now says the full year will beat 5%.

Then, on October 19, the inflation number: 1.8% for September, core 1.7%. Of 17 economies we compared, only China (0.9%) and Switzerland (1.0%) printed lower. Every ASEAN peer was higher — Singapore 2.2%, the Philippines 7.2%. The United States, remember, is at 3.7% and its central bank is hiking because of it.

How is that possible when Brent is $116 for everyone? Because Malaysia absorbs the oil shock in the budget instead of at the pump. RON95 is fixed at RM1.99 for citizens while the unsubsidised price has climbed to about RM4.42. Electricity surcharges are waived for most homes. The bill for that shield is now running at about RM40 billion against RM15 billion originally planned, and producer prices — what factories pay for inputs — are up 12% in a year while consumer prices rise under 2%. The pressure is real. It is just deferred.

Which brings us to Nibong Tebal. On October 27 the Finance Ministry cut a petrol station in Sungai Buaya, Penang, out of the Budi Madani programme after finding more than a thousand suspicious transactions: over RM270,000 in subsidy payments withheld, nine people barred, and police reports lodged by Malaysians whose MyKad details had been used to pump “their” RM1.99 fuel. It is a small case with a big message. The gap between RM1.99 and RM4.42 is RM2.43 a litre, and every litre of it is a temptation. Targeting the subsidy saves an estimated RM2.5–4 billion a year; enforcement is how those savings stay real.

Here is the puzzle of the month. Malaysia grew 5.3%, inflation is the lowest in the region, the budget is expansionary — and the KLCI spent October fighting for 1,600. It closed at 1,601 on October 8, slipped to 1,595.75 on the 19th, dipped to 1,596.69 intraday on the 21st, and only in the last week clawed back to 1,615.60 on October 30. That is 3.9% down for the year and 8.8% below January’s 1,771 peak. In August we were cheering 1,750.

The answer is in Chapter Two. A US 10-year yield above 5% against 3.97% on Malaysian government bonds means foreign money is being paid to wait in dollars. Foreign funds have now sold a net RM7.2 billion of Malaysian shares in 2026. The ringgit, which touched RM4.03 in August, weakened all the way to RM4.18 on October 24 before the strong GDP print and talk of US–Iran contact pulled it back to about RM4.07. Bank Negara’s next meeting is November 5, and swap markets price about a 76% chance of an OPR hike within six months — which would be the first increase since May 2023. A hike would narrow the gap with the Fed and help the ringgit. It would also be the end of cheap money for Malaysian borrowers.

The long-term story has not changed. On October 14 the Digital Ministry told Parliament that 27 data centre projects worth RM225.97 billion have been approved under the Data Centre Task Force, promising 4,053 jobs, 3,523 of them high-skilled and 89% of those for Malaysians. Nationwide the count is 117 data centres worth RM385.7 billion, 55 already running, and Johor alone has 1,110 megawatts live — third in Asia-Pacific. The constraint now is power and water, not approvals. If Chapter Four made you nervous, it should: every dollar of that US$600 billion of American capex ends up as an order somewhere in this chain.

And then there is Tuesday. On November 3 Americans elect all 435 members of the House, 35 senators and 36 governors. Republicans hold both chambers; polls and prediction markets give Democrats roughly an 80–90% chance of taking the House and a coin-flip on the Senate. The reason is the same number that is driving the Fed: inflation at 3.7%, petrol up 9.1% in September alone to about US$4.29 a gallon, and only 26% of voters approving of the president’s handling of the economy. History offers one comfort. Since 1950 the S&P 500 has been higher 12 months after every midterm — 19 out of 19, averaging about 15%.

October answered August’s big question — AI is not dying, it is just getting expensive — and asked a harder one in its place. November has an unusually full calendar for working out the answer. Here’s what to watch:

1. The midterm result, November 3–4 — The likely outcome is divided government. Markets have historically liked that: less legislation, fewer surprises. Watch the dollar and Treasuries on the night rather than stocks; a messy or contested count is the one scenario that bites.

2. Bank Negara, November 5 — The last meeting of the year, with growth at 5.3% and swaps pricing a hike within six months. A move to 3.00% would be the first since May 2023. If it comes, the ringgit strengthens and loan instalments rise. If it doesn’t, expect the statement to prepare you for January.

3. Nvidia reports later this month — The receipt test, round two. After Alphabet and Amazon were punished for spending, the company that collects that spending gets to say whether the orders are still coming. Its new Rubin chips are the swing factor for every AI stock, from Nasdaq to Penang.

4. The road to December 9 — One US jobs report and one inflation print stand between now and the Fed’s decision. An 82% hike probability can go to 95% or 60% on a single number. Gold and the ringgit will move with it.

5. Hormuz, again — Qatar is mediating, Brent just fell 7.6% in a day on the rumour of talks, and 28 ships were hit last month. A real ceasefire takes oil towards $90 and solves Malaysia’s subsidy maths overnight. Another tanker takes it towards $120. There is still no middle scenario.

An election, a rate decision, an earnings report and a war, all within thirty days. Trade smaller than you want to. Stay sharp.