Customers shop gold jewellery at a jewellery department store in Beijing, China October 18, 2025. REUTERS/Tingshu Wang

By Marc Jones and Rae Wee

LONDON/SINGAPORE (Reuters) -The shine was threatening to come off one of the year's best-performing trades on Wednesday as gold extended its sharpest drop in over five years, although equity bulls remained unfazed as bond markets took the strain.

Gold remains firmly on course for its strongest year since the 1979 oil crisis thanks to a 50% leap in price, but another 2.5% drop during London trading - after Tuesday's 5% dive - pushed it back towards $4,000 an ounce. [GOL/]

There has been no obvious catalyst for the plunge other than general altitude sickness after a blockbuster run amid uncertainty about a reshaping of the world order.

EUROPEAN STOCKS EDGE UP, BOND YIELDS NUDGE LOWER

"Gold was massively stretched, massively overbought. There's been a lot of FOMO (fear of missing out) going into that market," said Tony Sycamore, a market analyst at IG, adding that tech stocks and some other markets were in a similar position.

"For some of these other frothy markets, we're seeing little flash crashes now ... We're just seeing little tremors in markets, and potentially there's something more significant to come."

Equity markets, which have also roared higher this year, ignored gold's stumbles, gearing up instead for Tesla results later, which will kick off earnings season for the super-sized 'Magnificent Seven' group of Wall Street stocks. [.N]

Europe's STOXX 600 index was inching higher, after getting close to a new record high on Tuesday, although most large Asian bourses ended lower overnight.

Geopolitics remained front and centre with a planned summit between U.S. President Donald Trump and Russian President Vladimir Putin now in doubt and ambiguity too over a potential meeting between Trump and China's President Xi Jinping.

The selloff in gold injected some volatility into the broader markets overnight, but it did little to knock other safe-haven assets like bonds.

European government debt yields nudged lower, while 10-year U.S. Treasury yields - often the biggest driver of global borrowing costs - consolidated the 1-year closing low of 3.945% they had recorded on Tuesday.

Investors scooped up UK 'gilts' too - but also sold the pound - after data showed Britain's consumer price inflation and a key underlying measure of price growth unexpectedly held steady in September. [/FRX]

That pushed interest rate futures to price a roughly 75% chance the Bank of England will now cut UK rates to 3.75% from 4% at its December meeting, up from about 46% before the data.

"We see clear and pronounced risks of a December cut versus our base case of a February move," Morgan Stanley analyst Bruna Skarica said, referring to the inflation numbers, adding a cut could even happen in November.

JAPAN STIMULUS

Oil prices pushed higher for a second day, rising by about 2%, buoyed by hopes of progress for U.S. trade deals with China and India. [O/R]

Asia's other focus had been that new Japanese Prime Minister Sanae Takaichi is preparing an economic stimulus package likely to exceed last year's 13.9 trillion yen ($92.19 billion).

The Nikkei saw a late rally but MSCI's index of Asia-Pacific shares outside Japan ended down 0.4%, while Nasdaq and S&P 500 futures were flat after a mixed session on Tuesday.

Shares of Netflix sank nearly 6% after the bell as the streaming giant missed Wall Street's third-quarter earnings targets, whereas General Motors' stock surged 15% after raising its profit outlook. [.N]

In currencies, the dollar was heading for a fourth day of modest gains while the yen ticked up to 151.64 per dollar after the stimulus report.

The package marks Takaichi's first major economic initiative since the advocate of big fiscal spending took office on Tuesday, reflecting her commitment to what she calls "responsible proactive fiscal policy."

The Bank of Japan also meets next week, where expectations are for the central bank - like the ECB in Europe - to stand pat on rates.

WAITING ON CENTRAL BANK CUES

The U.S. Federal Reserve also meets next week, and investors have almost fully priced in a 25-basis-point rate cut.

The dearth of U.S. economic data due to the ongoing government shutdown means that policymakers could be left flying blind at the meeting, a less-than-ideal situation as they remain divided over which risks deserve the most attention.

Trump on Tuesday rebuffed a request by top Democratic lawmakers to meet until the three-week-old U.S. government shutdown ends.

The shutdown has in turn left currencies largely rangebound over the past few sessions due to the lack of fresh catalysts from data releases, although inflation data will be published on Friday. [/FRX]

(Reporting by Rae Wee. Editing by Kim Coghill and Mark Potter)