Market Insights October 2026

2 days ago

8 min read

We kicked off early with quite a volatile September, but that didn't concern us much. Historically, September is known as the worst month of the year for market performance.

What has caught our eye, however, is the move in the bond market. Both US and French 10-year Treasury/Obligations assimilables du Trésor (OAT) yields have cleared 5%. To put these numbers into context, a 10-year yield above 5% pushes sovereign borrowing costs to levels not seen in decades, significantly raising debt-servicing burdens for major economies. At the same time, US 30-year mortgage rates have broken past 7%, putting severe pressure on consumer affordability and home transactions. Borrowing money, it seems, is now officially a luxury experience!

Historically, when bond yields spike like this, stock markets take a sharp leg down. Yet this time around, equities have defied typical bond-market dynamics, with the S&P 500 continuously pushing into new all-time highs.

Because we dumped our long duration and added commodities earlier at the beginning of the year, this yield surge didn't impact our portfolios much. But it leaves us with an interesting question: is the bond market simply doing what bond markets do, or are fixed-income investors trying to have their own little say ahead of the elections (a US Liz Truss moment)?

Political Shifts

Politics are strictly top of mind across global markets right now. But looking down at our allocation in Brazil, we were delighted to see a massive political pop-up—even setting aside our core premise of Brazil being a premier commodity-rich stock market. In short, we're getting to double-dip!

It was pretty hard to predict that Flávio Bolsonaro would do quite so well in the first round of presidential voting in Brazil. Against expectations, he beat incumbent President Luiz Inácio Lula da Silva, and now seems overwhelmingly likely to win the run-off in two weeks’ time. Until a few weeks ago, Bolsonaro’s chances of prevailing seemed very slim.

The elections for the legislature need no second round, and so the scale of the victory for Bolsonaro and the right is already clear. They now hold an outright majority in the upper house, and occupy a far stronger position in the lower house after squeezing the center.

At 80, Lula is one of the world’s ultimate political survivors, and it is always unwise to count him out entirely. But it’s hard to see how he can surmount these odds, particularly as the broader regional mood appears tilted against incumbents and in favor of the right.

If the political outcome was hard to predict, the market reaction certainly wasn’t; investors were delighted, bidding up Brazil’s Bovespa index to its highest level in dollar terms since 2011. Monday’s rally in the Brazilian Real (BRL) against the US Dollar was the largest single-day gain in four years. Market analysts (including TS Lombard's research team) point to legislative control as the primary driver. With a favorable Congress, Bolsonaro has a real shot at his target of cutting government spending by 1.5% of GDP—a level of fiscal consolidation that market participants felt Lula struggled to credibly signal. Now, fiscal discipline looks to be Bolsonaro’s responsibility to execute.

For a deeper dive into these macro trends, make sure to check out Kam's and my recent economic update video discussion.

US Midterms & Regulatory Reminders

Turning toward the US, we have the upcoming midterms, which might well be part of the reason for this recent bond yield run-up (a bit of a "Liz Truss moment," if I could say). However, history teaches us that a divided government is usually the best-case scenario for equity markets due to policy gridlock and predictable spending constraints. Capitalists among us should be cheering on the Democrats for a split legislature—and with President Trump's approval ratings hovering at an all-time low of 29%, that split outcome is looking increasingly probable.

Important Regulatory & Banking Changes

EU Banking Framework (Article 21c): A major regulatory update for non-EU financial institutions takes effect on January 11, 2027 under Article 21c of the EU’s updated Capital Requirements Directive (CRD VI). This framework strictly limits how non-EU banks operate within EU member states, which may impact how your US bank accounts interact with European services while living abroad. Please call us if you get any letters from your home bank back in the US.
Tax Deadline Alert (October 15th): The October 15th US expat tax extension deadline is now just a week away! If you have any outstanding questions, please give us a call—and please be kind to your accountants right now, as they are slammed busy getting filings across the finish line!

Market Update

The main theme for September was escalation. August's hope of a Hormuz settlement faded and crude rose back above $100 a barrel, its highest since May. Central banks responded: on 16 September the Fed raised rates by a quarter point to 4.00%, its first increase since July 2023, a week after the ECB lifted its deposit rate to 2.50%. U.S. equities declined -0.84% in dollar terms for the month but remain up +12.42% YTD, while Global ex-U.S. equities fell -2.38% but keep their lead at +14.22% YTD.

Europe was the weakest region at -4.56% (+6.03% YTD), around half of it currency. Emerging Markets (-0.56%), Asia Pacific (-0.18%) and Latin America (-0.30%) were close to flat and remain 2026's strongest regions at +23.38%, +23.46% and +14.75% YTD. Large Growth (+2.18%) was the only style segment to gain. The dividing line was balance sheets rather than discount rates: companies funding themselves from cash flow, chiefly the large technology names spending on AI, shrugged off higher yields; those that borrow, or whose customers borrow, did not.

The sector table tells the same story. Technology rose +5.08% (+36.45% YTD) and now makes up 40.83% of the S&P 500, while Financials (-7.14%), Materials (-7.15%), Real Estate (-6.48%), Consumer Cyclical (-6.44%, now -8.29% YTD) and Utilities (-5.92%) bore the damage. Energy fell -3.26% even with crude above $100, having already priced much of this in (+40.28% YTD). Fixed income had its weakest month of the year, with U.S. bonds -2.61% and Global bonds -2.38%, and U.S. Real Estate fell -6.40%, cutting its 2026 return to +3.67%. Consumer sentiment dropped from 55.2 to 48.1 as the 30-year mortgage rate passed 7%.

Since month-end, the picture has softened. Payrolls rose only 29,000 in September, with the prior two months revised down a combined 60,000, and wage growth of 3.0% is now running below 3.4% inflation. Markets now see an October hike as unlikely, Treasury yields have eased from their highs, oil is floating at $100 and the Nasdaq 100 has reached new records.

October is a month of scheduled decisions:

September CPI on 14 October and PPI on 15 October.
The FOMC on 27-28 October.
The UK Budget on 28 October, and the ECB on 29 October.
The U.S. midterm elections on 3 November, followed by the October jobs report on 6 November.

The Fed is fighting inflation from an energy shock it cannot influence while the labor market cools, and the 14 October CPI print is the data point most likely to decide which concern wins. For the midterms, the bond market cares less about the result than the fiscal path, and neither outcome looks likely to reduce Treasury issuance. The models are not positioned on any single outcome; with the strongest and weakest assets both driven by rates in opposite directions, dispersion continues to argue for disciplined rebalancing over conviction.

Heatmap

In dollar terms, September reversed August's gains: the average allocation fell -2.01% and the median -2.63%. Unlike July, losses were broad, with only four of 22 holdings finishing positive and a handful of gainers pulling the average above the median.

Brazil (EWZ +4.8%) led, helped by commodity exposure and a central bank that tightened well ahead of its peers, followed by cybersecurity (CIBR +4.6%), extending August's +9.1%. Commodities (FTGC +0.1%) were flat. Energy (VDE −1.9%) slipped despite crude rising, the behavior we flagged in August: the sleeve had run on the risk premium, and adding on strength would have been the wrong response.

Fixed income was negative throughout, but for different reasons. BND (-2.6%) fell on rates alone, while BOND (-3.5%), PICB (-3.5%) and high yield (PCEB -4.2%) also carried currency losses; roughly two points of PCEB's decline was the euro rather than credit. For non-USD bonds this is a translation loss that reverses if the dollar does, and the underlying yields are now materially higher.

The weakest holdings were rate-sensitive or European: U.S. real estate (VNQ -7.0%), European equities (FEP -6.0%), U.S. small caps (VB -5.1%), UK equities (FKU -4.4%) and U.S. value (VTV -3.6%), with FEP and FKU also carrying currency drag. Emerging Markets (AVEM -0.1%) beat the -0.56% headline EM return, and Infrastructure (GRID -1.0%) proved more resilient to rising yields than in July. If CPI confirms a softer path on 14 October, the rate-sensitive holdings that led the losses are the most likely to recover, and rebalancing toward target is how the portfolio participates.

Yield Curve

September brought the largest monthly move in Treasury yields this year, close to parallel: the 2-year rose to 4.88% (from 4.34%) and the 10-year to 5.29% (from 4.73%), crossing 5% mid-month for the first time since 2007. At the front end, the 3-month (4.20%) and 6-month (4.33%) sit above the new 4.00% upper bound on fed funds, pricing a further increase, though weak payrolls have pushed that expectation toward December. Cash above 4% remains available for short-term needs.

Twelve months ago, this segment was priced for cuts; it is now priced for hikes. This is where the bond book sits by design, with duration around seven to eight years and laddered maturities, locking in intermediate yields at their highest since before the financial crisis. A position that will get extended in the near future where opportunities arise.

The long end (20-year 5.68%, 30-year 5.64%) remains a term premium story rather than a war story, with the Treasury expecting to borrow $628 billion in the fourth quarter alone. The softer jobs report pulled the 10-year back toward 5.16%, a meaningful move but nowhere near enough to reverse September.

Abroad, the pressure is more acute. The UK 10-year stands at 5.48%, and the 30-year gilt briefly topped 6% on 1 October, the highest since 1998. The Bank of England held at 3.75% in September with three votes for a hike, and the 28 October Budget gives gilts a policy and fiscal test within a fortnight. The euro curve repriced most at the front, with the 2-year at 3.18% from 2.00% a year ago, while the 10-year remains well below U.S. and UK levels at 3.61%.

Credit is behaving better than the headlines suggest. U.S. BBB yields rose 60bp to 6.22%, in line with Treasuries, so investment-grade spreads were essentially unchanged. That is a market repricing the cost of money rather than fearing defaults, and it supports keeping credit at the higher-quality end. For income clients the conclusion from August holds and is stronger: September made fixed income painful to own and made forward yields the most attractive of this cycle.

Currency Movements

GBPUSD: MoM (%) -2.29% YTD (%) -1.76%

EURUSD: MoM (%) -2.14% YTD (%) -3.46%

GBPEUR: MoM (%) -0.15% YTD (%) +1.76%

The US dollar was the standout in September, strengthening by more than 2% against both sterling and the euro over the month. GBP/USD has now given back its gains for the year and sits 1.8% lower year to date, while EUR/USD is down 3.5% since January. Sterling was broadly flat against the euro in September and remains 1.8% higher year to date. For clients holding assets or spending in a currency other than their portfolio's base currency, these moves can account for a meaningful component of reported returns.

What to watch this month:

UK inflation (September): 21/10 relevant to GBPUSD + EURGBP
US Fed rate decision: 28/10 relevant to USDGBP + USDEUR
ECB rate decision: 29/10 relevant to USDEUR + EURGBP

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