MARKET COMMENTARY – OCTOBER 2026

Global equity markets were broadly lower during September, pausing after a strong summer as rising government bond yields, higher oil prices and a stronger US dollar weighed on sentiment. The conflict in the Middle East remained unresolved, with Brent crude moving back above $100 a barrel, and the US Federal Reserve, the European Central Bank and the Bank of Japan all raised interest rates. Strength in AI-related technology shares supported parts of the US and Asian markets, but gains were narrow, and the month highlighted the sensitivity of markets to the direction of bond yields.

The US was relatively resilient. The Federal Reserve raised interest rates by 0.25% to a range of 3.75%-4.00% on 16 September, its first increase since 2023, and signalled that a further rise is likely before the end of the year. Economic data remained robust, with business activity at its strongest in more than five years and a stronger-than-expected jobs report, although cooler-than-expected inflation data at month end eased expectations of an immediate follow-up move. The S&P 500 finished marginally lower and the technology/AI heavy Nasdaq rose, but beneath the surface the picture was weaker: technology and communication services were the only sectors to advance, smaller companies fell and the 10-year Treasury yield briefly rose above 5.3%, its highest since 2002.

AI remained the dominant structural theme and the main source of market leadership. Semiconductor, memory-chip and AI infrastructure companies continued to benefit from strong demand, with Taiwan and South Korea among the best-performing emerging markets. New developments in AI prompted some concerns over regulatory issues and disruption elsewhere in the technology sector, but strong investment and adoption continued to support the sector. Heavy borrowing by US technology companies to fund the build-out, which has exceeded $200 billion of long-term bonds this year, is also adding to pressure on bond markets.

European equities were among the weakest developed markets, with the STOXX Europe 600 falling 2.4% in euro terms and ending a five-month winning streak, as higher energy prices, rising bond yields and political and fiscal uncertainty outweighed resilient economic data. The European Central Bank raised its deposit rate by 0.25% to 2.50%, citing upside risks to inflation. Japanese equities were mixed, with semiconductor strength lifting the Nikkei 225 modestly while the broader TOPIX slipped, as the Bank of Japan raised its policy rate to 1.25%, the highest level in more than thirty years.

Emerging market equities declined modestly, with the MSCI Emerging Markets Index falling 0.7% in US dollar terms, as a stronger dollar, higher global yields and elevated oil prices offset strength in technology-oriented Asian markets. Taiwan and South Korea advanced on semiconductor demand, while India, China and South Africa were among the weaker markets.

UK equities fell but held up better than continental Europe, helped by a larger weighting to energy companies, with the FTSE All-Share Index declining 1.9%. The Bank of England left interest rates unchanged at 3.75% on 16 September, but by a 6-3 vote, with three members preferring an increase to 4%, and warned that rates may need to rise if higher energy prices lead to more persistent inflation. UK business activity slowed to a three-month low as higher energy costs and concerns ahead of the October Budget weighed on sentiment.

Bond markets had a very difficult month as yields rose sharply across major markets, with the yield on the Bloomberg Global Treasury Index rising above 4% for the first time since 2007. In the UK, the 10-year gilt yield rose by around 0.36% to 5.4%, its highest since 2007, and the 30-year yield climbed to almost 6%, a level not seen since 1998, amid concerns over the government’s finances ahead of the October Budget. The Bank of England responded by announcing a six-month pause in gilt sales under its quantitative tightening programme, together with an end to sales of long-dated gilts. UK inflation rose to 3.1% in the year to August, up from 2.9% in July, driven largely by higher fuel prices, and markets are pricing in further interest rate rises. Corporate bonds also fell as credit spreads widened, particularly in high yield.

Oil prices rose by more than 10% during the month, with Brent crude trading above $100 a barrel as US-Iran tensions persisted and uncertainty over Middle Eastern supplies continued, reinforcing inflation concerns. Gold fell by more than 6%, giving back part of August’s sharp gain as higher yields and a stronger US dollar weighed on the metal.

In general markets again showed resilience in September, with robust corporate earnings and strong economic data limiting losses in the major equity indices, but the month was a reminder of how sensitive markets are to the level of bond yields. Higher energy prices, tighter monetary policy, fiscal concerns and narrow equity market leadership suggest markets could remain vulnerable to further volatility, with the Federal Reserve’s meeting at the end of October, the UK Budget and the Bank of England’s decision on 5 November all in focus. This reinforces the importance of maintaining diversification across asset classes, regions and investment styles.

Total returns in GBP to 30/09/2026

* Inflation data to August 2026

Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk

This commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.