Investment Commentary - September 2026

Financial markets experienced a more challenging environment during the third quarter as renewed geopolitical tensions and rising commodity prices added to inflationary pressures. The conflict between the US and Iran was again an important influence, with disruption to Middle Eastern energy supplies pushing oil prices sharply higher. At the same time, economic activity remained relatively resilient and corporate earnings continued to grow. This combination of stronger inflation and robust growth encouraged central banks to adopt a more restrictive stance, resulting in significant increases in government bond yields. Equity markets were comparatively resilient, although performance varied considerably between regions and sectors.

September saw these trends intensify. Energy prices rose further during the month following attacks on Saudi Arabian infrastructure and disruption to the country's East-West oil pipeline. Hopes of renewed negotiations between the US and Iran also faded towards the end of the month. Central banks responded to the changing inflation outlook, with the Federal Reserve, European Central Bank and Bank of Japan all raising interest rates during September. Nevertheless, economic data remained relatively strong, with business surveys suggesting that activity was continuing to expand in both the US and Europe.

Global equity markets produced mixed returns in September but remained relatively resilient over the quarter. In the US, the S&P 500 declined -0.3% during September but returned +2.3% over the third quarter. The Nasdaq performed well, gaining +1.9% in September and +2.6% over the quarter. Technology shares continued to benefit from strong earnings and substantial investment in artificial intelligence, although performance within the sector was uneven following the sharp semiconductor sell-off in July. The Magnificent Seven were particularly strong over the quarter, returning +11.1%.

European markets were weaker. The STOXX 600 declined -2.4% in September, leaving it down -0.6% over the quarter, while Germany's DAX fell -4.0% during the month but recorded a small +0.8% quarterly gain. Political and fiscal concerns were particularly significant in France, where equities and government bonds both came under pressure. The UK market proved more resilient, with the FTSE 100 declining -2.0% in September but gaining +1.8% over the quarter, helped by its relatively greater exposure to energy and commodity-related companies.

Asian and emerging markets experienced considerable dispersion. Japan's Nikkei gained +1.2% in September but declined -4.1% over the quarter following its strong performance earlier in the year. South Korean equities were particularly weak during the quarter as semiconductor stocks reversed some of their earlier gains, with the KOSPI falling -19.2%. Emerging market equities declined -0.7% in September and -0.4% over the quarter. Despite this, earnings expectations in emerging markets continued to improve, providing some support following their strong first-half performance.

Bond markets faced a much more difficult quarter. Sticky inflation, resilient economic growth and renewed monetary tightening led to substantial increases in government bond yields. In the US, the 10-year Treasury yield rose by 82 basis points during the quarter to 5.28%, its highest level since 2007. US Treasuries returned -2.3% in September and -3.2% over the quarter. The rise in yields was also influenced by concerns over government borrowing and increased corporate issuance associated with investment in AI infrastructure.

European government bonds were even weaker. The 10-year German Bund yield rose by 73 basis points during Q3 to 3.58%, while euro sovereign bonds returned -2.2% in September and -4.4% over the quarter. French government bonds were particularly weak as fiscal concerns contributed to a significant widening in the yield premium over German Bunds. UK gilts declined -1.3% in September and -2.8% during the quarter.

Credit markets also weakened as rising government bond yields outweighed the benefit of relatively healthy corporate fundamentals. Investment-grade bonds were particularly affected by their longer duration, while high yield proved somewhat more resilient. US high yield returned -2.5% in September but was broadly unchanged over the quarter, while euro high yield fell -1.8% during the month but generated a small positive quarterly return of +0.2%. High starting yields, shorter duration and relatively contained default expectations helped high yield outperform investment grade credit.

Commodities were among the strongest-performing assets during the quarter, driven by both energy and agricultural prices. Brent crude rose +14.4% in September and +42.0% over Q3, ending the quarter at $103.53 per barrel. WTI gained +5.4% during September and +30.1% over the quarter. European natural gas prices also rose sharply, while the broader Bloomberg Commodity Index gained 16% during Q3.

Agricultural commodities also experienced substantial gains over the quarter, adding to concerns about the inflation outlook. Corn rose +21.3% and sugar +22.9%, while wheat gained +16.4%. Industrial metals were stronger, with copper rising +6.9% over Q3. Precious metals produced more modest quarterly gains despite a difficult September. Gold fell -6.3% during the month but remained +3.7% higher over the quarter, while silver declined -9.2% in September but gained +3.1% during Q3.

Currency markets were also influenced by changing interest-rate expectations. The US Dollar Index gained +2.0% during September and +0.3% over the quarter. Sterling declined -2.1% against the dollar during the month and was broadly unchanged over Q3, while the euro fell -2.5% in September and -0.8% over the quarter. The Japanese yen was the strongest major developed-market currency over Q3, appreciating +3.3% against the dollar, helped by intervention earlier in the quarter and the Bank of Japan's September rate increase.