Highlights
After a more difficult start to the quarter, calm quickly returned to equity markets, which have comfortably consolidated their gains over the past few months. And yet, pressure in bond markets has continued to intensify, amid persistent chaos across the energy complex. How should we interpret this apparent disconnect?
In the short term, a significant decline in energy prices would help ease tensions in bond markets. Interest rates have never been as closely correlated with oil prices as they have over the past year.
However, that is not the whole story: behind the fog created by the energy supply shock may lie an economy with a more fundamental potential to overheat.
Overall, our base case remains largely intact. Economic growth still appears solid, supported in part by strong capital spending, while moderate monetary tightening and some easing in geopolitical tensions should help avoid the worst on the inflation front.
Nevertheless, the risks surrounding our outlook have necessarily increased recently, as the global economy and equity markets are being weakened by persistently high energy prices and rising borrowing costs.
Meanwhile, movements in bond markets appear increasingly stretched from a technical perspective. The situation could still deteriorate before it improves but, at current levels, the risk-return profile is becoming increasingly attractive over a horizon of one year or longer.
Bottom Line
Although the economic environment remains supportive for equity markets, rising risks call for a somewhat more cautious stance as we enter the final quarter of 2026.
Against this backdrop, we took some profit on our equity overweight, reallocating capital to bonds, which have become oversold. We also further reduced our allocation to emerging markets, whose relative volatility had reached levels not seen since 2009.