Bendura Bank: Market Outlook October 2026
ANDRIEVSKII.CH | October 12, 2026
All eyes on the debt levels
In September global bond yields continued to trend higher with accelerating pace compared with previous months. The US 10-year Treasury yield rose from 4.7% at the end of August to nearly 5.3% by month-end, reaching its highest level since 2007. At the same time the 30-year Treasury yield climbed to its highest level since 2002, around 5.7%. Despite this sharp rise in rates, US equity markets remained relatively resilient and continued to trade within the narrow range established since early August.
The Federal Reserve delivered another rate hike in September as inflation remained above target and economic activity continued to show surprising resilience. Strong economic growth has been a key driver of higher yields, while rising oil prices have further contributed to upward pressure on long-term interest rates. Market expectations remain tilted towards additional monetary tightening, with investors still pricing in several further rate increases over the coming year. Although these expectations may ultimately prove too aggressive, they reflect the prevailing view that the Federal Reserve is likely to maintain a restrictive policy stance until there is clearer evidence that inflation is moving sustainably back towards its target. The relationship between oil prices, bond yields, and equity markets remains a key theme for investors. Rising oil prices have typically been associated with higher bond yields and increased headwinds for equity markets, while a stabilization in energy markets could provide a more supportive backdrop for risk assets. Against this backdrop, and with US equity markets approaching new all-time highs, investors will continue to closely monitor economic data, central bank communication, and geopolitical developments as key drivers of market performance in the months ahead. While the overall market environment remains constructive, elevated valuations and higher interest rates may leave markets increasingly sensitive to any signs of slowing economic momentum or renewed inflationary pressures.
Global Economy
USA
The US economy remained resilient through September, although signs of moderation became increasingly visible. Consumer spending and retail sales surprised on the upside, manufacturing activity rebounded strongly into expansion territory, showing the continued strength of domestic demand. At the same time, the labour market cooled with non-farm payroll growth slowing to just 29,000 jobs and unemployment edging up to 4.2%, suggesting that higher interest rates are gradually weighing on economic momentum. Inflation remained above the Federal Reserve’s comfort zone, with headline CPI at 3.4% and producer prices still elevated, prompting the Fed to raise its policy rate by 25 basis points to 4.0% in September and signal that further tightening remains possible. Financial markets initially interpreted the weaker employment data as reducing the urgency for additional rate hikes, leading to a temporary decline in short-term Treasury yields. Meanwhile, consumer confidence deteriorated significantly, falling to its lowest level since 2014, reflecting growing concerns about future economic and labour market conditions. The housing sector also remained under pressure as elevated mortgage rates continued to weigh on demand. Overall, the US economy entered the fourth quarter in a mixed but still constructive position: robust consumer activity and improving manufacturing support the growth outlook, while softer labour market data, weakening sentiment and persistent inflation suggest that monetary policy will likely remain restrictive. Investors’ attention now turns to the upcoming inflation data, which will be critical in shaping expectations for the Federal Reserve’s next policy steps.
Europe
The Eurozone economy showed notable resilience despite a renewed energy shock linked to tensions in the Middle East. While economic activity remained relatively robust, inflation re-accelerated and growth expectations softened. The European Central Bank raised its deposit rate by 25 basis points to 2.5% and maintained a data-dependent stance, with policymakers signalling that further rate increases may be necessary should energy-driven inflation persist. Headline inflation rose sharply to 3.8%, while core inflation remained above the ECB’s 2% target, reflecting continued price pressures from higher energy costs. Economic data painted a mixed picture: manufacturing and services PMIs remained firmly in expansion territory, highlighting the resilience of business activity, while German factory orders posted their steepest monthly decline in several years, pointing to growing weakness in parts of the industrial sector. Labour market conditions remained broadly stable, although risks to employment are increasing as tighter monetary policy and elevated energy prices weigh on the outlook. Looking ahead, the Eurozone enters the final quarter of the year facing a challenging combination of persistent inflation, restrictive monetary policy and ongoing geopolitical uncertainty. While current activity data remain encouraging, investors will closely monitor energy markets and upcoming ECB decisions, as the balance between inflation control and growth preservation becomes increasingly delicate.
Asia
Japan and China entered the final quarter of 2026 from markedly different economic positions. In Japan, economic conditions remained broadly resilient, supported by a tight labour market, rising real wages and improving business activity. Unemployment remained low at 2.5%, while real wages increased for an eight consecutive month, signaling that the long-awaited wage-inflation cycle is becoming more entrenched. Against this backdrop, the Bank of Japan raised its policy rate by 25 basis points to 1.25%, the highest level since 1995, continuing its historic normalization process after years of ultra-loose monetary policy. Inflation remained close to the Bank’s 2% target and manufacturing activity expanded solidly, although household spending continued to disappoint as consumers remained cautious despite higher incomes. Looking ahead, policymakers appear increasingly focused on preventing inflation from overshooting target rather than stimulating growth, suggesting that further policy tightening may be gradual as the impact of previous rate hikes is assessed.
China, by contrast, continued to face challenges from weak domestic demand and slowing economic momentum. Consumer spending remained subdued, industrial profit growth decelerated sharply and inflation stayed low despite modest increases in food and energy prices. In response, authorities unveiled a broad package of targeted support measures, including large-scale liquidity injections into the banking system, expanded lending programs and mortgage-related stimulus aimed at sustaining economic growth. While these measures helped improve sentiment, policymakers stopped short of implementing a full-scale stimulus programme, reflecting concerns about financial stability. Encouragingly, manufacturing activity returned to expansion territory and exports remained exceptionally strong, driven in part by demand for AI-related products. Overall, Asia’s two largest economies continue to follow diverging paths: Japan is navigating a mature economic expansion and policy tightening cycle, while China remains focused on stabilizing growth and reviving domestic demand. Investors will closely monitor upcoming inflation and labor market data to assess the sustainability of these trends and the likely direction of monetary and fiscal policy.
Shares
US equities experienced a volatile September as rising bond yields, persistent inflation concerns and expectations of tighter monetary policy weighed on broader market sentiment. While the S&P 500 declined only modestly, performance beneath the surface was considerably weaker: the equal-weight S&P 500 fell 5%, small-cap stocks endured their largest setback since early 2025, and the Dow Jones Industrial Average recorded a decline of more than 4%. Most sectors finished in negative territory, with Financials, Materials, Real Estate and Utilities among the weakest performers. However, the overarching market narrative remained unchanged: technology continued to dominate both earnings growth and market leadership. Semiconductor stocks surged, supported by ongoing AI-related investment, while several mega-cap technology companies delivered strong gains helping the Nasdaq outperform broader indices. Importantly, the current rally continues to be driven primarily by earnings rather than valuation expansion. Technology is expected to contribute roughly three-quarters of total S&P 500 earnings growth in 2026, while forward valuation multiples have generally compressed despite record market levels. Although higher Treasury yields remain a key concern for investors, historical market data suggests that equity valuations have often coexisted with elevated interest rates, particularly when economic growth and corporate earnings remain robust. As a result, the outlook for US equities is supported by resilient earnings growth, continued AI-driven capital expenditure and the prospect of a fourth consecutive year of double-digit returns for both the S&P 500 and Nasdaq. European equities recorded their first monthly decline in six months as investors navigated a challenging combination of higher bond yields, renewed inflation pressures and energy market uncertainty. Major indices across the region fell between 2% and 4%, with France and Germany among the weakest performers. The renewed surge in energy prices, driven by Middle East tensions and concerns over potential supply disruptions, reignited inflation fears and prompted markets to price in a more aggressive tightening path from the European Central Bank. Rising government bond yields, a weaker euro and sterling, and growing fiscal concerns related to higher borrowing costs further weighed on sentiment. Nevertheless, underlying economic activity and corporate earnings remained relatively resilient, helping prevent a broader market correction. Sector performance reflected the changing macroeconomic backdrop. Oil & Gas emerged as the strongest performer, benefiting from sharply higher crude prices, while Banks gained support from rising interest rates and improving net interest income expectations. Technology stocks also outperformed, continuing to benefit from global enthusiasm surrounding artificial intelligence infrastructure and digital investment themes. Looking ahead, European equities remain closely tied to developments in energy markets and the path of ECB policy. While higher inflation and tighter financial conditions present clear headwinds, resilient economic activity and steady corporate profitability provide a constructive medium-term backdrop for investors.
Bonds
Fixed income markets remained under significant pressure during September as investors reassessed the outlook for inflation, fiscal deficits and government debt sustainability. US Treasury yields moved sharply higher across the curve, with the 10-year Treasury yield rising above 5.2% and reaching levels not seen since 2007, while the 30-year Treasury yield climbed to its highest level since the early 2000s to 5.6%. Rising oil prices, persistent inflation concerns, robust economic activity and expectations of further Federal Reserve tightening all contributed to the sell-off in longer-dated government bonds. The main reason for it is that investors are becoming increasingly focused on the US fiscal outlook. Total US government debt surpassed the USD 40 trillion mark in August, reaching approximately USD 40 trillion and more than doubling in a decade. Interest payments are now one of the largest federal budget expenditures, approaching USD 1.2 trillion annually and consuming close to 5% of GDP. As large deficits continue and maturing debt is refinanced at substantially higher rates, markets are increasingly demanding greater compensation for lending to governments. While higher yields have improved income opportunities for bond investors, they also signal the end of the ultra-low-rate era and imply tighter financial conditions across the economy. Some prominent investors and analysts say that the problem can have devastating consequences in upcoming years if debt levels will not be sustained and growth levels will slow.
European bond markets were caught up with similar challenges. Yields across Europe were rising sharply amid renewed energy-driven inflation pressures, tighter monetary policy and growing concerns about fiscal sustainability. The ECB’s rate hikes and increasingly hawkish rhetoric pushed government bond yields higher across the region, while UK 30-year gilt yields briefly exceeded 6%, their highest level since 1998 and the highest among G7 sovereign issuers. Rising debt-servicing costs are becoming a growing burden, with countries such as the UK, France and the US now spending more on interest payments than on defence. As a result, investors have become increasingly sensitive to fiscal risks and government borrowing needs.
France has emerged as a particular area of concern within the Eurozone. French 10-year government bond yields rose to approximately 4.8% (the highest level since 2008), while the spread versus German Bunds widened to 128 basis points, the largest gap in fourteen years. France now pays more to borrow than both Italy and Greece, which marks a remarkable reversal from the sovereign debt crisis era. Investors are demanding a higher risk premium due to persistent budget deficits above 5% of GDP, limited prospects for fiscal consolidation and growing political uncertainty ahead of next year’s presidential election. Political situation is raising concerns that a future government may be even less committed to fiscal discipline. The repricing of French sovereign risk reflects both the deteriorating fiscal outlook and heightened political risks, but it also raises the potential for broader contagion across Eurozone bond markets. While French government bonds have become a focal point of Eurozone fiscal concerns, the sharp increase in yields has materially improved their valuation. Current yield levels offer an attractive income opportunity for long-term investors, although political uncertainty and fiscal sustainability remain key risks to monitor in the months ahead.
Commodities & Currencies
Sugar markets have experienced a remarkable turnaround in 2026, driven primarily by the intensification of El Niño weather conditions. What began the year as an expected global surplus quickly evolved into a supply deficit as adverse weather reduced production across several key growing regions. Forecasts shifted dramatically from an expected surplus in early 2026 to deficit projections by mid-year, reflecting deteriorating crop conditions in major producers such as India, Thailand and Europe. Europe suffered its weakest sugar beet harvest in a decade following severe summer heatwaves, while Thailand’s production outlook deteriorated significantly. World’s second-largest sugar producer, India, faced severe rainfall shortages and rising domestic prices, prompting the government to authorize rare duty-free sugar imports to support local supplies. Concerns intensified further in early October when production estimates for India’s upcoming crop were revised sharply lower due to ongoing drought conditions and water rationing in key agricultural regions. At the start of October sugar is to be the best-performing soft commodity with neck-to-neck performance of Wheat of around 38% this year. In comparison, gold has provided slightly negative returns on year-to-date basis, implying our view that a diversified commodity allocation can provide valuable portfolio diversification and an effective hedge against inflationary and supply-side shocks.
As highlighted in last month’s outlook, we expected the EUR/USD exchange rate to move towards 1.12, a level that has now been reached considerably faster than anticipated. The euro fell to a 17-month low of 1.1161 on 5 October before stabilizing modestly around 1.12, driven by a combination of European political and fiscal concerns and renewed US dollar strength. The main catalyst was growing investor unease over France’s fiscal outlook, which pushed French government bond yields and spreads sharply higher, while political uncertainty in both France and Spain further weighed on sentiment towards the common currency. At the same time, rising US Treasury yields and safe-haven demand supported the dollar, amplifying the move lower in EUR/USD. Although some investors now see value in the euro after the sharp decline and expect French fiscal stress to remain contained, the near-term direction of the currency pair will likely continue to be shaped by developments in European sovereign bond markets and the relative path of US and Eurozone monetary policy.
The US dollar continued to strengthen against the Swiss franc during the third quarter, with USD/CHF rising from around 0.81 to a year-to-date high of 0.8340 following the Federal Reserve’s September rate hike. The move was primarily driven by the substantial interest rate differential between the United States and Switzerland, with elevated US yields and the Fed’s higher-for-longer stance continuing to support the dollar. In early October, the pair briefly retreated after weaker-than-expected US employment data and a surge in demand for the Swiss franc as investors sought safe-haven assets amid concerns surrounding France’s fiscal outlook. However, this move proved temporary. As US Treasury yields resumed their ascent and the dollar benefited from ongoing European fiscal stress, USD/CHF quickly recovered towards 0.83. Overall, the currency pair remains largely a rate-differential story, supported by significantly higher US yields, while the Swiss franc continues to provide intermittent resistance whenever geopolitical or European sovereign risks trigger renewed safe-haven demand.
Source: www.bendura.li
Disclaimer: This publication is provided for informational purposes only and does not constitute personalised investment advice or a recommendation to buy or sell securities. Investments in financial instruments involve risks, including the potential loss of capital.
Aleksei Andrievskii | Advisory Board Member, Bendura Bank AG | Liechtenstein