Please see the below article from Tatton Investment Management discussing bond pressures, AI-driven markets and the US midterms, received this morning – 05/10/2026.
Bonds cast shadow over equities
Global equities struggled last week. Tech stocks held, but the rest of the market dropped, on fears that AI-fuelled growth is overheating the economy. A softer-than-expected US jobs report on Friday eased those worries, and we think strong earnings growth should keep stock markets supported.
Lower oil prices would also help. Over the weekend, Saudi Arabia cut crude oil contract prices to Asia while US partners in the G7 agreed to release 100 million barrels of crude oil reserves in return for the US not banning diesel exports. Nevertheless, oil and refined product prices are slightly higher this morning after the Saudi-backed Yemeni government intensified attacks on the Houthis.
UK commentators were sceptical about by the Chancellor and Prime Minister’s conference speeches, with little sign of a positive growth agenda but at least markets aren’t worried about short-term fiscal discipline. That was enough to keep sterling firm against the rising dollar.
Financing pressures came back to bite the AI leaders themselves. Oracle’s bonds sold off after its ‘force majeure’ notice on its Project Jupiter lease – raising broader tech credit spreads. This was markets struggling to digest the sheer debt issuance, rather than actual credit stress. But credit spreads are still a problem for equity valuations: given rising real yields and credit spreads, equity valuations should probably be cheaper. That doesn’t mean stocks will sell off, but it puts more pressure on AI firms to deliver strong earnings.
Weaker US core inflation would have been expected to allow real yields to edge lower but they moved higher, continuing the trend begun early in September. Strong US growth (2.4% annualised) raises the odds the Fed has to act, although a soft labour market could dampen consumer demand.
European political unrest is back in the news. Growth is being weighed down by energy prices and, particularly in France, rapidly rising financing costs. PM Lescure budget proposal on Thursday estimated a deficit fall from 5.4% of GDP to 5% but unrest among 6th form students (lycéens) has caused some investors concern that there is no political appetite for fiscal discipline. Meanwhile, the Sanchez minority government in Spain has failed to pass its housing plan after widespread protest and has therefore called an election for Sunday November 29th. The Euro slipped markedly last week and has gone further down in early Monday trading.
Higher input and interest costs appear to be causing global growth to soften, so why are yields still rising? Market strategist Ed Yardeni puts it down to the unwind of the yen carry trade – hedge funds have lost their source of cheap financing. That’s one factor, alongside AI capital demand, fiscal risk and historic bond volatility.
Hopefully, a strong Q3 earnings season will drown out the worries.
September asset returns review
September was mixed for markets. Global equities rose 0.9% in sterling terms, but bonds lost 1.7%. The aggregate equity gain hides disparities too: tech stocks powered the gains while most other indices fell. September is typically a weak month for returns, as investors return from holiday and reposition portfolios, so perhaps the volatility should be little surprise.
Government bond yields climbed to multi-decade highs, led by the US, where the 10-year treasury reached 5.3%. UK gilt yields rose more slowly than US yields for once, though that is a hollow victory as long as gilt yields keep rising in absolute terms.
Investors typically blame bond trouble on oil prices – and Middle East tensions certainly didn’t help. Iran’s ceasefire proposal eased things into the end of the month, but oil still finished 10.6% higher.
More significant than energy, though, was growth. Business surveys were strong almost everywhere, but remarkably so in the US. AI-related investment continues to power the world’s largest economy, seemingly unaffected by interest rates and energy. That mix of strong growth and sticky inflation pushed the Fed, ECB and BoJ to raise rates – and the BoE to signal a hike next month.
AI’s thirst for capital pushed up borrowing costs for everyone else, hurting UK, European and smaller US companies, as well as government bonds themselves – a kind of reverse ‘crowding out’.
China stocks lost ground yet again. High oil prices and weak Chinese demand hurt broader emerging markets, but the EM index still gained 1.5% from its dominant chipmakers.
How long can markets keep rising on the back of a narrow, AI-driven rally? The narrowing of hyperscaler credit spreads into the month end hinted that their borrowing binge may be slowing. If so, the growth and inflation outlook could look less worrisome as we head into year-end.
Do markets care about the US Midterm Elections?
Trump’s Republicans face a tough battle in November’s midterm elections. High oil prices from the president’s unpopular war (and particularly in rural Republican states, high diesel prices) have frayed the MAGA base and delivered Trump’s lowest ever approval rating. Democrats are all but certain to retake the House, while forecasters give them a slightly-better-than-even chance of winning the Senate too. Betting markets and renowned forecaster Nate Silver put the Democrats’ Senate chances even higher.
The market impacts of a Democrat victory would be marginal, but potentially meaningful. Trump would be forced to rely even more heavily on executive orders – putting him more at risk of conflict with the Supreme Court. The court already ruled against his original tariffs, and Washington’s replacement tariffs now require lengthy investigation to be implemented, rather than the president’s whim. We would not expect a repeat of last year’s ‘Liberation Day’ tariff mayhem, though impeachment or forced policy reversals remain unlikely, given Senate arithmetic.
There are risks at the extreme: if Trump attempted to cancel or overturn the election, US bonds and the dollar would likely get hit – even if he failed. We can’t rule that out, but it’s less likely than it once looked. Combative figures like Stephen Miller have lost influence, cabinet members Rubio and Vance are already positioning for a post-Trump era, and Republican lawmakers look more willing than ever before to challenge their figurehead (if only rhetorically).
The important thing for markets in the long-term is what this means for fiscal policy. Trump’s fiscal indiscipline continues to worry bond investors, but a Republican return to pre-Trump fiscal discipline after a midterm defeat could offer markets some reassurance. Don’t expect the midterms to move markets much themselves, but what comes next – a more constrained White House, and a possible fiscal rethink – could matter more.
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Marcus Blenkinsop
5th October 2026