Rising Yields, Oil Shocks and a Narrow Recovery

The third quarter of 2026 was a story of renewed tensions and rising yields, and although a strong earnings season helped markets recover, the gains were narrow and hard-won.

July was the most difficult month, as the Strait of Hormuz closed again and investors began to question the scale of AI spending. Markets found their footing in August, lifted by a strong earnings season, before rising bond yields and escalation in the Red Sea brought fresh bumpiness in September. Throughout the quarter, central banks made it clear they are more inclined to raise interest rates to keep inflation in check.

Bonds had a tougher quarter, falling as yields rose and central banks shifted towards tightening. The Federal Reserve held rates in July before raising them by 0.25% in September, and the Bank of Japan followed suit. The European Central Bank raised rates in both July and September, while the Bank of England signalled a hike at its next meeting in November, with gilts holding steady through the change of Prime Minister in July.

Over the quarter, the global aggregate bond index fell 2.6%, UK government bonds (gilts) fell 2.5% and sterling corporate bonds fell 1.9%. By September, yields had reached some of their highest levels in decades, with the US 10-year Treasury yield ending the month at 5.3%.

Heavy bond issuance from technology companies funding AI infrastructure competed with governments for the same investors, prompting the US Treasury to announce it would at least double its bond buyback programme.

Global shares returned 1.5% in sterling terms over the quarter, dipping in July before recovering on the back of strong earnings, though the gains were concentrated in relatively few places.

Japan was the standout major market, returning 5.9%, helped by a rare joint US and Japanese intervention to support the yen.

In the US, strong earnings outweighed growing scrutiny of AI capital spending, with large-cap shares returning 2.2% and technology large-caps a slightly better 2.5%.

UK large-cap shares returned 1.8%, while Europe ex-UK fell 2.7%. Emerging markets slipped 0.5%, with September's gains concentrated in chipmakers TSMC, Samsung and SK Hynix. China returned 2.1% for the quarter, though weak consumer spending means it remains down 9.3% year to date.

Commodities were the clearest beneficiary of the renewed tensions, returning 25.0% overall, led by Brent crude, up 34.3%. Brent rose above $100 per barrel in July and briefly reached $108 in September amid escalation in the Red Sea and disruption in the Strait of Hormuz, before ending the month back below $100.

Gold and silver returned 3.5% and 4.0% respectively, with gains in August giving way to sharp falls in September as higher yields raised the cost of holding assets that pay no income. Global REITs, meanwhile, fell 6.1%.

Markets head into the fourth quarter with strong third-quarter earnings expected, which has generally been supportive for shares, though risks remain two-sided and market pricing suggests a further rate rise from the Federal Reserve.

Higher real yields (interest rates after inflation) and wider credit spreads (the extra interest companies pay to borrow compared with governments) on large technology issuers are raising the pressure on companies to deliver those profits.

A weaker-than-expected US jobs report has eased fears of an overheating economy, but market gains have become narrower, and energy prices remain a source of volatility while talks between the US and Iran have yet to produce a resolution.

We expect our investment managers to remain ready to act as clarity emerges, guided by long-term fundamentals, disciplined valuations, and in constructing portfolios that are well diversified across asset classes, geographies and themes.

If you have any questions related to the above or require any advice, please email info@greenarch.uk.