U.S.-Iran diplomatic efforts continue, with compromise proposals from Qatar and Pakistan briefly raising hopes of a breakthrough. However, differences over nuclear issues persist, while U.S. and Israeli military preparations raise concerns over intensified strikes on Iran after the midterm elections, adding to Middle East uncertainty and market volatility. Markets remain focused on U.S. earnings. Strong initial results from financials provide downside support, while Thermo Fisher Scientific and other healthcare firms beat revenue, earnings and outlook expectations, lifting healthcare stocks.
Weak demand at the U.S. Treasury’s $13bn 20-year bond auction pushed the high yield to 5.469%, the highest auction rate since January 1986, highlighting persistent weakness in long-duration Treasury demand. Credit spreads briefly widened amid concerns over heavy AI-related debt issuance and investment payback. As earnings season began, investors shifted toward defensive, high-quality bonds, with U.S. and Asian investment-grade bonds showing relative resilience.
Persistent U.S.-Iran tensions and elevated oil prices have prompted the Fed to resume rate hikes, lifting expectations for further tightening. While some Fed officials remain cautious, rate futures imply another 25 bps hike, potentially in December, and three additional hikes over the next year. With geopolitical tensions likely to persist, we expect the Fed to maintain a hawkish stance in 2027 if inflation remains above target. However, the U.S. 2Y Treasury yield has largely priced in future hikes, with its direction dependent on core inflation trends.
Tesla’s 3Q26 results were mixed. Gross margin and deliveries beat expectations, revenue was broadly in line, and operating profit missed. The biggest surprise was free cash flow of US$1.5bn versus consensus of negative US$4.3bn, while lower capex guidance raised concerns.
In September, persistent geopolitical tensions drove oil prices higher, while renewed Fed rate hikes and heavy Treasury and corporate bond issuance contributed to the bond market’s worst monthly performance this year. Among the 10 worst monthly total returns for U.S. investment-grade bonds since 2021, more than half occurred in 2022, when the Fed began hiking rates in March, highlighting interest rate risk as the bond market’s biggest challenge over the past five years. However, subsequent returns following these weak months were mostly positive over the following year, except for January and March 2022, immediately before and during the Fed’s initial hikes. Higher yields enhanced carry income and improved long-term bond return potential.
U.S. healthcare spending is heavily shaped by regulation. Deductibles under employer-sponsored insurance (ESI) and Affordable Care Act (ACA) plans have risen, and out-of-pocket maximums are higher than a year ago. Because of these changes, U.S. hospital admissions, surgical volumes and hospital visits all improved in the third quarter. Goldman Sachs estimates that 3Q hospital visits will rise 4% year over year. Seasonal factors should also lift healthcare utilization in the second half above the first half. Fourth-quarter earnings are expected to be solid, and this strength could carry into next year. This outlook is reflected in the recent record high of the XLV ETF.
