Latest from BCA Research
The big risk for the markets remains a flare up in the Middle East conflict. The Fed appears to be targeting geopolitics as much as inflation fundamentals. By the logic of transitive properties, therefore, more war means more hikes. That’s negative. So why are we not bearish on equities and bonds? Because President Trump holds his own faith in his hands. With his unfavourability near all-time highs (Chart of the Month), the conflict in Iran is at its end. Our worry? A Democratic Party sweep that surprises in its intensity and thus forces markets to start pricing in a leftward tilt in 2028.
Democratic candidate for the Texas Senate seat, James Talarico, has been leading his opponent, Republican Ken Paxton, for over a month in the betting markets. At the moment, Talarico’s probability of turning the Texas Senate seat blue is a whopping 65%. This is partly a result of Paxton’s flawed candidacy that builds on his dramatically flawed time as Texas’s attorney general. Remember, the staunchly Republican Texas House of Representatives voted to impeach Paxton in 2023!
Markets woke up to twin Houthi attacks on October 12. On October 9, the Yemen-based, Iran-allied, militant group attacked the King Khalid International Airport with a missile, killing 12 civilians and injuring over 300. Following that attack, President Trump suggested that the US “may” join Saudi Arabia’s fight against the Houthis. On October 11, the airport was struck again, with Saudi Arabia vowing to respond.
Betting markets give Democrats a 90%-plus chance of flipping the House, but history suggests a midterm flip is business as usual, not a signal for 2028. Volatility measures suggest little of the typical election risk is priced at the index level, but stock-level volatility is elevated, particularly in politically sensitive sectors, and politically exposed stocks are underperforming. Index protection looks inexpensive.
Middle Eastern crude exports are back at pre-war levels, yet Brent remains above $100/bbl. We explain why more barrels haven’t meant lower prices, and why policymakers have no clean fix. Even if Putin follows through on his reported agreement to release Russian diesel supplies into global markets, it is unlikely to meaningfully ease the fuel's supply disruption over the near term.
China's policy stance is gradually becoming more supportive of households, but a decisive reflationary pivot has yet to materialize. In the meantime, we favor large state-owned banks and onshore utilities as defensive plays.
We review our Model Bond Portfolio performance for Q3 and look ahead as energy prices continue to drive fixed income markets. Balanced labor markets point to a mild tightening cycle, creating opportunities in government bonds and credit, while inflation-linked bonds continue offering protection against persistent energy risks.
We keep the Global Geopolitical Risk Score at 8 because there are still no ceasefires in Europe or the Middle East. Russia is provoking NATO, which will need to push back. Iran, emboldened by the lack of definitive US success, pushes its luck, which could invite a destructive response from the US. The Chinese economy remains fragile, increasing the likelihood of foreign belligerence. After the US midterm, President Trump faces fewer political constraints, allowing him to pursue a maximalist foreign policy to cement his legacy during his lame-duck period.
The global bond selloff is not over, but opportunities are emerging. US Treasuries and French OATs remain vulnerable to further selling, while other European government bonds look increasingly attractive. Investors should favor German Bunds and peripheral bonds, particularly on a currency-hedged basis.
The Irkutsk plague scare is not yet a crisis, but if it becomes one, Russia is a bad place for it to happen.