2 November 2026
Key takeaways
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As Americans head to the polls, history offers equity investors an encouraging pattern: since 1950, US stock market performance has consistently accelerated in the year following midterm elections. Of course, correlation is not causation, and political calendars do not drive markets alone.
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While clearing an election often relieves market uncertainty, Brazil's ballot box just delivered a jolt instead. President Lula's unexpected re-election triggered a significant repricing across Brazilian assets.
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Chancellor Healey played it safe in his first UK Budget, pairing household energy support with a multi-year fiscal consolidation that starts reducing net debt from 2029-30. With little by way of large-scale policy announcements, the market reaction was muted. Yet sticking to the fiscal plans will be challenging.
Chart of the week – K-shaped markets
Following its October decision to leave the funds rate unchanged, the Federal Reserve faces a difficult balancing act. Restrictive policy and gradual further tightening remain necessary to bring sticky inflation back to target, especially with oil's renewed rise heightening upside inflation risks. Yet, an uneven, K-shaped economy complicates the task: policy is ultimately too accommodative for sectors benefitting directly from the AI boom, yet too tight for industries further removed from it or competing with technology companies for capital.
After moving in lockstep for much of the year, US large- and small-cap stocks have mirrored this divide, splitting into a K-shape since late summer. The S&P 500 remains buoyed by bumper mega-cap earnings, despite lingering concerns over AI capex plans. Meanwhile, the rate-sensitive Russell 2000 has fallen as markets price in more aggressive Fed tightening – current expectations of three more hikes imply a peak funds rate of over 4.50% in 2027.
However, the Fed is likely reaching the limits of how restrictive policy can become. The jump in bond yields is already doing much of the heavy lifting to cool growth, and there is a reasonable chance that oil prices moderate in line with the futures curve. A less hawkish outcome should help unwind this K-shaped divergence in markets and deliver a modest softening in the US dollar. Alongside wider AI spillovers and converging profit growth across sectors and regions, the broadening-out trade looks set to stay very much alive in 2027.
Market Spotlight
Look under the bonnet
This year’s climb in bond yields has put the “income” firmly back into fixed income, opening up compelling opportunities for investors. Yet with mainstream corporate bond spreads near the tight end of their historical range, additional value can also be found beyond the usual suspects.
Securitised credit. In simple terms, securitisation bundles pools of loans – from mortgages to corporate debt – into tradable bonds sliced into tiers, or “tranches”, letting investors choose where on the risk-and-return spectrum they want to sit. Junior tranches act like a car’s crumple zone: they absorb the impact of any loan defaults first, leaving senior AAA and single-A investors insulated while still earning attractive income. And because most of them pay floating rates, they carry near-zero duration risk, smoothing out the ride when rates are bumpy.
So why do they pay wider spreads than corporate bonds? Because intricate engineering requires skilled mechanics. Structural complexity and lower liquidity make rigorous research, security selection, and manager expertise essential, potentially rewarding investors prepared to look under the bonnet. However, these investments also carry risk.
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. The level of yield is not guaranteed and may rise or fall in the future. Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific company, country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management, Factset, Bloomberg, Macrobond. Data as at 7.30am UK time 30 October 2026.
Lens on…
Capitol gains
As Americans head to the polls, history offers equity investors an encouraging pattern: since 1950, US stock market performance has consistently accelerated in the year following midterm elections. Of course, correlation is not causation, and political calendars do not drive markets alone. Many post-midterm rallies coincided with powerful secular tailwinds – from 1980s disinflation and the 1990s tech surge to post-Global Financial Crisis “monetary policy on steroids” and the rise of mega-cap tech. Still, the electoral cycle plays a role. Markets dislike uncertainty, and once midterms pass, investors gain clearer visibility on the policy agenda. If the administration loses one or both chambers of Congress, it may lean more on executive actions and trade policy – yet divided government reduces the risk of sweeping fiscal or legislative surprises. |
Other volatility drivers remain, including inflation, rates, and AI. And given how strongly markets have run in recent years, another 20% gain is a tall order today. Yet after a stretch where political events – from "Liberation Day" to Iran – rattled sentiment, clearing the midterms can turn politics from a headwind into a welcome market tailwind.
A real shock
While clearing an election often relieves market uncertainty, Brazil's ballot box just delivered a jolt instead. President Lula's unexpected re-election triggered a significant repricing across Brazilian assets. Opposition gains in Congress point to legislative gridlock, complicating efforts to restore fiscal credibility and keeping Brazil's fiscal risk premium elevated. Some emerging markets debt experts think interest rates are unsustainably high and likely to move lower over the coming year, especially if pragmatic compromise with centrist lawmakers unlocks fiscal consolidation and key economic appointments calm nerves. |
However, Brazil's bigger macro story hasn’t vanished overnight. An AI-fuelled appetite for commodities and high oil prices could still play straight to the country's strengths.
Taxing times
Chancellor Healey played it safe in his first UK Budget, pairing household energy support with a multi-year fiscal consolidation that starts reducing net debt from 2029-30. With little by way of large-scale policy announcements, the market reaction was muted. Yet sticking to the fiscal plans will be challenging. Consolidation relies heavily on one lever, tax increases, despite revenues already at post-WWII highs as a percentage of GDP. Moreover, avoiding main tax rises for smaller, politically easier measures adds complexity to an already complex tax system and leaves revenues more uncertain. A greater mix of tax increases and spending cuts could reduce slippage risks, especially if cyclical deterioration knocks upwardly revised 2028-30 OBR GDP forecasts off course. |
Backloaded consolidation and persistent inflation concerns – with the BoE expected to raise rates – are likely to keep 10-year gilt yields elevated in the near term. However, G7-topping yields provide attractive income, while subdued UK growth and a possible moderation in oil prices in 2027 should ease price pressures, allowing scope for a modest decline in yields over the next 12 months.
Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg, Refinitiv, FactSet. Data as at 7.30am UK time 30 October 2026.
Key Events and Data Releases
Last week
This week
For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management. Data as at 7.30am UK time 30 October 2026.
Market review
Global equities rose after recent declines, as investors assessed further corporate earnings releases and major central banks’ rate decisions. In the US, tech heavyweights were mixed, with the S&P 500 and Nasdaq higher, while the interest-rate-sensitive small-cap Russell 2000 outperformed. The Euro Stoxx 50 recovered from recent losses, alongside rallies in the DAX. In Asia, the Nikkei 225 edged higher, while the Kospi traded higher amid a week of earnings releases from semiconductor heavyweights. The Sensex advanced, while onshore mainland Chinese equities lagged their offshore counterparts. In Brazil, stock indices fell markedly following Lula’s unexpected second-round victory in the presidential election, with the Brazilian real suffering notable losses against the US dollar. Across major sovereign bond markets, US Treasury yields broadly declined. German Bund yields were largely stable, while French OAT yields fell. UK gilt yields were also down following the Autumn Budget.
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