Macro Freestyle podcast – Resilience under pressure
Global markets have shown notable resilience amidst rising bond yields and sustained geopolitical tension, as highlighted by Standard Chartered's recent analysis. Per the full note , factors such as upcoming elections, rising bond yields, and fiscal pressures have been cited as potential stressors on market stability. This resilience appears to be holding firm for now, but traders should be wary of shifts, particularly with critical events looming that could alter the landscape. The current market sentiment reflects an optimism that contrasts with the pressures outlined, making it essential for players to reassess positioning as these factors evolve.
What the desk is arguing
The desk asserts that despite broader macroeconomic uncertainties, global markets have maintained their stability. Standards set in recent analyses suggest that while market participants remain optimistic, vigilance is necessary given the upcoming challenges posed by fiscal dynamics and geopolitical events, including key elections that could sway sentiment.
Supporting their thesis, Standard Chartered's commentary highlights the ongoing increase in bond yields, which typically signal tightening financial conditions. As yields rise, the interactions between equities and fixed income will be critical for traders to monitor, particularly as changes in these metrics may prompt reassessments of risk tolerance across asset classes.
Where it sits in our coverage
As of now, our consensus target for the EUR/USD pair is 1.075, with a range spanning from 1.04 to 1.12. Notably, firms like jpmorgan have aligned with this outlook, posting a target of 1.10 for March 2026. Meanwhile, bofa presents a contrary forecast of 1.04, indicating some divergence among analysts.
In general, the desk’s view aligns well within the upper bounds of this consensus, suggesting a cautious yet optimistic viewpoint as macro variables fluctuate and influence trader behavior.
How other firms see it
Several firms, including jpmorgan, advocate a bullish tone on the euro, underlining their belief in sustained strength as global market dynamics shift. In contrast, bofa expresses caution, predicting potential headwinds that could limit upside momentum.
Traders should keep an eye on movements in USD/CAD and GBP/USD, as these pairs may react intricately to shifts in U.S. yield dynamics and broader geopolitical developments influencing market sentiment.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Global markets display resilience amid rising bond yields and geopolitical uncertainty.
- 02Significant events like elections and natural phenomena (e.g., El Niño) could impact market stability.
- 03Current consensus on EUR/USD is 1.075, influenced by differing firm expectations.
- 04Monitoring fixed income trends is crucial for managing FX exposures in this volatile environment.
Market implications
Traders should closely watch the 1.075 level in the EUR/USD, as it represents a key pivot point in the current outlook. Adverse shifts in bond yields or unexpected geopolitical events could trigger significant volatility.
Risks to this view
Key risks to this outlook include unexpected central bank policy changes or geopolitical escalations, which could rapidly alter market sentiment and lead to an erosion of the current resilience observed.
Hello, I'm Eric Robertson, Global Head of Research and Chief Strategist at Standard Chartered. And I'm Madhur Jha, Global Economist and Head of Thematic Research also here at Standard Chartered. Welcome to Macro Freestyle, our monthly podcast series where Madhur and I will identify and explore topics that are likely to be most impactful and relevant for financial markets and the global economy.
Welcome back everyone to another episode of our podcast, which we are recording on the 12th of October 2026. Recently, markets have tempered expectations of Fed rate hikes and risky assets remain supported with VIX low and equity markets holding up. But concerns about fiscal sustainability have re-emerged as we head into a busy election cycle across sub-key economies.
The mood music in DM bond markets is changing for the worse, not only with the 10-year USD yields hitting their highest levels since 2002, but also as yields in other DM economies have risen sharply over the last few months. Today, we're going to try and unpack some of the drivers of this bond market volatility and also discuss the potential spillover for other asset classes as well as the real economy. Eric, we have discussed in previous episodes, the somewhat surprising resilience of the global economy and markets to a series of shocks.
Do you see this resilience increasingly coming under pressure as we head towards the end of the year? Yes, this is the million dollar question between now and the end of the year. We have seen resilience across not only the global economy, but also global financial markets and we've seen a number of shocks this year, which historically you would have assumed might have presented more of a headwind from an economic point of view.
The overwhelming momentum in the technology space with regards to CapEx and the AI initiatives and data centers has provided not only an offset to some of these risks, but in many cases has overwhelmed the downside risk. But it creates this extraordinary divergence in a number of economies between those parts of the economy that are linked to tech and AI and those that are more traditional aspects of the economy. But as you've pointed out with our colleagues in a number of reports, global trade is the forgotten hero in some ways of the global economy.
Yes, there are challenges. Yes, costs are up. Yes, supply chains have been disrupted.
But overall, global trade for goods and services continues to surprise on the upside. The other side of the coin, as you allude to, is this issue of the volatility in interest rates. For sort of the first two thirds of the year, the increase in yields for many people was viewed as a benign event.
It was a repricing of yields from what some would argue were inappropriately low levels. And that repricing was maybe a function of monetary policy normalization, maybe a function of higher nominal growth in a few places. But over the last six to eight weeks, we've seen a real change.
The volatility of interest rates has gone up along with the level of yields. And the concern around fiscal narratives, the negative feedback loops between the fiscal story and the election cycle are all really starting to weigh on markets. And we saw a significant interest rate shock in September, which has caused quite a bit of difficulty for investors and risk managers.
And the final point is we've got elections popping up. It feels like everywhere. We're halfway through the Brazil election cycle.
We have U.S. midterms coming up in a few weeks, and we have the market obviously very focused on presidential elections in France for next year. So it does feel like those headwinds are starting to accumulate. Thanks, Eric.
Maybe talking a little bit more about the backup in long-term bond yields that we have seen. It's not just the U.S. We're also seeing the backup in yields across Japan and France, as you mentioned.
How worried are you about the spillover of this to the rest of the world? And do you see this more as structural concerns coming through, or is this more of a reflection of the upcoming election cycle? Even with the mild reduction in Fed rate hike expectations for the October meeting, yields have remained elevated.
And so what that tells us is that the rise in long-term yields globally is not just a function of changing central bank expectations. There's the inflation angle, there's the fiscal angle, there's the political angle, all wrapped up in what we would call an increase in term premium. What really worries me, and this is something I've been writing about for most of the year, is that the fiscal deterioration that we are seeing across a number of economies ultimately is going to require political will and political ability to get back under control.
Because of where we are in the various election cycles, I worry that we will not see much political movement towards getting these fiscal narratives under control. We're seeing it in the U.S., we're seeing it in France, we're seeing it in the U.K., we're seeing it in a number of the major developed economies around the world. Whether it's coincidence or a structural shift, some of the elections that we've seen this year in emerging economies has actually been a very positive catalyst for their FX and rates markets.
We had the elections in Colombia in June, which produced a positive result. We're seeing a positive reaction so far in Brazil. So it's not entirely a global story.
But my concern is that the major bond markets are seeing this negative feedback loop. The long end of the yield curve in these major economies seems to have lost its anchor. And that is potentially a real threat to both markets and the economy.
When we talk about what the central bank is expected to do over the next six months or nine months, there's a reasonable range of expectations that you can hang your hat on. With the long end of the yield curve, there is no anchor when we get into this negative feedback loop. So is the right level for 10-year treasury yields 5% or 6%?
Well, it's not clear. And so that's what markets are grappling with. And I don't expect that uncertainty to dissipate.
I expect it to get worse over the next three to six months. And that raises my question for you, Madhur, which is the spillover to emerging economies from this bond market volatility has been extremely limited so far, which cuts against what history and precedent would suggest. You've written a number of reports based on a model of external vulnerabilities where rising interest rates is one of those factors.
I wondered if you could talk a little bit about how EM economies are behaving, how they're responding and what you think the lessons are in the current scenario. Thanks, Eric. EM economies have been surprisingly resilient to a number of shocks, but clearly there's an underlying improvement in fundamentals that we have also seen for these economies, which is helping them.
We've had rate increases, we've had shocks, but this rise in 10-year bond yields could be more impactful because it is a benchmark for international borrowing costs for these EM economies. And that's why we're looking at this a little bit more in detail than if it was any other part of the curve that was rising. Now, historically, what has driven yield rises has been a crucial determinant of how EMs react.
So what is driving the rise in USD yields? If it is primarily growth-led, so it's just normalization of Fed policy, then EM economies can weather that quite okay, because what comes with high borrowing costs is also rising demand for EM exports, healthier investor confidence, a lower risk cap or higher risk tolerance and a better or more benign risk environment overall. So if it is primarily driven by growth, the backup in bond yields, then that is tolerated well by EM economies.
And that's what we've seen for the last few months. But as you mentioned, the last six to eight weeks, we've seen a change. And this is why we are a little bit more concerned about the road being a bit rockier over the coming months.
Because now, the driver of the yield increases is very much risk premia-led and not so much a growth-improving story, right? And what we found historically is that when yield increases are driven by rising risk premia, then this leads to capital outflows, equity market weakness, EM cred spreads widening, and even currencies coming under pressure. So that's why it's a more challenging environment over the coming months.
Icarus, which is our external vulnerability model, would also suggest a very similar outcome. If you have expectations of tighter global financing conditions for EM markets, a rise in the slope of the yield curve, because we are expecting the shorter end to be not rising as fast as the longer end, then you are going to see more risks of vulnerability for the EM economies. And all of this becomes worse if we are expecting US dollar strength as well.
So the double whammy of rising borrowing costs as well as US dollar strength, that tends to have a bigger impact on EM economies than otherwise. And that brings me to a question for you, Eric Das. This backup in bond yields strengthened your US dollar view.
Would you say that this reverses some of the concerns around de-dollarization that markets have had? We've seen another very good bounce or recovery in the dollar over the last six weeks from the lows in September. Initially, that was largely driven by the repricing of Fed rate hike expectations before the September meeting.
Now, obviously, long-term rates have gone higher as well in the US. And so there has been a recognition in markets that while the fiscal narrative in the US is negative, what has been repriced, which has helped the dollar, is the growth expectations, right? And people are generally now accepting that the US economy and maybe even corporate profits as well are in better shape than people assumed back in the second quarter.
We're effectively at the top end of the range that the dollar has been in over the last six to nine months. And we have the US midterm in three weeks' time. And you mentioned the idea of de-dollarization.
And there is a very strongly held view amongst the global client base that the political risk and political uncertainty in the United States is high enough to justify and even incentivize diversification away from the dollar. And we have seen that theme play out in a number of mini cycles since March and April of 2025. And I don't think that has gone away.
There's increasingly a decent probability that the Democrats will take not only the House but the Senate as well. And so then you get a real gridlock in the US political arena. I worry about the implications there for things like raising the debt ceiling.
If the Democrats have control of all of Congress, the debate around the debt ceiling is going to get potentially very contentious, even more so than it has been in the past. I don't think that would be supportive for the dollar. And so we have this tug of war.
US growth still looks okay. Financing conditions are getting tighter. Long-term yields are higher.
Interest expenses going up. Mortgage rates in the US above 7%. All of these tensions are struggling for dominance in the market narrative.
The unanswered question is going to be what the political and economic momentum looks like coming out of the midterm elections. And we need to be braced for the fact that coming into the end of this year and going into early next year, you're going to have the ramifications of the US midterms. You're going to have the anxiety around the French elections in April and May of next year.
So the political inspired volatility, I think, is going to continue to create volatility in FX. And as you and I have talked about in the past, I think that simply leads to a lot more government intervention in markets. We've seen another example of that with India.
We're seeing more and more examples of government intervention in either the bond or the FX markets around the world, whether it's the US, Japan, India, et cetera. And I think that is going to be the reality that we are faced with going forward. So do we still maintain a dollar positive view?
Yes. Do we acknowledge that there are quite a few two-sided risks when we talk about FX at the moment? Absolutely.
And maybe shifting back to EM for a second, Madhur, many of the top performing currencies this year are EM currencies, right? Now, some of that is high yield and carry, but some of it is domestic fundamentals, which in some cases have improved enough to perhaps offer resilience against some of these DM inspired external shocks. But talk to me about how you think about the reaction function of EM central banks in this landscape.
It's very reassuring to see EM weather so many shocks over the last few years and come out largely unscathed. Of course, there have been some pockets of worry. They have improved policy credibility a lot.
There's been a move towards inflation targeting. There's been a move towards building up buffers like FX reserves. And we've also seen them trying to maintain control over the fiscal debt and deficit positions despite all the shocks that we've gone through.
So all of that is helping the story. And some of these are also integrated into the AI supply chain story. So they are also getting some offset to rising borrowing costs from stronger domestic growth.
But again, the domestic macro picture for many EM economies is looking a little bit more challenging now for a couple of reasons in particular. The first is the persistence of the energy shock. So far, the EM consumer has been shielded from this energy shock by the governments, by the central banks using various measures, whether it's price caps or subsidies or just providing liquidity in the system, using demand management measures like reducing the number of work days in a week.
All of these measures have been used to support the EM consumer. But the longer the energy shock lasts, the more difficult it is to sustain these kind of measures. You start running lower on the buffers that you have been using, and that causes the authorities to have to, say, raise the price gaps or to not provide so many subsidies because your fiscal position is coming under strain.
So that is a little bit more challenging now. And on top of that, you have an El Nino which is developing, which is considered to be a super El Nino. That has implications as well because it could raise food inflation and make the burden on the consumer a lot higher, both through imported inflation as well as domestic inflation.
So this combination of a persistent energy shock with potentially disruptive implications from El Nino in an environment of rising external borrowing costs does make it more challenging for EMs. They are getting offset from better trade, as you mentioned. They are getting offset from strong growth in the U.S. and also the AI cycle.
But it's not going to be quite as benign as we've seen over the last few months. And markets will then start to look at which economies have been able to maintain buffers compared to others to try and pick the winners and the losers. Madhur, can I just ask a follow on question to the El Nino discussion?
Because one of the things that you have talked about extensively over the years is this issue of choke points and how relevant that has become in global trade. When people hear choke point today, they often think about the Strait of Hormuz or the Red Sea with the geopolitical implications. But you have also highlighted how El Nino and the various weather patterns have also impacted some of these choke points.
Could you just share a little bit more on that topic? Absolutely. There are various different choke points that we're looking at.
The last time we discussed it, we were talking about the potential that the El Nino this time will be a super El Nino, which would be like one of the five worst ever recorded. And that is now confirmed by the weather agencies that it is definitely a super El Nino. The risk now is it's being called a Godzilla El Nino, which is the worst El Nino on record because the temperatures could rise so high.
This has implications for food production. So countries like Sri Lanka have seen the worst drought in decades. India, Pakistan, they've seen very weak agricultural production or below expected rainfall.
Countries like Colombia and Ecuador, you have lower fishing. In terms of choke points, the Panama Canal is a very important shipping route. But because of low water levels, you are seeing traffic through the Panama Canal having been reduced.
So we've already got higher shipping costs and disrupted shipping traffic because of the geopolitical risk. But now the weather conditions are also having an impact. There have been widespread fires in Indonesia, for example, which might affect cropping.
So there's various things that are happening that could have an impact on food production exports. You also have impact on hydroelectricity production with droughts that might be impacted as well. So the choke points that we are seeing can be also export led.
We've seen in the past when we've had super El Ninos, for example, in 2014, 2016, you've had the big exporting countries for rice imposing export bans. And that becomes a source of strain for other importing economies. So there are various ways in which this could have an impact on emerging markets.
And the authorities are very cognizant of the risks already. And we're also seeing some changes in behavior of central banks as a result. So we've had the central banks of Colombia, India and Philippines already raising rates and citing partly the risk from El Nino as one of the reasons a lot of the other central banks in Latin America, in sub-Saharan Africa, they're also flagging the risk of El Nino as being something that could lead to higher inflation, could have an impact on the real purchasing power of the consumer.
And this could disrupt through drought, through landslides, through earthquakes. It could disrupt logistical supply chains as well. And that we're already seeing, as I said, in the Panama Canal region.
So we're going to obviously keep tracking this over the coming months. Eric, with volatility being low so far and given the backdrop of lecture related noise, ongoing geopolitical tensions and the bond deal backup, volatility might pick up across asset classes. How should investors position themselves for all of this?
One of the challenges this year, we've seen this in the past, but it's been especially prevalent this year, is that we get these volatility shocks, which certainly validate the idea of having hedges in place and accumulating insurance or options during these periods of low vol to try and insulate either portfolios or corporate balance sheets. The problem is these volatility shocks seem to normalize almost as quickly as they come on the scene. So the ability to monetize that hedge has been quite challenging.
The other thing is that we haven't really seen any of these shocks that we've talked about today spread beyond a single asset class. We've seen considerable commodity volatility this year, and you've spoken about how relevant that is for consumers in emerging economies where food prices are such a large portion of the consumer basket. And yet the spillover from commodity volatility has been relatively limited.
And then more recently, we've had pretty extraordinary interest rate volatility in some markets where you would not necessarily expect it. And again, that has really not spilled over into significant FX volatility, equity volatility, or even credit volatility. Another example is the fact that with all of the debt issuance that we've seen in the corporate world this year, whether it's U.S. investment grade probably hitting record levels for the year, whether it's the hyperscalers.
We have seen selective examples of spread widening, but again, it hasn't spread. And that's the big question mark. That is the really big unanswered question for this year, which is why have these isolated volatility shocks not sustained themselves?
And why have they not spread to other asset classes? What will be the catalyst that is required to create that? I'm not sure.
I would hazard a guess that a really big surprise in a coming election could be the catalyst. Perhaps another leg higher in not only bond yields, but bond yield volatility could certainly be a catalyst. If you were to see an extension of the recent dollar rally, in other words, if the dollar were to start rallying against some of those high yield currencies where we know that there's quite heavily populated positions and you saw an unwind of those positions.
I could list five or 10 factors that we would all agree would potentially exacerbate volatility. But what I'm struggling with is, are any of those on a standalone basis enough to create a sustained volatility shock? And I'm not sure.
And even if you look at the U.S. midterm elections now, the idea of a democratic sweep of Congress, I don't think would be a surprise to anybody anymore because it's been so well advertised in the polls and certainly the polling momentum over the last three or four weeks has shifted in that direction. So I find myself in that strange scenario where I'm worried about the risks, but I don't think I can actually claim that I'm uncovering any risks that would be a surprise to everybody. Everybody knows what the big potential threats are.
The one we have to worry about is the one that nobody's talking about. And by definition, that black swan is unknowable at the moment. The final point I would make is that with the increase in short-term interest rates, not just in the U.S., but in a number of locations, cash is now a viable asset class.
You earn 4% sitting in U.S. dollar cash at the moment. So holding a portion of your balance sheet or your investable capital in cash is not only potentially a prudent decision from a risk management point of view, it's an insurance policy, but you're getting paid to hold it. And it's very rare that you get paid to hold an insurance policy.
Usually you are the one paying for that protection. So there are things investors and risk managers can do today to increase the resilience of their exposure, but we're in a difficult time and we need to be attuned to the risks in all directions. Thanks, Eric, for a great discussion as always, and thank you all for listening in and look forward to having you join us for our next podcast.
Thank you for listening to Macro Freestyle, our monthly podcast series on all things macro. Please do join us again for next month's edition. This podcast is provided for informational purposes only.
It does not constitute a personal offer, recommendation, or solicitation to enter into any transaction or adopt any hedging, trading, or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices. All related disclosures and disclaimers can be viewed in the link in the description accompanying this podcast. Transcribed by https://otter.ai
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