8 Months of Hormuz Blockade: Where Do Markets Stand?
Our Base Case for the Remainder of 2026:
No Armageddon but Rising Geopolitical Risks, Strong Earnings, and Shallow Monetary Policy Tightening
Market Movers: 2026 Year to Date
Key Market Drivers for the Remainder of 2026
Key Risks
How to Take Advantage of the Positive Investment Environment?
SystematicEdge has developed a series of investment strategies that give investors a diversified, cost-efficient exposure to Equity, Fixed Income, and Commodities. Our strategies are based on three pillars:
1.A fully systematic investment process
2.Use of efficient institutional financial instruments
3.Cost compression at all levels.
The performance of our flagship strategies in 2025 and 2026 year to date is shown in the table and chart below.
To see the full factsheets for our strategies, please contact insights@systematicedge.com.
Global Asset Outlook: Diverging Growth, Rising Yields and a Stronger Dollar
Global markets delivered mixed performance in September, with technology-led U.S. equities remaining resilient while European, Indian and Greater China markets generally weakened. Emerging Asia outperformed, driven by strong gains in Japan and South Korea, although Chinese equities continued to lag on both a monthly and year-to-date basis. Fixed income markets saw yields rise sharply in the U.S. and Europe, while China remained on a lower-rate path, highlighting diverging monetary policy trends. Commodity and cryptocurrency markets rebounded, led by oil and digital assets, while the U.S. dollar strengthened against most major currencies during the month.
Equity: Global equities delivered mixed performance in September. U.S. markets diverged, with the S&P 500 slipping 0.5% MTD while the Nasdaq 100 gained 3.2%, leaving both up 11.8% and 20.4% YTD respectively. Asian markets were mixed, with the Nikkei 225 (+0.7% MTD, +32.6% YTD) and KOSPI 200 (+0.9%, +78.5%) outperforming. European equities weakened, as the Euro Stoxx 50 fell 2.4% MTD despite remaining up 8.2% YTD. Greater China and India lagged, with HSCEI (-3.4% MTD, -7.8% YTD), Hang Seng TECH (-7.9%, -22.9%) and NIFTY 50 (-6.1%, -13.4%) posting notable declines.
Fixed Income: Government bond yields moved higher across developed markets, with the 10-year U.S. Treasury ending September at 5.29% (+54bps MTD, +112bps YTD) and the 10-year German Bund at 3.60% (+26bps MTD, +74bps YTD). China remained an outlier, with the 10-year government yield at 1.70%, broadly unchanged MTD (-1bp) and down 16bps YTD.
Currencies: The U.S. dollar strengthened broadly during September, pushing EURUSD down to 1.1328 (-2.5% MTD, -3.6% YTD), AUDUSD to 0.6943 (-3.1% MTD, +4.1% YTD), and USDJPY to 157.39 (-1.5% MTD, +0.5% YTD). USDRMB ended at 6.7086, little changed in September (-0.1%) but down 3.8% year-to-date.
Commodities: Commodity performance was mixed, with WTI crude oil surging to 90.42 (+5.4% MTD, +57.5% YTD), supported by continued supply tightness and strong year-to-date gains. Gold retreated to 4,156 (-6.2% MTD, -3.9% YTD), while copper finished at 14,460 (-0.5% MTD) but remained up 16.5% YTD.
Crypto: Cryptocurrencies rebounded strongly in September, led by Solana at 117.99 (+13.8% MTD, -5.0% YTD), followed by Ethereum at 2,681.27 (+8.4% MTD, -10.0% YTD) and Bitcoin at 83,626.90 (+6.0% MTD, -4.6% YTD). Despite the monthly recovery, all three major digital assets remained in negative territory year-to-date.
Global equities are up 12% YTD, supported by strong earnings and investment in AI, the energy transition, natural resources, and defense. Improving manufacturing activity and robust capital spending should sustain earnings growth and support further equity gains over the next 12 months.
Modest monetary tightening may increase volatility, but resilient growth, corporate profits, and transformational innovation should underpin the outlook despite higher rates and geopolitical uncertainty. Valuations remain broadly reasonable, with excess concentrated mainly in U.S. AI stocks.
Key risks include Middle East tensions, inflation, higher interest rates, and intensifying technology competition.
In the U.S.: Strong Earnings and AI Support Further Upside, S&P 500 Up 11.8% YTD
U.S. equities have traded sideways recently, but solid YTD gains and strong earnings support our positive outlook. We expect modest Fed tightening to remain manageable, with further upside if growth stays resilient and inflation eases. Earnings growth may be peaking, but returns should remain healthy unless forward estimates face substantial downgrades. AI-related capex is expected to rise at least 30% next year, benefiting infrastructure suppliers as adoption and monetization expand.
In Europe: Earnings Recovery Supports Gains Despite Energy and Rate Risks, EuroStoxx50 Up 8% YTD
Eurozone equities are supported by recovering earnings, improving structural conditions, and reasonable valuations. Energy disruptions and higher interest rate expectations pose near-term risks, but stronger earnings could offset valuation pressure from higher discount rates. We expect 14% earnings growth in 2027, supported by improving manufacturing activity, easing currency headwinds, and increased investment in AI, electrification, and defense. This year’s growth remains underpinned by long-term trends, cost discipline, and strong commodity-sector performance.
In China: Broadening Earnings Growth and Attractive Valuations, HSCEI Down 8% YTD
Second-quarter results showed strong profit growth driven by AI investment, industrial upgrading, and overseas expansion. Earnings gains are spreading beyond technology leaders, while higher dividends and buybacks provide additional support. AI spending is already generating revenue and profits, with semiconductor equipment benefiting from sustained demand and localization. Innovative health care, fintech, and commodity-related companies also offer resilient earnings prospects. Valuations remain attractive, supporting our positive outlook.
The Iran conflict is lifting oil prices and inflation expectations, but markets may be pricing in excessive Fed and ECB tightening. Despite a more hawkish Fed outlook, we expect a weaker USD amid U.S. fiscal concerns and uncertainty surrounding the midterm elections. Pro-growth currencies, especially the RMB, should benefit from strong trade surpluses and policy support.
Tighter Fed policy and renewed energy disruptions remain key risks, making disciplined FX hedging essential to protect capital.
EUR/USD: Down 2.5% in September and 3.6% YTD to 1.1325, European Risks Weigh
EUR/USD fell to 1.1325, its lowest since May 2025, pressured by French fiscal concerns, high U.S. yields, and energy risks. The euro weakened despite easing expectations for further near-term Fed hikes, suggesting growing concern about Europe.
Fiscal stimulus in Europe, potential ECB hikes, and stabilizing oil prices in 2027 should support a recovery above 1.15, capped at 1.20, over 12 months.
Given this asymmetric 1.10–1.20 outlook and competing FX drivers, active hedging remains essential.
USD/RMB: Flat in September and down 3.8% YTD to 6.7075, as China Stimulus and Trade Flows Support Further RMB Gains
China’s largest stimulus package since September 2024 includes mortgage subsidies and expanded central bank funding to support its 4.5%–5.0% growth target. We expect USD/RMB to decline toward 6.20 over 12 months, with PBoC-guided RMB appreciation of about 0.5% per month. A temporary U.S.-China tariff truce and an average monthly trade surplus of USD 100bn should sustain sell USD-to-RMB conversion demand. A more hawkish Fed could keep the dollar stronger for longer, making active FX hedging essential for businesses with cross-border exposure to China.
USD/JPY: Down 1.5% in September to 157.40, flat YTD, BoJ Tightening Limits Yen Weakness
The BoJ raised rates by 25 bps to 1.25%, but a split vote and Governor Ueda’s balanced remarks tempered expectations for aggressive tightening. September meeting opinions showed growing concern about inflation exceeding 2%, leaving another hike possible this year, with timing uncertain ahead of October and December decisions. We believe further normalization should make a sustained move above USD/JPY 160 harder, without establishing a lasting yen appreciation trend. Carry trade unwinding and capital repatriation into JPY remain risks that could trigger a sharp yen rally.
Bank Bonds Offer Compelling Yields near 6% in USD and 5.25% in EUR
With the benchmark 10-year Treasury yield at 5.30% in the U.S. and 5% in euro in France, a 20-year high, current levels offer an attractive opportunity to lock in yields. High-quality bank bonds now yield around 6% in USD and 5.25% in EUR offering compelling income opportunities near 20-year highs and supported by strong fundamentals.
Global bond yields, except in China, are at their highest levels since 2000, up more than 100 bps year to date. France’s 10-year yield has risen more than its peers, widening the France-Germany spread to 150 bps, double its year-to-date level. Investors are demanding a higher risk premium amid political unrest and a deteriorating deficit. De-dollarization has also accelerated the USD yields increase: China’s U.S. Treasury holdings have fallen 50% in 10 years as its gold holdings have grown.
Our base scenario for fixed income: Rates should stabilize when energy prices do:
The Fed and ECB have signaled a more patient approach, since rate hikes cannot directly address an oil supply shock. We expect one more 25 bp hike in the U.S. and Europe by year-end. 2027 policy will depend on the pace of détente in the Middle East. Resilient growth and easing supply pressures should gradually moderate inflation. In our main scenario ten-year yields in U.S. and Europe could rise a further 50 bps before stabilizing around 5.75% in the U.S., 4% in Germany and 5.50% in France.
Specific Risks for fixed income portfolios: Excessive Monetary Tightening and Oil-Driven Inflation
After the ECB raised rates by 25 bps to 2.50% on September 10, additional Fed or ECB hikes could weaken growth and equity performance. U.S. and European policy rates are already nearly twice their respective GDP growth rates, while elevated oil prices could prolong inflation.
Short-Term Cash Opportunity: Enhanced Cash Management (ECM) at 4.75%
A More Efficient Alternative to Bank Deposits
The higher yield curve and wider bank credit spreads create an opportunity to generate a stable net income yield of 4.75%, about 25% higher than traditional bank deposits and roughly 1.0% to 1.5% above prevailing deposit rates. ECM is designed to preserve capital while maintaining liquidity. Further details are available in the “Opportunities” section.
Commodities have performed strongly this year, with our Geopolitical Risk Mitigation (GRM) portfolio up more than 22% YTD. Broad commodity exposure provides portfolio diversification, inflation protection, and a hedge against supply disruptions, supported by historically low correlations with equities and bonds. While U.S.-Iran tensions may ease in 2027, restoring full flows through the Strait of Hormuz could take time, while geopolitical uncertainty and structural demand from electrification remain supportive.
Our Geopolitical Risk Mitigation (GRM) strategy reflects this outlook through exposure to gold, oil, and copper, three assets increasingly in demand amid rising geopolitical and economic tensions. Further details are available in the “Opportunities” section.
Oil: Brent is up 68% YTD at USD 99/bbl, after peaking at USD 120/bbl in March. Prices rose 15% in September but remain below their March peak
Middle East crude exports have recovered to 17.5 million barrels per day, or 95% of pre-war levels, as Saudi Arabia restored East-West pipeline flows.
G7 countries and partners plan to release up to 100 million barrels of emergency oil and diesel reserves over four months, helping prices fall below USD 100/bbl.
Recovering demand and inventory declines of 100 million barrels in August and 500 million since February keep supply tight, though China’s crude imports should fall over 24 months as its energy transition advances.
The oil futures curve points to easing tensions and normalizing energy prices. We expect prices to decline by year-end as U.S.-Iran negotiations progress.
Gold fell 6.2% in September to USD 4,150/oz, bringing its YTD decline to 4%
Gold is down 4% YTD following a 25% correction from its January record high of USD 5,600/oz.
The Fed’s latest rate hike may fuel further volatility, but gold’s long-term investment case remains intact.
Sanctions, reserve-access concerns, and rising government debt strengthen demand for a store of value that is not another institution’s liability.
Diversification away from concentrated U.S. dollar exposure and a weaker dollar should support gold over the medium to long term. We continue to view gold as a strategic portfolio diversifier rather than a tactical trade on current geopolitical developments.
