INSIGHTS
By
Ed Meltzer,
Head of Distribution
Modern Capital's Rich de Wet and Brad Atkins recap the Q3 2026 market update webinar — rates, inflation, oil, and the global rotation away from U.S. stocks. Listen to the full recording.
A Risk-On Year Meets Higher-for-Longer Rates
It's been a strong three quarters for global stocks, led by technology and AI-related names. The Nasdaq-100 and the MSCI World index are both up roughly 12.5% year to date, and the S&P 500 is up just shy of 13% — solid full-year-type returns with months still to go. The IMF is holding its 2026 global growth forecast at roughly 3%, only a tenth of a point below its April estimate, crediting AI-driven productivity gains for offsetting the drag from the Middle East conflict.
Rates, though, have moved the opposite direction from what many expected. Rather than cutting, the Fed has held its benchmark rate at 3.75%, and markets have largely taken cuts off the table — swaps pricing now points to the Fed ending the year closer to 3.94%, with small odds of a hike in September or December. Treasury yields have risen sharply and the curve has steepened: the 2-year is up about 68 basis points to 4.16%, the 10-year up about 47 basis points to 4.64%, and the 30-year up about 35 basis points to 5.19%, driven by stronger business investment and heavier government borrowing. The Treasury Department intervened just before the webinar to pull long-end yields back down — a reminder that natural market forces and policy responses are both in play.
Inflation, Oil, and the Middle East Wildcard
Inflation is sticky but manageable, not spiraling. June CPI came in at 3.5% year over year, still well above the Fed's 2% target, while real GDP grew 2.1% in the second quarter — a decent number, but not without risk. The Fed's Beige Book described business activity as expanding at a "slight to moderate" pace, with cost pressures tied to both the Middle East conflict and tariffs. Inflation trends are diverging globally: China is flirting with deflation (July CPI up just 0.5% year over year, the slowest in six months), while the ECB is watching euro-area wage growth accelerate into 2027.
If there's one commodity story this year, it's oil. WTI crude is up 50% year to date to $85 a barrel, and Brent is up 52% to just under $92 — a direct result of the Middle East conflict that broke out in late February. Oil staying this elevated is one of the biggest upside risks to global inflation and a real constraint on how much room central banks have to ease. Gold, by contrast, is up only about 4% on the year to $4,500 an ounce — with essentially all of that gain coming in the day before the webinar, tied to the Treasury's rate intervention — suggesting markets are treating this as an oil and supply shock rather than a broad flight to safety. The dollar index is similarly flat, up about 1.5% year to date.
The Middle East conflict remains the top macro risk, weighing on global trade and hitting emerging and developed markets differently. China is worth watching closely — export-driven growth is masking weak domestic demand, and analysts at Macquarie think a sharp export downturn could force a much larger stimulus package and a meaningful jump in the yuan. The Bank of Japan is another one to watch, with at least one member floating faster rate hikes — a scenario that would matter a great deal for global carry trades and the Japanese government bond market.
Central Bank Divergence and the Global Rotation Away from the U.S.
One of the biggest portfolio themes right now is how differently the world's central banks are behaving. The Fed is on hold with a slight tightening lean; the ECB's Christine Lagarde has described inflation and growth risks as more balanced than before; the Bank of England remains undecided; and the Bank of Japan looks to be leaning toward further tightening. That divergence is opening up real opportunities in currency and rates markets, particularly in major currency pairs and emerging-market local bonds — though EM central banks themselves are split, with Mexico near its inflation target but not declaring victory while China leans toward easing.
Zooming out globally, international stocks have largely kept pace with or beaten the S&P 500's 13% return. Japan is leading all major markets — the Nikkei 225 is up over 28% year to date, powered by AI and semiconductor names, with Q2 marking Japan's best quarter ever (a move Modern Capital's Tactical Income Fund has benefited from), though it has pulled back somewhat from its June peak. Emerging markets overall are up nearly 20%, but the composition is shifting, with large funds rotating out of Korea and semiconductor names into Chinese internet, Indian tech, and Indonesian banks, even as Morgan Stanley upgraded Korea and Thailand to overweight in early August on valuation grounds.
Europe is holding its own, with the MSCI Europe index and Euro Stoxx 50 both up around 11%, helped by the best earnings revisions in five years per Citi and a narrowing earnings gap with the U.S. per Barclays. The UK has been resilient too, with the FTSE 100 up over 8%. China remains the clear laggard — the Hang Seng and Shanghai Composite are barely positive — though Hong Kong had its best month relative to Korea on record in July as money rotated into Chinese internet and bank stocks. Perhaps the biggest-picture data point: Bank of America found U.S. stocks captured only $26 of every $100 in global equity inflows earlier this year, the lowest share since 2020 — a real signal that the "U.S. exceptionalism" trade is starting to rotate elsewhere.
Looking Ahead to Q4 2026
Putting it all together, here's what Rich and Brad flagged to watch over the next three months: this week's inflation report and its influence on the Fed's September and December meetings; whether long-end Treasury yields keep steepening if business investment and borrowing stay strong; whether oil holding in the $82–$88 range keeps central banks from turning dovish; whether China sees a sharp enough export downturn to trigger a bigger stimulus package; and whether the Bank of Japan moves faster on rate hikes in a way that ripples through global carry trades. More broadly, expect central bank divergence to keep driving currency and rates opportunities, continued AI-driven swings in semiconductor-heavy markets like Korea and Taiwan, and a gradual rotation into non-U.S. and value-oriented markets as long as the U.S. keeps capturing a shrinking share of global equity flows.
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