Mid-term blues for a humbled President

The Democratic sweep of Congress should reduce the probability of a major Iran escalation and create a more constructive backdrop for fixed income and selected risk assets.

• The authors expect US inflation to fall below 3% by mid-2027, while forecasting rate hikes in December and the first quarter before the Fed holds policy steady.
• US GDP should remain supported by business investment, although tighter restrictions on AI infrastructure could slow spending growth and help stabilise hyperscaler spreads after heavy debt and equity issuance.
• Eurozone CPI could peak at 4.5% in the first quarter and fall below 2% by late 2027, supporting the possibility of ECB easing before the end of 2027.
• The team has added exposure to Italy and France and re-entered Romania, where bonds offer spreads above 300 basis points after a political compromise reduced downgrade risk.
• UK headline inflation could exceed 5% next spring, yet the Bank of England may raise rates only once or twice more after lifting Bank Rate to 4%; the team also closed a long US dollar position, added Mexican peso exposure and extended credit risk.

Takeaway: The authors favour moderately long exposure to European sovereigns, euro credit, selected emerging-market currencies and gilts as political and inflation pressures ease, while acknowledging that weak equities could still trigger a flight to quality.