Economic Snapshot: Markets hold their ground as rate pressures rise
September brought a more challenging end to the quarter as higher interest rates, rising bond yields and renewed geopolitical tensions unsettled markets.
Global shares still produced a modest quarterly gain, supported by resilient economic growth and strong corporate earnings. For Australian investors, the weaker Australian dollar also helped overseas returns. Australian shares were softer, with the ASX falling during September as persistent inflation and another Reserve Bank rate rise weighed on the outlook.
Interest rates remained a major influence. Both the US Federal Reserve and the RBA raised rates in September, while longer-term bond yields increased substantially across many major economies. This also affected interest-rate-sensitive investments such as property and infrastructure.
Oil prices rose sharply as Middle East tensions increased, adding another source of inflationary pressure. Overall, September reinforced an investment environment in which economic growth remains relatively resilient, but inflation and interest rates continue to create uncertainty.
Global Developed Equities
Global share markets were relatively resilient over the September quarter despite higher interest rates, rising bond yields and renewed geopolitical uncertainty. Strong corporate earnings and a generally resilient global economy provided support, although performance remained concentrated in some of the largest technology companies.
US shares gained over the quarter, with the S&P 500 rising around 2%, while several major technology companies recorded much stronger gains. Corporate earnings were also encouraging, with underlying earnings growth remaining healthy across the US and improvements also evident in Japan and parts of Europe. Smaller companies were less resilient, reflecting their greater sensitivity to higher borrowing costs and less diverse revenue sources.
European markets weakened in September as interest rates and bond yields rose, while Japanese equities were comparatively steady.
For Australian investors, currency movements provided an additional benefit. The MSCI World ex Australia Index returned 1.5% in Australian dollar terms over the quarter and 7.1% for the year to date. The weaker Australian dollar helped boost unhedged overseas returns during September.
Overall, global equities continue to benefit from solid corporate profitability, but higher rates and relatively elevated valuations leave markets more sensitive to changes in economic and earnings expectations.
Australian Equities
Australian shares had a subdued September quarter, with the S&P/ASX 200 falling 2.4% in September and returning 3.7% year to date, trailing global shares.
The domestic backdrop has become more challenging. Inflation increased to 4.0% in August, prompting the RBA to lift the cash rate to 4.60% in September, its fourth increase during 2026. Unemployment rose to 4.6%, highlighting the difficult balance between controlling inflation and avoiding an excessive economic slowdown.
Major banks and miners were among the weaker performers in September despite some solid company results, while CSL was a notable positive performer over the quarter. Smaller companies also generally lagged their larger counterparts.
Housing remains important to watch. Higher mortgage rates have weighed on borrowing and property prices, while cautious consumer spending is creating a more difficult environment for some businesses.
For investors, the key issue is whether inflation eases sufficiently to limit further rate rises. Until that becomes clearer, higher borrowing costs and softer economic activity are likely to remain important influences on Australian company earnings and market performance.
Emerging Markets
Emerging markets delivered mixed returns over the quarter but have performed strongly over 2026 overall. The MSCI Emerging Markets Index was slightly lower for the quarter in US dollar terms, while its Australian dollar year-to-date return remained a strong 18.3%.
Technology-heavy Asian markets were particularly volatile following weakness in semiconductor shares. Korea experienced a significant quarterly decline after very strong earlier gains, while Brazil performed strongly. Chinese exports also remained resilient, particularly for technology-related products, although domestic economic growth and the property sector remained subdued.
Higher US interest rates and a stronger US dollar created additional pressure for some emerging-market currencies. The direction of US rates and the dollar is therefore likely to remain an important driver of emerging-market returns.
Property and Infrastructure
Listed property and infrastructure were among the weaker investments during the quarter as rising bond yields reduced the relative appeal of their long-term income streams.
Australian listed property fell 8.4% over the quarter, while global listed property and infrastructure also declined. These assets can provide attractive income and some protection against inflation over time, but they can also be sensitive to movements in interest rates and bond yields.
With both the RBA and US Federal Reserve raising rates in September, the short-term outlook is likely to remain closely linked to whether longer-term bond yields begin to stabilise.
Fixed Interest – Global
Global bond markets experienced a difficult quarter as investors adjusted to the prospect that interest rates could remain higher for longer. In the US, the 10-year government bond yield increased substantially to 5.29% by the end of September, contributing to falling bond prices and returns.
The Federal Reserve raised its key interest rate in September, with inflation remaining above its preferred level. Other major central banks, including those in Europe and Japan, also increased rates.
The rise in bond yields reflects several factors. Economic growth has remained more resilient than expected, energy prices have increased and governments and companies continue to issue significant amounts of new debt. Investors are consequently demanding higher yields for holding longer-term bonds. Against this backdrop, the main global bond index, hedged into Australian dollars, fell 2.4% over the September quarter.
While rising yields have hurt existing bond prices, they also mean that new bond investments can offer higher income than was available when interest rates were much lower. This highlights bonds' dual role in portfolios: short-term prices can fluctuate, but higher yields can improve prospective income and longer-term return potential.
Fixed Interest – Australia
Australian bonds followed the global trend, with yields rising as inflation remained stubbornly high and the RBA increased interest rates again.
The RBA lifted the cash rate to 4.60% in September, bringing the total increase during 2026 to one percentage point. Inflation reached 4.0% in August, reinforcing the Bank's concern that price pressures remain too high. However, unemployment also increased to 4.6%, suggesting parts of the economy are slowing.
This creates a difficult balancing act for the RBA. Further rate rises could be needed if inflation remains persistent, but the effects of previous increases are still flowing through households and businesses.
Rising yields meant falling prices for many existing fixed-rate bonds, with the broad Australian bond market losing 1.5% over the quarter. Floating-rate investments and bank bills performed better over this period.
For investors, higher yields have made fixed income more attractive from an income perspective than it was during the ultra-low-rate years. However, bond prices may remain volatile while markets continue to reassess inflation and the likely path of interest rates.
Commodities and Currencies
Commodity markets were heavily influenced by geopolitical events. Brent crude oil rose almost 42% over the quarter to US$103.50 a barrel as Middle East tensions and concerns around oil supply intensified. Copper also rose, while iron ore weakened modestly. Gold fell during September as bond yields and the US dollar strengthened but remained higher over the quarter.
Currency movements also reflected changing interest-rate expectations. The Australian dollar fell around 3% against the US dollar in September, ending the quarter near US70 cents. This weakness helped improve the Australian-dollar returns from unhedged international investments.
Looking ahead, energy prices remain particularly important because sustained increases could add further inflationary pressure and complicate the outlook for interest rates.
Key Takeaways for Investors
- Higher interest rates remain the key influence on markets. Inflation is proving persistent and central banks are maintaining restrictive policy, creating pressure for bonds, property and some areas of the share market.
- Corporate earnings remain an important source of support. Global shares have remained relatively resilient despite higher rates, helped by continued earnings growth, particularly among large US companies.
- Bonds are offering more attractive income, but volatility may continue. Rising yields have hurt existing bond prices, while simultaneously improving the prospective income available from fixed interest investments.
- Diversification remains important. Australian shares, international shares, emerging markets, property and bonds responded differently to September's changing economic environment, reinforcing the value of maintaining exposure across different asset classes rather than relying on any single market.
Bottom Line for Investors
September was a reminder that markets rarely move in a straight line. Economic growth and corporate earnings have remained more resilient than might have been expected in a higher-interest-rate environment, but persistent inflation, rising bond yields and geopolitical uncertainty are creating a more demanding backdrop for investors.
The key implication is that higher interest rates are changing the relative attractiveness of different investments. Shares can still benefit from earnings growth, but relatively high valuations in specific sectors mean expectations matter. Bonds now offer substantially more income than during the low-rate years, although prices may remain volatile until the direction of inflation and interest rates becomes clearer.
For long-term investors, the backdrop supports a balanced approach rather than reacting to short-term market movements. Diversification across Australian and international shares, fixed interest and other assets can help portfolios participate in growth while spreading the risks created by an uncertain economic and interest-rate environment.
Looking for Personal Financial Advice?
This investment update is a general overview of market movements for the month. For personal financial advice to achieve your investment goals, contact your FMD adviser.
If you're new to FMD, but ready to get serious about planning your financial future or a worry-free retirement, book an initial discovery meeting with one of our financial advisers in Melbourne, Adelaide or Brisbane.
General advice disclaimer: This article has been prepared by FMD Financial and is intended to be a general overview of the subject matter. The information in this article is not intended to be comprehensive and should not be relied upon as such. In preparing this article we have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained on this article to particular circumstances. FMD Financial, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained on this article. FMD Group Pty Ltd ABN 99 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977. The FMD advisers are Authorised Representatives of FMD Advisory Services Pty Ltd AFSL 232977. Rev Invest Pty Ltd is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977.