Investors are closely monitoring social unrest in Europe, led mainly by France. According to experts at international asset managers, October could be a complicated month for global markets considering the US midterm elections, rising bond yields, and geopolitical and domestic political risks, which do not appear to be losing momentum.
“October is a month that strikes fear into the heart of many investors due to the dramatic, high-profile sell-offs experienced that month in 1929, 1987, and 2008. The negative perception of October is more psychological than real, as historically it has not been the worst month for stock market investing. However, psychology is important when it comes to the markets, and with bond yields hitting multi-year highs, several major elections around the corner, and the US midterm elections just a month away, it seems October is taking us straight into the danger zone,” acknowledges Kristina Hooper, Chief Market Strategist at Man Group.
From Aberdeen Investments, they note that short-term selling pressure may not be over. “Rising oil and gas prices have highlighted pre-existing weaknesses in the fiscal credibility of the US, the UK, and France, as well as persistent inflation, while forced liquidations by leveraged investors have amplified these moves. The only factor that could clearly halt this trend is an improvement in the geopolitical situation in the Middle East,” they indicate.
The Case of France
For now, the big focus is France, as spreads on its sovereign debt have reached new highs while fiscal consolidation seems increasingly distant. It is worth noting that the wave of riots and violence that has broken out responds to social discontent resulting from government cuts and rising inflation. “With the French 10-year bond close to 5%, the 140-billion-euro net savings program proposed by Le Pen arouses skepticism by requiring a gross adjustment of 185 billion euros and relying on unrealistic GDP growth of 1.8%, compared to real estimates of between 0.5% and 0.8% for 2026. The lack of a solution to the French deficit revives the ghost of the 2012 sovereign debt crisis, placing the European Central Bank before the dilemma of letting debt fall and harming confidence in the euro, or intervening and rewarding fiscal indiscipline, creating moral hazard in the rest of the region,” points out Javier Cabrera, analyst at XTB.
For Erick Muller, Director of Product and Market Strategy and Co-Head of the Asset Allocation Group at Muzinich & Co, political gridlock and the proximity of the 2027 elections make it difficult to adopt corrective measures and could prolong uncertainty in the markets. “France is a good example of the difficulties developed economies face in controlling public spending. In 2026, its deficit stands at around 5.6% of GDP, and the interest cost on debt is increasing considerably. This year, interest expenditure has gone from a forecast of 70 billion euros to approximately 80 billion. In 2027 it could reach 92 billion, and in 2028 be close to 100 billion. To put these figures in perspective, the government is trying to find savings of 53 billion euros, something I don’t think it will achieve. We are talking about an increase of around 30 billion in interest payments in just three years. It is a very difficult situation to solve,” he explains.
In his opinion, France’s problem is that the economy is slowing down and the political landscape makes any fiscal response extremely difficult. “Expected growth for 2026 has been reduced to practically half of what was initially expected, which also affects public accounts. Markets are asking what the answer is to this deterioration, and for now, they are not finding any satisfactory one,” he adds.
Return of the Bond Vigilantes?
In this context, investors are paying close attention to the spike in debt yields and the course of the Federal Reserve—have the “bond vigilantes” returned? For Giordano Lombardo, founder, CEO, and CIO of Plenisfer Investments (Generali Investments), yes; furthermore, he warns that the boom in AI investment, increasingly financed by debt, and rising public deficits are increasing pressure on fixed-income markets and elevating stagflation risks.
According to his analysis, the increase in bond yields extended to public securities of other countries. “All major fixed-income markets registered negative returns, except China. In recent weeks, concerns surrounding government bonds of certain Eurozone countries have resurfaced strongly, and France seems to be the epicenter of the crisis this time due to the sharp increase in its public deficit and the prospect of elections that could further worsen the sustainability of public finances,” he states. Moreover, he considers that waves of pessimism in the fixed-income market also affected the technology sector.
His main conclusion is that we have entered a phase of structural bear market conditions for bonds. “However, in recent months, the role of the Federal Reserve has once again become the dominant factor driving short-term movements in the bond market. In addition, the fiscal policies of major economies have all been expansionary, at least over the last fifteen years and especially following the post-pandemic measures introduced in 2020. In the US and Europe, there do not appear to be political forces interested in returning to the fiscal discipline of previous decades,” he qualifies.
Fabrice Chemouny, director of Chief Client Officer.
Natixis Investment Managers (Natixis IM) has announced the creation of the Global Client Development division, which will bring together all teams involved in client services across the entire value chain. According to the asset manager, the new division will feature three areas: Client Markets, organized into six geographic regions; Partnerships; and Product Range & Solutions.
Additionally, it announces that Fabrice Chemouny, current Head of International Distribution, will lead this division as Chief Client Officer. He will assume his new role on January 1, 2027, reporting directly to Philippe Setbon, CEO of Natixis IM. As clarified, this new organizational structure will be implemented following the conclusion of the information and consultation process with the relevant employee representative bodies.
This new organization is part of Groupe BPCE’s VISION 2030 strategic plan. Based on Natixis IM’s ambition for organic growth, this transformation aims, in particular, to adapt the firm’s distribution model to accelerate its global growth and better respond to client needs.
According to the announcement, the creation of a single global platform, which will integrate the United States and other international markets, will foster synergies across regions, provide clients with access to the full range of investment capabilities of Natixis IM and its affiliated investment managers, and enhance operational agility.
The new division will be structured around three main pillars. First, Client Markets, which is a single distribution platform organized into six regions, with each region focused on meeting the needs and investment preferences of its clients, taking into account local market regulations and specifics: United States; Northern Europe and Canada: United Kingdom, Netherlands, Nordics, and Canada; Continental Europe and Latin America: Western and Southern Europe, including France; Central and Eastern Europe; Latin America; and US Offshore; Middle East, Central Asia, and Africa; Asia-Pacific, excluding Japan; and Japan.
Second, a new Partnerships area, whose mission will be to strengthen existing strategic distribution alliances and establish new ones with banking networks, insurers, and other distributors worldwide, with the goal of making Natixis IM’s offering accessible to a broader client base. And finally, a new Product Range & Solutions department. As explained, this area will define the product range strategy based on client needs, developing solutions in areas such as retirement, long-term savings, and wealth management, drawing upon the offerings of investment managers affiliated with Natixis IM.
“We are a global player with deep local roots. In an increasingly fragmented international environment, we want to strengthen both dimensions. Our strategic plan has proven successful, and we want to take it a step further. This new organization further reinforces the central role of clients in our model across all regions and helps accelerate our growth,” stated Philippe Setbon, CEO of Natixis Investment Managers.
For his part, Fabrice Chemouny, who will assume the role of Chief Client Officer of Natixis Investment Managers effective January 1, 2027, added: “By bringing our teams together into a new global organization, we combine a deep understanding of each market with the strength of an international player. Furthermore, we will make our offering accessible to a greater number of clients through new distribution alliances and work with them to develop solutions tailored to their long-term needs. This transformation will provide us with the agility needed to navigate volatile markets, foster synergies across regions, and drive innovation for the benefit of our clients.”
From a former avenue of mansions in Miami to rural land transformed into corporate centers in Texas, these districts concentrate banks, wealth managers, and investment firms that manage billions of dollars. The Wall Street of Latin American offshore is not a single street: it is a network of districts where regional wealth finds infrastructure, specialists, and connections to global markets.
On the Latin American financial map, there are streets that function as more than just corporate addresses. They are meeting points for high-net-worth individuals, international banks, investment managers, tax advisors, lawyers, and firms specializing in preserving and transferring wealth.
From their offices, investment strategies are designed, wealth structures are organized, and the financial needs of entrepreneurs, families, and major investors in the region are served.
Brickell Avenue, in Miami, is probably the most representative example of this geography of money, but it is not the only one. In Houston, Post Oak Boulevard brings together private banking offices and wealth managers; in Dallas, the Crescent Court complex houses major wealth management firms. They are enclaves with distinct characteristics, but they illustrate how US financial infrastructure allows serving capital that crosses borders.
Calling them the Wall Street of Latin American offshore is useful to understand their importance by comparing them to that iconic New York street, although in reality they are not stock exchanges in a strict sense, nor does all the wealth they manage belong to Latin Americans. Their relevance lies in the concentration of institutions, specialists, and services that allow managing international fortunes from the United States.
Brickell Avenue: The Heart of the Latin American Business
If there is an address that allows visualizing the connection between Latin American wealth and the US financial system, it is Brickell Avenue. The Brickell district, in downtown Miami, combines corporate buildings, bank offices, and firms specializing in investments, with an advantage that another US financial center can hardly replicate: its historical relationship with Latin America.
But what was or what existed before on that street? In the early 20th century, Brickell Avenue had little to do with the skyscraper landscape that today identifies Miami’s financial district. It was a residential area, with large houses and mansions built by some of the most prominent families of the young city. Its prestige was such that the corridor came to be known as Millionaire’s Row, the avenue of the millionaires.
The presence of international institutions is not merely symbolic. J.P. Morgan Private Bank, for example, maintains offices at 1450 Brickell Avenue, where it offers private banking, investment, and wealth advisory services. Morgan Stanley, for its part, announced in 2016 the opening of an office at 1111 on the same avenue, specifically dedicated to wealth management for clients residing in Latin America.
The presence of these players responds to a business logic: major wealth requires more than just managing a portfolio of stocks and bonds. They demand access to global markets, credit, estate planning, fiduciary structures, geographic diversification, and coordination of tax and corporate matters with specialists in different jurisdictions.
In that ecosystem, Brickell’s offices function as access points to much larger financial platforms. A client’s wealth can be distributed among different asset classes, custodians, and jurisdictions, while the relationship with the banker and much of the advisory services are concentrated in Miami.
The importance of the city also transcends a single avenue. Downtown Miami and Brickell are part of an office market in which international financial firms compete for strategic locations. According to Colliers, in the fourth quarter of 2025, the Brickell, Downtown Miami, and Coral Gables submarkets each recorded more than 400,000 square feet of Class A office leasing during the year. The data does not correspond exclusively to financial institutions, but it confirms the scale of the corporate market in which they operate. (Colliers, Miami-Dade Office Market Report, January 2026).
Brickell, furthermore, does not exhaust the business map. Coral Gables and other areas of Miami-Dade host bank offices, wealth managers, and professional service providers. For this reason, rather than reducing the industry to a single street, it is convenient to understand it as a financial corridor whose most recognizable core is Brickell.
Houston: Post Oak Boulevard and the Management of Major Fortunes
Texas offers another piece of this geography, although with a different specialization. Houston combines an economy historically linked to energy with an extensive private banking, financial advisory, and wealth management industry. That structure is relevant for entrepreneurs, investors, and families with interests in Mexico and other Latin American markets, especially when their businesses are linked to energy, infrastructure, and cross-border trade.
One of the most visible points is Post Oak Boulevard, in the Uptown and Galleria area. Offices of institutions offering investment, private banking, and wealth management services are located there.
The history of Post Oak Boulevard shows an even more radical urban transformation. In the 1940s and 1950s, the Uptown area, west of downtown Houston, was surrounded by open land, agricultural areas, and new residential developments. Post Oak was then a two-lane road that ran through prairies and fields, flanked by drainage ditches.
The turn began with post-war commercial development. In 1951, the Sakowitz department store bet on the area; later, other establishments and commercial projects arrived. The decisive moment was the opening of The Galleria, in 1970, promoted by developer Gerald Hines on land that still retained part of its rural character.
Today, an indicator of the dimension of the business appears in Morgan Stanley Wealth Management. The firm reported that its Houston Post Oak market, made up of three offices, had 145 financial advisors, 75 support employees, and four private bankers, in addition to a management and specialized team. Together, that operation supervised $56 billion in client assets and generated annual revenue of $355 million, according to data reported as of October 15, 2025.
The figure requires a precision: it corresponds to Morgan Stanley’s Houston Post Oak market, not to all assets managed by institutions located on the avenue, nor exclusively to Latin American clients. However, it offers a concrete measure of the scale that a wealth advisory platform can reach in this district. (Morgan Stanley Wealth Management, Houston Market Institutional Information).
The corridor also brings together other participants. Texas Capital Private Bank has offices at 1330 Post Oak Boulevard, where it offers wealth advisory, investment management, credit solutions, fiduciary services, and private banking. BBVA, for its part, announced in September 2025 the opening of an office at 1980 on the same avenue to strengthen its corporate and investment banking activities in the United States, expand Global Wealth Advisory services, and reinforce its service to Mexican clients.
BBVA’s presence is particularly significant due to the financial relationship between Mexico and Texas. The entity presented the new office as part of its US expansion strategy, with specialized capabilities in energy and clean technologies, in addition to corporate and wealth services. (BBVA, September 2025).
Post Oak Boulevard represents, therefore, a node in which business wealth, banking services, and wealth management converge. Its link with Latin America is different from Miami’s: less focused on the historical specialization of an international hub for regional fortunes and more connected to the economic activity, business, and financial needs that link Texas with Mexico and other markets.
Dallas: Crescent Court and the Business of Preserving Wealth
In Dallas, the wealth map has one of its most recognizable points at Crescent Court, in the Uptown area. The complex houses offices of major institutions offering investment management and services for high-net-worth families and individuals.
In the early 1980s, several plots of land north of downtown Dallas were occupied by former car dealerships. Developer Caroline Hunt and Rosewood Corporation acquired those properties to build a mixed-use complex that would contribute to transforming the Uptown area.
The project, known as The Crescent, opened in 1986. Its estimated investment was $400 million, an extraordinary figure for a real estate development at that time. The complex incorporated three office towers, a hotel, and retail spaces, in addition to a five-level underground parking garage with capacity for approximately 4,100 vehicles.
Currently, UBS maintains a wealth management office at 100 Crescent Court, while J.P. Morgan Wealth Management has a presence in the same complex. Both institutions offer services ranging from investment advisory to financial planning and strategies to preserve and transfer wealth.
Dallas’s importance does not depend solely on the international entities located in this complex. The city is part of a Texas economy with major companies, business owners, and families with accumulated wealth in sectors such as energy, real estate, technology, and services. That base fuels the demand for wealth management, estate planning, credit, and investment diversification.
For Latin American capital, Dallas constitutes an alternative within the US network of financial services, although it should not be automatically equated with Miami as a specialized center for international Latin American clients. The existence of offices of major banks confirms the depth of its wealth market, but it does not allow attributing a specific volume of Latin American assets to them without additional data.
A Network of Institutions, Not a Single Street
The addresses above show that the Latin American offshore business in the United States is not concentrated in a single building or a single city. It operates through a network of offices, banking platforms, and specialized providers whose function is to connect clients with global financial markets, products, and services.
Miami stands out for its international specialization and its links with Latin America. Houston combines wealth management with a business base closely related to energy and trade. Dallas, for its part, offers an extensive private banking and wealth advisory infrastructure for major fortunes.
The difference matters because the term offshore does not necessarily describe an opaque structure or an operation intended to evade tax obligations. In this context, it generally refers to the management of assets outside the owner’s country of residence. It is an activity that can include international investments, custody, estate planning, and global banking services, always within applicable legal frameworks.
For this reason, the power of these districts is not measured solely by the number of banks that have their offices on the same avenue. It also resides in the ability to bring together in a relatively small space those who design strategies, manage relationships with clients, connect investments with global markets, and coordinate legal, tax, and fiduciary services.
For Latin American families seeking to diversify their assets outside their countries of origin, these hubs offer access to a financial infrastructure that is difficult to replicate in a single place. For institutions, they represent markets in which proximity to the client, specialization, and the ability to coordinate multiple services can become competitive advantages.
The image of a Latin American Wall Street distributed among Brickell, Post Oak, and Crescent Court helps to understand this reality, provided it is recognized that these are centers with different functions and that the money managed by each firm does not necessarily equal Latin American wealth.
Ultimately, the power of these streets lies in their ability to connect the wealth of Latin America with the international financial system. Behind the facades of their buildings, there are not just offices: there are investment, advisory, and wealth management platforms that form part of the infrastructure with which the region’s major capital moves beyond its borders.
The Center for Climate Prediction of the National Oceanic and Atmospheric Administration (NOAA) maintained an advisory on the El Niño phenomenon and stated that it is intensifying, with a probability exceeding 90% that a very intense episode will occur during the autumn and winter of the Northern Hemisphere in 2026-27. The starting point for any outlook on the agricultural market facing 2027 is that meteorological agencies have reached a consensus, and have done so with unusual certainty.
The World Meteorological Organization reached the same conclusion on September 3, indicating a probability close to 100% that El Niño will persist during the periods from September to November 2026 and from December to February 2027, with the forecast that the phenomenon will reach a very strong intensity before reaching its peak toward the end of the year. Monitoring data from the Australian Bureau of Meteorology agree: the so-called relative El Niño 3.4 index reached +2.51 °C in the week ending September 13, compared to an El Niño threshold of +0.80 °C, while most models indicate that a maximum exceeding +3.0 °C will be reached and it is forecast that the phenomenon will persist until the autumn of 2027.
Oceanic Niño Index (ONI), from 2000 to Present. Source: National Oceanic and Atmospheric Administration (NOAA), Bloomberg Finance L.P. and WisdomTree, as of July 31, 2026.
The effects of El Niño on agriculture occur with a delay of between six and twelve months relative to the peak, due to the time it takes for atmospheric changes to modify local climate, affect crop cycles and impact global supply chains. Therefore, an event that reaches its peak at the end of the year impacts more directly the 2026/27 crops that are currently being sown or prepared: the Southern Hemisphere summer harvest, India’s Rabi season, West Africa’s main harvest, and Southeast Asia’s oil palm and robusta coffee cycles. The price impacts of what is happening in the Pacific will be felt mainly starting in 2027.
The Gulf Conflict Has Shifted from Focusing on Energy to Being a Matter of Inputs
The Gulf conflict has lasted seven months now and, instead of stabilizing, it has escalated. The ceasefire agreed upon in April and the memorandum of understanding signed in June were rendered ineffective when hostilities resumed in July. The recent event with the greatest impact took place on September 11, when Saudi Arabia closed its 1,200-kilometer east-west pipeline following a drone attack, which meant the closure of the main route by which Gulf crude bypasses the Strait of Hormuz.
In the agricultural sector, main exposure derives from the trade of fertilizers and raw materials transiting through the same waterway, and it is precisely the difference compared to 2022 that makes it lasting. The war between Russia and Ukraine in 2022 diverted trade flows, whereas this one has diminished productive capacity. It is estimated that 31 ammonia plants across the Middle East have been directly affected or closed down completely; another 49 in South Asia have reduced production or are halted due to raw material shortages; and at least 20 Russian plants have suffered damage due to drone attacks.
Their reactivation will require time and capital far beyond the end of hostilities. Persian Gulf countries account for approximately 43% of seaborne urea exports and 44% of seaborne sulfur trade. Even in the United States, which obtains two-thirds of both its urea and phosphate from the domestic market, 12% of the urea supply and 17% of DAP/MAP (diammonium phosphate/monoammonium phosphate) comes from beyond the Strait. This points to a capacity constraint extending across several seasons, rather than a freight transport issue.
Grains: A Group of Annual Crops That Already Carries a Risk Premium
The energy sector has recorded the largest individual variations of the year 2026, and refined products and crude oil occupy four of the top five spots. However, what is most revealing about the year-to-date performance table is the breadth, rather than the magnitude. Agriculture occupies virtually the entire space of the ranking between rice and sugar.
Cumulative Performance Year-to-Date Across Commodity Groups. Source: Bloomberg Finance L.P. and WisdomTree, as of September 21, 2026.
What has driven crops throughout the year has been almost exclusively geopolitical and input factors, rather than weather factors. Wheat is the clearest example: the World Agricultural Supply and Demand Estimates (WASDE) report for September was clearly bearish, as world production for the 2026/27 campaign was revised upward by 3.1 million tons to 822.4 million due to increased harvests in Australia and Canada, and ending stocks were increased by 3 million tons to 276.3 million. However, wheat prices have risen 42% year-to-date, as continued Russian and Ukrainian attacks against Black Sea port infrastructure have disrupted the physical route for nearly a quarter of world wheat exports. Net speculative positioning in wheat increased 130% last month, reflecting an improvement in confidence regarding this grain. For this commodity, the structural outlook could depend on whether the current risk premium proves persistent, rather than sporadic. Black Sea infrastructure has now become a recurrent target, rather than representing a one-off disruption, and Australian wheat is in the highest exposure band to El Niño for the 2026/27 harvest.
On the other hand, corn markets are highlighting a genuine supply contraction. U.S. production for 2026/27 was cut by 5.4 million tons to 401.3 million due to hot conditions and uneven rainfall. Global production was reduced by 7.9 million tons to 1,291 million, and global ending stocks fell by 2.6 million tons to 272.1 million. Net positioning increased 92%. In the case of corn, the argument that has been made for years is the constraint in inputs. Corn is the most nitrogen-intensive crop, and fertilizer prices are projected to remain above pre-conflict levels until 2028. Where prolonged under-application of phosphate and potassium is already observed, doses have decreased between 10% and 15% in recent years. Consequences on yield manifest with a three-year lag. This is a slow, cumulative drag that affects the yield trend, rather than a one-off single-season disruption, and is the mechanism by which this conflict extends beyond itself.
Meanwhile, the soybean sector has been driven more by demand than supply. The United States Department of Agriculture (USDA) has raised U.S. production to 123.4 million tons, but China has already purchased nearly 13 million tons this season, representing more than half of its annual commitment of 25 million tons, valid until the year 2028, in addition to a broader commitment to purchase $17 billion worth of agricultural products. China’s purchase commitment extends until 2028 and could provide some demand support that depends less directly on weather conditions. The reason for short-term caution is stocks: soybean and soybean oil reserves stand 7.9% and 8.5% above their five-year seasonal averages. Soybean oil features an additional and underappreciated support factor in the energy context: with crude oil above $100, biofuel demand could strengthen the vegetable oil sector independently of oil production.
Soft Commodities: The Sector Where the Meteorological Signal Is Least Reflected in Prices
The cumulative year-to-date performance table makes it clear. Sugar is up 20%, cotton up 25%, but cocoa is down 9%, coffee down 22%, and orange juice down 28%. The soft agricultural products sector, which historically has shown the greatest sensitivity to El Niño, has been the weakest link in the agricultural sector this year.
The exception is sugar and the clearest expression of the double impact. In early September, raw sugar was trading at 18.44 cents per pound, near the 16-month high located at 18.77 cents, as supply reduction reinforced expectations of a deficit in the 2026/27 campaign. Production in center-south Brazil fell 7.9% during the first half of August, and high energy prices continue to encourage mills to prioritize ethanol over sugar. India has authorized the duty-free import of one million tons of raw material, while drastically reducing ethanol diversion, a combination of measures suggesting domestic stocks are tighter than official figures indicate. Monsoon rainfall has been significantly below normal in Maharashtra, Karnataka, and Marathwada, regions representing close to one-third of Indian production. Sugar is affected by both meteorological conditions and energy price pass-through, and holds the thinnest inventory cushion among major soft agricultural products.
Cocoa is the crop generating the most controversy. Prices have recovered strongly since the low recorded in the second quarter, with New York futures standing around $6,250 per ton, and rainfall in West Africa during the August mini-drought was well below normal levels for this time of year, representing a real risk to pod survival and main crop development if rain does not fall. In contrast, the stock situation is fundamentally different from that of 2023/24. ICE-certified stocks have recovered to near their two-year high, while European cocoa grindings in the first quarter fell 4.6% year-on-year to reach their lowest level in 17 years. The cocoa sector faces this El Niño episode with reserves it lacked two years ago, and with demand clearly damped by the previous price crisis. The bullish thesis is based on weather conditions overcoming those reserves; it is not the same strategy as in 2023.
Regarding Arabica coffee, it faces improving supply: the Brazilian harvest is well advanced and revised export registry data indicate significantly higher flows than previously reported. Certified stocks remain near multi-year lows and physical availability is tight, but the supply trend is positive. The Robusta variety is the most interesting investment. It has been trading near multi-month lows, around $3,296 per ton, precisely as drought spreads across Indonesia and Vietnam during a critical flowering period. Since coffee is a perennial plant, damage suffered during flowering affects the 2027/28 crop, not the current one. Robusta coffee prices stand near their recent lows, even though major producing regions lie in the highest exposure band to the El Niño phenomenon. This creates a divergence between current prices and potential meteorological risks threatening supply.
For its part, cotton is up 25% year-to-date and is the commodity most dependent on demand. Recent price evolution has been downward due to improving U.S. crop conditions, declining export sales, and a strengthening dollar. The curve is in contango, somewhat steepened compared to wheat or corn, which contrasts with cotton stocks being the tightest of the group seasonally. That divergence highlights that the market is placing more weight on current crop conditions than on previous harvest scarcity, and that should a weather disruption occur in 2027, there would be very little margin for error. However, the long-term evolution of cotton is more closely tied to global textile demand and the dollar than to the Pacific region.
Conclusion
Two disruptions impact the same production window from different directions. The Gulf conflict increases cost and limits availability of inputs used prior to the 2026/27 campaign, doing so over a multi-year horizon, as damage affects production capacity rather than trade routes. El Niño increases the likelihood that the yields those inputs aim to protect fall below trend, with a lag in market transmission between six and twelve months relative to the oceanic peak, meaning its effects will be felt mainly in 2027.
The intensity of El Niño and its regional meteorological effects could differ from current forecasts, while an easing of geopolitical tensions could reduce pressure on energy and fertilizer markets. Better-than-expected harvests, inventory replenishment, lower demand, or changes in government policy could also offset pressures arising from meteorological conditions and input costs, resulting in commodity price performance different from that analyzed above.
Macro and geopolitical uncertainty, interest rates that have stayed higher for longer and high index concentration are testing investors and their advisors alike. Now artificial intelligence is adding a new source of noise to the advisory relationship – “and clients are really listening to AI”, warns José Corena, Managing Director of the Americas at MFS Investment Management. In an exclusive interview with Funds Society, Corena explains why Latin American investors are unlikely to fall out of love with fixed income, and why liquidity concerns suggest private markets may already have peaked: “We have probably already seen a peak in private credit and private equity.”
Corena also makes the case for active management, highlighting MFS Meridian Funds – Contrarian Capital Fund and the firm’s Blended Research range, which combines fundamental and quantitative research. He also discusses the expansion of MFS’ active ETF line-up and what it takes to get new products onto distribution platforms.
Finally, he reflects on a year of change in MFS’ regional team, which spans Chile, Uruguay, Brazil, Colombia, Miami, New York, Texas and the U.S. West Coast, and explains why having people on the ground remains central to its strategy.
With markets this complex, what are clients really asking for?
Simple: they don’t want to lose money. That sounds straightforward, but markets have become far more complex. Geopolitical fragmentation is reshaping trade and investment decisions, interest rates have stayed higher for longer than expected, and a handful of stocks now dominate the major indices. When so much of the market rests on so few names, owning the index is not quite the safe harbour it seems – and research, selectivity and genuine diversification start to matter a great deal more.
On top of that, AI is adding another layer of noise between advisors, their teams and their clients – and clients are really listening to it.
Latin American investors have long had a love affair with fixed income. Is it still justified?
Very much so. Latin American investors will always have a soft spot for fixed income, and today the asset class is giving them good reason. After years of near-zero rates, bonds are once again offering something investors had almost forgotten about: meaningful income. For clients, that combination of income, diversification and liquidity is hard to ignore.
Some investors have been looking for that income in private credit. But I think we have probably already seen a peak in private credit and private equity. Clients are increasingly asking what they are really being paid to lock up capital for seven or ten years, and in our view the reward for illiquidity has been shrinking. Public credit, by contrast, offers attractive yields and solid fundamentals – and you can get your money back when you need it.
That doesn’t mean fixed income is a market to own blindly. Not every borrower is equally well placed, so research and careful credit selection make a real difference. Each country also has its own dynamics. In Mexico, institutional investors have plenty of local fixed income opportunities, while Chile‘s pension reform could bring greater flexibility in asset allocation. But the common thread across the region is the search for reliable income without giving up liquidity.
MFS is a committed active manager. How are you responding to the shift towards passive?
We are a global active manager with more than 100 years of history, and we are fully committed to public markets. We don’t do alternatives, private credit or private equity. Instead, we focus on what we do best: active management across public equity and fixed income, allocating capital responsibly and always with a long-term lens.
That said, we recognise that investors have choices – between active and passive, and between vehicles, from traditional mutual funds to the growing area of active ETFs. We launched our first active ETFs in the U.S. in December 2024 and now have 13, covering U.S. and international equities as well as fixed income. They have been very well received, with assets of more than $3 billion, and tax-loss harvesting has been an important driver of demand.
Active management is here to stay, even if it increasingly sits alongside low-tracking-error strategies, active ETFs and passive products. The Magnificent Seven have done extraordinarily well, but that doesn’t mean the other 493 companies in the S&P 500 lack potential. Concentration doesn’t last forever. New competitors emerge, and AI is lowering the barriers to entry, which could accelerate that process. As market leadership broadens, active managers are well placed to find the next generation of leading companies.
Which strategies are standing out this year?
Two in particular – and on the surface they couldn’t be more different, which is exactly the point. One goes where other investors fear to tread; the other makes sure we don’t miss what the market has overlooked.
MFS Meridian Funds – Contrarian Capital Fund is built on a simple truth: markets change, but human nature doesn’t. When a company hits trouble – a management misstep, a supply-chain snag, a cyclical slump mistaken for structural decline – fear takes over and investors sell first and ask questions later. That is when perfectly sound businesses end up trading well below what they are worth. Our portfolio managers, Anne-Christine Farstad and Zahid Kassam, lean into that discomfort rather than run from it. As they like to put it, you buy where it hurts.
Buying cheap shares is the easy part; the real skill is telling a temporary setback from a permanent one. We don’t invest in certainty – we invest in probabilities. The lower the price we pay, the less needs to go right, so a margin of safety is non-negotiable. So is a strong balance sheet, which buys a company time to fix what went wrong. When the dust settles and the fundamentals shine through again, that is when we believe the share price can bounce back. The result is a concentrated portfolio, built stock by stock with no regard for benchmark weights. Notably, it has no technology exposure today – and that is no accident. Tech is the market’s favourite trade, and the valuations show it; there is nothing contrarian about paying top prices for what everyone already owns. Even so, since its launch in November 2024, the fund has outperformed its benchmark, the MSCI World Value Index, and passed US$1 billion in assets in less than two years.
Blended Research takes a very different route to the same destination – generating alpha for clients. Every stock gets two independent opinions – one from our fundamental analysts, one from our quantitative models – and we focus on the “intersection” stocks that both rate positively. Quantitative models tend to shine when markets are driven by momentum; fundamental research comes into its own when momentum fades. Together, they give us human judgement and machine discipline across a far broader universe of securities. Long before AI became the talk of every boardroom, we were putting people and models to work side by side: we launched our first Blended Research strategy in 2001, so this is a capability with a 25-year history. Different routes, same conviction – in today’s concentrated markets, the best opportunities are often where the crowd isn’t looking.
Fee-based advisory is growing in U.S. wealth management. Is Latin America following?
In the U.S. offshore business serving non-U.S. clients, advisors increasingly see the benefits of the advisory model. Larger teams are forming because they are building businesses around longevity and generational planning, not individual transactions.
Generational and technological change mean advisors need time to build relationships with clients and their wider families. But transactional business won’t disappear. I expect the two models to coexist – some clients will want an advisory relationship, others won’t – and we can serve both.
The Southern Cone faces a particularly tough transition from brokerage to advisory, and reaching U.S. levels of advisory penetration would be hard given how the independent ecosystem works. Independent brokers rely on trailers, or retrocessions, as their advisory fee, and they don’t have the scale or time to work with 15, 20 or 25 fund houses, so they focus on five or ten. There are advisory elements in their model, but it is not true advisory.
How do you get new products onto those platforms?
We have a dedicated team of relationship managers working across our U.S. domestic, international and global platforms. Platforms have become more selective. Many products were approved 20 or 25 years ago, so firms already have a large line-up to review. The question now is simple: what makes a new product distinctive enough to justify adding it?
On the independent side, platforms such as Insigneo – one of our largest clients in Latin America – matter a great deal, and Insigneo has been relatively open to new products. Launching in the Southern Cone can also help us build scale, which in turn strengthens the case for those products with U.S.-based clients. We have some distinctive strategies coming to market, and we hope they will reach the critical mass needed for approval.
It has been a year of change for your regional team. What does that mean for the clients and advisors you work with?
It has probably been the year of most change for our team, and most of the moves were personal decisions. We are known for our low turnover as a firm, in both the investment department and even in distribution. Sometimes when long-tenured colleagues leave, it is a good reminder that change is constant.
What does not change is the continuity and the priority of having people on the ground. Advisors want a partner who understands their market, picks up the phone when markets get difficult and brings our global research to their clients’ portfolios. We want to be the people advisors call before they talk to their clients, not after.
Finally, what role will AI play in the future of investment and advice?
AI is here to stay. I tell my team that AI will not replace us, because nothing can replicate face-to-face interaction – understanding the person and the relationship.
But if you are not using AI, you will be replaced. Used well, it can make us far more efficient.
The problem is that it adds to the enormous amount of noise we already get every day from social and mainstream media – and different platforms can give different answers. For example, we have seen advisors prepare detailed proposals, only for clients to upload them into an AI tool and ask whether they make sense. The answer can point to a passive solution, even when the whole conversation was about meeting an actively managed investment need.
That doesn’t make those recommendations right or wrong. But a machine cannot understand a relationship between an advisor and a client or family that may have been built over 20, 30 or 40 years. AI can read the document; it cannot understand the context behind the relationship.
North American Private Equity Panel at the Picton Latam Summit 2026
In a context in which private equity has failed to reach the performance of public equities, returning below the S&P 500 and the MSCI ACWI over one, three, and five years, the question regarding the value of the illiquidity premium is once again on the table. The fact is there is a question hanging in the air: Is there still room to generate alpha in the asset class? Especially in North America, where the United States remains the largest and deepest market for private capital.
This is the question that brought together a panel of specialists from major specialized asset managers, convened by the Latin American distribution firm Picton, at the latest edition of its Latam Summit. Before an audience of GPs and LPs from various corners of the region, investment professionals outlined a landscape in which everyone is competing for the most attractive assets and dispersion is forcing investors to be more selective.
“There is performance, but you have to look at where to be,” said Nigel Beslee, Managing Director at Goldman Sachs. There is a major positioning challenge for investors, with the task of allocating conscientiously across different asset classes, against a backdrop of high uncertainty, significant market movements, and a technology narrative that is dictating the pace of trading desks globally.
“Nobody is aiming for median returns in PE,” the executive emphasized, as everyone is hunting for the highest returns.
“Rather than themes like sector or strategy, it is company-specific factors that drive alpha,” recalled Luca Salvato, Partner at Ares. In addition, there is the factor of certain “existential risks,” such as the AI revolution, which are difficult to quantify in a historical context given their nature as an unprecedented technology.
Against this backdrop, the professional emphasized market timing. “The timing in which a manager decides to sell the asset can generate a lot of alpha,” he assured.
The Technological Revolution
While private capital and public equity have different dynamics and characteristics, the professionals on the panel warned that private equity faces the challenge of beating a public equity market that has periodically been reaching new highs in recent years. This is mainly thanks to the effect of the stocks known as the Magnificent Seven—Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla—which group together the firms considered captains of the AI boom.
Between that and an ecosystem where investment cycles are increasingly longer, investors must find ways to access growth vectors at reasonable prices. “There is a massive trend of private for longer, especially in high-growth tech companies,” said Michael Zappert, Partner at TPG, so LPs must carefully evaluate how to access this category.
In that regard, those in the PE industry see an interesting source in the application of this technology within their portfolio companies. This, Zappert noted, can generate significant value, as “AI is going to change every aspect of work.”
Since it is currently difficult to access the major tech firms leading on this front, the professional does see more opportunities in this wave of application.
Beslee agreed with the reading, highlighting that it is “difficult” not to see AI as one of the largest market factors; while Salvato added that, although this technology will not necessarily be a major generator of alpha in the asset class, it will undoubtedly boost the companies they invest in.
Increasing Diversity of Structures
In addition to creativity in capturing AI tailwinds, the current context forces GPs to be more creative with the structuring of investment vehicles as well. “It’s about being thoughtful about the spaces where you can do something different,” in the words of Zappert; while Salvato emphasized that one cannot deny the importance of managers in asset management, given the increased sophistication of the environment in North America.
All panelists commented on their experiences applying this greater flexibility, as is the case with Leonard Green. David Kass, Partner at the firm, recounted that at the company they have had to remain flexible with the structuring of vehicles when the assets are good and fit with the firm’s investment philosophy.
Different avenues can even be pursued to invest in a diversified manner within the asset class. In the case of Goldman Sachs, they highlighted the GP Stakes strategy, which invests in stakes of specialized asset managers.
The Importance of Liquidity
In any case, professionals agree that liquidity will continue to be one of the key variables going forward in the world of private capital. “There is massive pressure for liquidity,” said Zappert, especially with the strong influx of capital that the asset class recorded in 2021. The prevailing trend in portfolios, he stressed, is toward having a higher level of liquidity, not less.
For that reason, a space that has opened up strongly is that of secondary funds and continuation vehicles, which have created new liquidity spaces for PE managers. The industry is focusing on DPI (Distributed to Paid-In Capital, the ratio of distributions to invested capital), commented Kass, so distributions generate their own pressure on portfolio management. “At some point, you have to generate liquidity,” he said.
Looking ahead, Salvato added, continuation vehicles “are here to stay” and “are becoming an important part of the ecosystem.” However, he warned, this space also features a high level of dispersion in results.
Photo courtesyMartín Herbon, Managing Partner at Latam Financial Services
After nearly three years on the Latin American distribution team at M&G Investments, veteran executive Martín Herbon is setting off in a new direction. The executive was recruited by Latam Financial Services, a firm that distributes the UK asset manager’s vehicles—among others—in the region.
The company informed Funds Society of the addition, highlighting that Herbon is “one of the top mutual fund distribution executives” in Latin America. His hiring, they explain, comes as the distribution firm expands its business in the region.
Herbon has more than 20 years of experience in the investment industry. He currently serves as Head of Global Financial Institutions at M&G Investments in London, forming part of the senior leadership team for the distribution business across Latin America, EMEA, and Asia-Pacific.
Previously, he held the same role at Natixis Investment Managers, a firm where between 2014 and 2021 he was Country Head for the Southern Cone, building an extensive network of relationships with private banks, family offices, independent advisors, pension funds, and sovereign institutions in the region.
Prior to that, he held leadership positions in portfolio management, investment strategy, and high-net-worth client advisory at RBC Wealth Management, Merrill Lynch, and Union Capital Group.
Latam Financial Services represents the asset managers M&G Investments, Nuveen, and Virtus Investment Partners, with a focus on the US Offshore and Latin American markets. Its strategy is developed from two hubs: its Miami office and its Montevideo office.
For years, investing in private markets implied accepting a demanding commitment: locking up capital for eight, ten, or more years, with no real possibility of early exit. Semi-liquid funds emerged to soften that restriction and bring these asset classes closer to a broader investor audience.
It is a middle ground between two worlds. A semi-liquid fund is a vehicle that invests in non-publicly traded assets, such as unlisted companies, private loans, infrastructure, or real estate, but offers the investor a certain capacity to enter and exit on a periodic basis. It is thus situated between traditional funds with daily liquidity and classic closed-end private equity funds.
The key difference lies in frequency. While a conventional equity fund allows participations to be redeemed on any business day, a semi-liquid fund typically opens liquidity windows on a monthly, quarterly, or even semi-annual basis.
How Liquidity Is Managed
The underlying assets cannot be sold overnight without sacrificing value. For this reason, these funds incorporate protection mechanisms for the benefit of all unitholders. The most common are:
Advance notice: Investors must communicate their intention to exit weeks or months in advance.
Redemption caps: Many funds set a limit per period, for example, a percentage of total assets. If requests exceed this limit, they are met on a proportional basis.
Initial lock-up periods: A minimum holding period is common before requesting an exit.
Liquidity reserves: Part of the portfolio is kept in more liquid assets to meet ordinary redemptions.
These mechanisms are not a flaw, but part of the design. They acknowledge that the illiquidity of the asset is inherent to the strategy.
What the Investor Looks For
The main appeal is the illiquidity premium: the additional return that, in theory, is obtained by holding assets that cannot be sold quickly. Added to this are diversification—since private markets have dynamics different from public ones—and access to opportunities not available on the stock exchange.
Furthermore, the format lowers barriers. Many semi-liquid vehicles allow lower minimum investments than traditional closed-end funds and avoid staggered capital calls, where investors must contribute funds as the manager requests them.
Risks and Points of Attention
Liquidity is “semi,” not total. In stress scenarios, when many unitholders want to exit at the same time, limits can be activated and delay payment. It is crucial, therefore, not to consider these investments as capital for immediate use.
Attention should also be paid to valuation. As these are unlisted assets, their price is calculated through models and periodic appraisals, rather than daily market quotes, which can artificially smooth apparent volatility. And, as with any alternative strategy, fees tend to be higher than in traditional management.
A Tool, Not a Universal Solution
Semi-liquid funds expand options for those seeking to diversify beyond equities and fixed income. Their usefulness depends on the investor’s time horizon, liquidity needs, and understanding of the exit terms. Reading the prospectus in detail, understanding the redemption rules, and allocating only a prudent portion of the portfolio are basic practices before investing.
Wikimedia CommonsPresidential Candidates of Brazil: Flávio Bolsonaro (left) and Luiz Inácio "Lula" Da Silva (right)
The strong rally in Brazilian equities following the first round of the presidential election reinforced international firms’ positive view on the country’s stocks. In analyses distributed after the vote, a range of international investment houses point to fundamentals supporting a continuation of the movement, backed by expectations of greater fiscal discipline, lower interest rates, and a resurgence of investor interest in companies linked to the domestic economy. The realization of this scenario, however, will depend on the next government’s proposals and its ability to execute them.
The Ibovespa advanced 7.70% on Monday, October 5, closing the first post-election session at 206,911.89 points. The reaction occurred after Flávio Bolsonaro finished the first round ahead of Luiz Inácio “Lula” da Silva, contradicting the president’s lead shown in some polls. The movement was accompanied by a drop in future interest rates and an appreciation of the real.
Foreign flows also gathered strength: international investors made net contributions of 10.06 billion reais into Brazilian equities during that session, the largest daily balance in the series tracked by Bloomberg since 2008.
UBS Sees Upside Potential Exceeding 30%
In the report published prior to the market open on Monday, UBS moved to adopt a “deeper and more lasting” fiscal adjustment as its base-case scenario. For the team, the higher probability of a change in government, combined with the composition of the new Congress, increases the chances of a credible fiscal anchor featuring spending control, a revision of indexation mechanisms, and a reliable trajectory of primary surpluses.
“We believe that domestic-linked equities, local interest rates, and the Brazilian real—in that order—should benefit substantially from a higher probability of this fiscal scenario,” states the report, signed by Alejo Czerwonko, Luciano Telo, Solange Srour, Ronaldo Patah, and Debora Nogueira.
According to UBS’s evaluation, the Brazilian market was trading at 8.7 times forward earnings, below its ten-year historical average of 9.7 times. If the fiscal scenario is confirmed, this multiple could approach 11.8 times.
“Combined with lower real interest rates influencing earnings expectations, this could translate into an upside potential exceeding 30% for the index over the coming months,” the team writes.
The estimate was formulated prior to the post-election session jump and therefore does not represent a projection of an additional 30% gain on top of post-rally prices.
Banks, retail, real estate developers, utilities, education, healthcare, and small caps are among the segments most sensitive to this shift. UBS also identifies room for a rotation out of oil stocks and into companies tied to domestic activity.
“If past election cycles serve as a benchmark, equity re-ratings would likely extend throughout the entire first year of the new administration, far beyond the initial post-election rally, as reform proposals advance through Congress and markets gain confidence in policy execution,” the report states.
Julius Baer Maintains Overweight Position
Julius Baer maintained its overweight recommendation on Brazilian equities. According to Nenad Dinic from the equity strategy area, the election outcome began resolving the risk-reward asymmetry identified prior to the vote in favor of the bullish thesis.
“We maintain our overweight position. The asymmetric risk-reward profile we identified before the first round is beginning to resolve in favor of our bullish thesis, with a Bolsonaro victory likely favoring faster fiscal consolidation, lower long-term interest rates, and an accelerated monetary easing cycle,” he states.
The combination of high real interest rates and low multiples offers, according to the firm, significant room for an equity re-rating.
“With real interest rates currently around 10% and local equities trading at 8.7 times forward earnings, the re-rating potential is substantial,” Dinic writes.
The strategist emphasizes, however, that electoral uncertainty should persist until the second round on October 25. Debates and initial details on fiscal proposals will remain at the center of investor attention.
Franklin Templeton Reaffirms Positive Outlook
Franklin Templeton also reaffirmed its favorable view on Brazilian equities. Larry Hatheway, Head of Research at the Franklin Templeton Institute, links this perspective to attractive valuations, earnings growth, and the possibility of falling inflation and bond yields.
“Attractive valuations for Brazilian equities and earnings growth, together with a backdrop of likely declines in inflation and bond yields, reaffirm our positive outlook on Brazilian equities,” he states.
This reading forms part of a broader conviction within the institution that investors should diversify their equity holdings beyond the United States, including emerging markets.
In local-currency Brazilian debt, Hatheway maintains a favorable assessment but adopts greater caution following asset appreciation.
“Most of the returns we anticipated between now and year-end have already materialized. Therefore, while we remain positive, we are now slightly more cautious regarding future returns,” he explains.
Aubrey Highlights Domestic Investor Capital
For Rob Brewis, Director and Manager at Aubrey Capital Management, the composition of Congress will be important for enabling deeper fiscal reforms.
“A deeper fiscal reform would need its support, and we would expect the Senate taking office next year to be more open to it than the current one,” he states.
Beyond foreign flows, Brewis highlights a potential domestic driver for the stock market. With high real interest rates, local investors had little incentive to shift resources from fixed income into equities. A shift in this landscape could expand demand for the asset class.
“The story for Brazilian equities is domestic. Local savers hold most of their money in fixed-income securities, and with real interest rates so elevated, there has been little reason to change,” he says.
“The test is knowing whether there will be fiscal discipline. If there is, and interest rates come down, we believe even a modest migration out of fixed income could, over time, represent a significant boost for equities,” he adds.
Vontobel Sees Revaluation Beyond the Stock Market
Thierry Larose, Portfolio Manager and Analyst at Vontobel, identifies a relief movement reaching across different markets. In comments sent following the initial reaction to the results, he highlighted the real’s appreciation of over 4% against the dollar, a drop of more than 100 basis points in DI futures yields compared to Friday’s close, and a tightening of credit spreads between 20 and 25 basis points.
“Investor confidence is boosted by expectations that the new government will quickly present a strong economic team, ambitious fiscal adjustment targets, and a constitutional amendment proposal shortly after the election,” he states.
The assessment continues Vontobel’s pre-election reading, which had already identified a favorable risk-reward ratio in fixed-rate government bonds.
“In our assessment, yields could compress considerably more under a Bolsonaro victory scenario than they might rise under a Lula re-election. In our view, this creates a very attractive asymmetric risk-return profile,” the firm noted.
Janus Henderson: The Market Will Demand Execution
Despite the favorable reaction, Janus Henderson emphasizes that the election results must still translate into concrete economic measures.
Thomas Haugaard, Portfolio Manager on the hard-currency emerging market debt team, considers that the first round increased the likelihood of a more market-friendly orientation. However, detailed fiscal proposals remain limited.
“Neither campaign has yet provided sufficient clarity regarding the pace, composition, or policy implementation of the adjustment,” he states.
For Haugaard, fiscal credibility remains the primary medium-term variable. A disciplined program could reduce the sovereign risk premium, improve debt dynamics, and encourage capital inflows.
“The market will ultimately demand policy execution, not merely campaign signals,” he underscores.
Aberdeen Demands Credible Proposals
Viktor Szabó, Investment Director of Fixed Income at Aberdeen Investments, also places the fiscal issue at the core of the analysis. While he considers that the new congressional composition could facilitate coalition building under an eventual Bolsonaro presidency, he emphasizes that the contest remains open.
“For markets, however, the central question remains Brazil’s fiscal outlook—its long-standing Achilles’ heel,” he states.
“Bolsonaro now needs to demonstrate that market expectations regarding stronger primary balances and fiscal reform are backed by credible proposals, rather than campaign rhetoric,” he adds.
In Szabó’s assessment, commitments made during the second-round campaign will carry more weight for markets than initial political momentum.
“The promises and commitments both candidates make over the next three weeks will matter more than the political momentum dominating the headlines,” he states.
Ebury Warns About the Duration of the “Honeymoon”
In the currency market, Diego Barnuevo, Senior Market Analyst at Ebury, sees room for a positive reaction from Brazilian assets driven by expectations of fiscal consolidation.
“The first-round surprise should initially translate into a positive reaction for Brazilian assets, including the real, supported by expectations of a more aggressive fiscal consolidation and a more sustainable growth model under an eventual Bolsonaro presidency,” he states.
The fintech considers, however, that the burden of mandatory spending limits the ability to execute significant expenditure cuts. If Bolsonaro wins, investor focus should shift toward government composition and the fulfillment of fiscal commitments.
“Fiscal announcements have so far been notably vague. Any disappointment on this front could quickly shorten the real’s honeymoon period,” Barnuevo warns.
Among international firms, expectations of fiscal adjustment and lower interest rates underpin the favorable outlook for Brazilian assets. The continuation of this movement will depend, however, on translating electoral expectations into an economic agenda capable of securing political support and producing results.
Inflation concerns continue to be the heaviest factor explaining short-term equity movements. The consensus among economists anticipated a strong U.S. inflation reading for September, which ultimately surprised on the downside: headline CPI reached +0.6%, in line with the year-over-year rate moving from 3.4% to 3.7%, while core CPI came in at +0.3% versus the +0.2% expected, shifting from 2.4% to 2.6% year-over-year. Its impact was amplified by the proximity of the Federal Reserve meeting scheduled for the 28th.
However, we believe the release was not strong enough to justify another rate hike in October. Beyond the impact of rising energy costs and the effect of AI investments on the prices of PCs, software, and mobile phones, the only aspect to monitor is the uptick in Owners’ Equivalent Rent (OER), which rose compared to the previous month.
The market’s immediate reaction to the data was to push expectations of a 25-basis-point rate hike in federal funds higher: probabilities spiked above 70%, only to quickly retreat to 12.7%, the lowest level since June. The September retail sales data (which deteriorated relative to August), the moderation in import prices shown in the Philadelphia Fed survey, and comments from Mary Daly (San Francisco Fed) and Michelle Bowman—who do not foresee a rate hike this month—exerted downward pressure on that probability, aiding the Treasury bond market. Regarding the U.S. Treasury bond, we do not believe that developments in the neocloud sector, discussed in the next section, were the main driver behind the yield compression. Investment in AI will continue to contribute positively to GDP in the coming months.
AI: Neocloud Strain and Ongoing Adoption
Inflation and its initial effect on the Treasury yield (which exceeded 5.32% on Wednesday before stabilizing near 5.08% on Friday) was also the catalyst for the sharp drop in share prices among neocloud companies. CoreWeave alarmed investors at the worst possible time by communicating that it would like to achieve an investment-grade credit rating to finance its growth on an “unlimited” basis. Its debt fell below 80 (against a par value of 100), having traded at par just a few months ago, while its CDS priced in a more than 50% probability of default over the next five years.
We consider this an isolated case affecting a subsegment of technology companies with higher financial leverage and greater sensitivity to rate hikes, rather than a red flag for the broader set of companies linked to the AI theme.
For now, the adoption of paid AI services among both large and small enterprises continues to advance, rising from 8% in large firms and less than 4% in small ones at the start of 2023 to 67% of large, 62% of mid-sized, and 50% of small businesses today—all within just three and a half years. Moreover, investments are being monetized: aggregate cloud revenues among major compute providers grew 43% year-over-year in the second quarter, based on nearly $370 billion over the last twelve months.
Geopolitics and the “Incompetence Premium” in U.S. Debt
In the short term, the evolution of inflation readings will be determined primarily by geopolitical factors. In this regard, uncertainty has heightened recently: Iran, through its Revolutionary Guard, has intensified threats against vessels that might “illegally” attempt to trade or load oil in the strait. Similarly, the Wall Street Journal reported comments from Iranian authorities regarding the deployment of troops to carry out retaliatory actions against U.S. allies in the Gulf.
As we have been explaining, one of the Iranians’ objectives is to keep the price of crude oil near $100 per barrel to minimize Trump’s chances of retaining control of the Senate as much as possible. However, the escalation in hostilities places Iran in a difficult situation to manage: overreaching in its pressure could hand Trump the justification he needs to strike with greater force once control of both houses is lost on November 3.
A poorly explained war, an imprecise central bank, and Treasury buybacks too small to move the needle have exasperated fixed-income buyers. Some strategists are already referring to an “incompetence premium” impacting the pricing of U.S. sovereign debt.
Woodford, Warsh, and the Abandonment of Forward Guidance
This is why the coincidence surrounding Kevin Warsh’s abandonment of forward guidance—which likely affected the structure of the yield curve—and the Nobel Prize in Economics awarded to Michael Woodford, arguably the academic who put the most effort into establishing a theoretical foundation for that concept, remains curious. The award arrived last Monday, October 12, four months after Warsh dropped the concept in the FOMC statement on June 17. That said, the contradiction is smaller than it appears at first glance.
In Interest and Prices (2003), Woodford argued that monetary policy operates primarily through expectations of the future rate trajectory rather than the rate applied today. At Jackson Hole (2012), he extended that concept to zero-lower-bound (ZIRP) environments. His recommendation was to communicate guidance state-contingent on the economy rather than tied to a calendar date. The Fed implemented this in December 2012 by incorporating unemployment and inflation thresholds into the FOMC statement.
His subsequent work with García-Schmidt (2019) on economic agents planning over finite horizons significantly tempers the impact of long-term projections. Thus, within his own body of work, we find reasons to believe that guidance was less potent than the models suggested.
In reality, the disagreement with Warsh lies in substance, not form. For Woodford, what must be communicated is the central bank’s reaction function to incoming data, not the path of interest rates. Warsh states that guidance has “outlasted its usefulness” and offers instead a “framework” or “roadmap,” provided it is not termed forward guidance. This closely aligns with abandoning the rate trajectory while retaining the reaction function—which is precisely what Wall Street requested.
Furthermore, an important nuance exists: Woodford advocated guidance as a tool specifically when rates are at zero. With federal funds at 3.75–4%, its marginal utility is significantly lower. Therefore, in my view, extrapolating what occurred post-COVID (in 2021, the issue lay in committing to a rate path in an unprecedented environment amid runaway inflation) with Powell’s “transitory inflation” commentary and the resulting loss of credibility would be a mistake.
What occurred then does not prove that communicating the Fed’s reaction function to the market is useless. The risk lies in leaving the market to guess it, which inherently increases uncertainty, noise, and volatility in the fixed-income market.
In summary, the Fed’s reaction function is the rule, explicit or implicit, that translates the state of the economy into a rate decision. Communicating it means telling the market how the Fed decides, without promising what it will do.
Communicating the reaction function establishes the rule: the market continues to react to data, but in the direction and magnitude intended by the Fed—exactly what Woodford advocated. The question with Warsh is whether, in removing guidance, he will also cease to communicate the rule.
