The week that was …
Economic round-up
UK interest rates held at 3.75%
As had been widely expected, the Bank of England held UK interest rates at 3.75% last week although it did say it was ready to raise rates if the war in Iran were to escalate. Six members of the central bank’s Monetary Policy Committee voted to hold and three for a rise – compared with a 7-2 split in June. Read more from the BBC here
Healey to stick to fiscal rules in October budget
John Healey has confirmed he will stick “well within the fiscal rules” when he delivers his first Budget as the UK’s chancellor of the Exchequer on 28 October. “The chancellor favours a straightforward, well-managed Budget this autumn,” one government insider was quoted as saying. Read more from the FT here
Fed leaves US rates unchanged
The Federal Reserve left US interest rates on hold in the 3.5-3.75% range after its meeting last week. This had been widely expected although Fed chair Kevin Warsh left bond markets confused when he said the central bank “would not waver” in containing inflation, without offering a coherent macroeconomic narrative for markets to follow. Read more from Reuters here
US economy slows in second quarter
The US economy notably slowed in the second quarter of 2026. It grew at an annualised rate of 1.5%, with a tailwind from consumption, but the reading was down from the 2.1% growth rate recorded in the first three months of the year and short of the 2% figure forecast in a Bloomberg poll of economists. Read more from the FT here
Q2 Eurozone GDP offers positive surprise
Eurozone GDP rose more than expected in the second quarter of 2026, expanding by 0.4% quarter-on-quarter. Across the European Union, growth accelerated to 0.5%, up from 0.1% previously. Annual growth also strengthened, reaching 1.0% in the euro area and 1.2% across the EU. Portugal and Spain were strong, while France, Germany and Italy slowed. Read more from Euronews here
Eurozone inflation edges up over July
Eurozone inflation ticked up in July, adding to the case for another European Central Bank interest rate hike. Inflation across the bloc was 2.9% over the month – up from 2.8% in June – but in line with consensus expectations. Rising energy costs from the Iran war drove the rise. Read more from Reuters here
Markets round-up
Musalem warns on Fed cred
Alberto Musalem, president of the St Louis Fed, has said last week’s sell-off in US treasuries was a signal the central bank must earn its “credibility” on fighting inflation by backing up its rhetoric with interest rate rises. The yield on 30-year US government debt hit its highest level since 2007. Read more in ‘In focus’ below and from the FT here
US intervenes in yen market
The US Treasury intervened in yen exchange rates on Friday – the first time Tokyo and Washington have joined forces to support the Japanese currency in nearly 30 years. The Federal Reserve Bank of New York sold euros to buy yen on behalf of the Treasury. Read more from the FT here
Apple shares drop …
Apple shares fell 7.4% on Friday, wiping more than $400bn (£2.97bn) from its market capitalisation, after the iPhone maker warned the artificial intelligence boom was draining the global supply of microchips. Tim Cook, Apple’s outgoing chief executive, said the company was “seeing some very significant constraints” and there was “limited flexibility in the supply chain to remedy it”. Read more from the Times here
… but Amazon supports markets
US indices ended higher on Friday, lifted by Amazon as the tech heavyweight’s strong quarterly report bolstered investor confidence in AI-related stocks. The company’s shares surged more than 15% after posting its biggest quarterly revenue growth in over four years. Read more from Reuters here
Oil prices jump higher
Crude oil prices rose 1% on Friday to around $85 a barrel, capping a more than 20% gain in July. This is the strongest monthly increase since March, amid growing concerns over global oil supplies as Middle East tensions remained high. Read more from Trading Economics here
BP puts North Sea assets up for sale
BP has announced it wants to sell its oil and gas fields in the North Sea – a move that could bring in more than $2bn. It is part of a sweeping portfolio overhaul under new CEO Meg O’Neill that is aimed at improving profitability. A day earlier UK prime minister Andy Burnham had said he planned to take a pragmatic approach to developing and using oil and gas resources in the North Sea. Read more from Reuters here
“There is clearly a danger the hyperscalers and other AI giants start to dominate the corporate bond market in the same way they have for equities – bringing volatility in their wake.
Selected equity and bond markets: 24/07/26 to 31/07/26
| Market | 24/07/26 (Close) |
31/07/26 (Close) |
Gain/loss |
|---|---|---|---|
| FTSE All-Share | 5769 | 5839 | +1.2% |
| S&P500 | 7412 | 7490 | +1.1% |
| MSCI World | 4789 | 4848 | +1.2% |
| CNBC Magnificent Seven | 407 | 425 | +4.4% |
| US 10-year treasury (yield) | 4.69% | 4.74% | |
| UK 10-year gilt (yield) | 5.03% | 5.06% |
Investment round-up
UK special dividends drop
UK special dividends fell 76% year-on-year to £465m over the three months to the end of June, according to Computershare’s latest quarterly Dividend Monitor – far higher than expected. Underlying UK dividends rose by 7.4% to £34.8bn over the quarter, however, helping drive record headline payouts of £35.3bn.
ETF ownership soars among retail investors
ETF ownership among non-advised UK investors is four times higher than it was six years ago, according to new research from Boring Money. In 2020, just 5% of investors held an ETF, compared with 22% who held funds. Today, the two are level at 19%.
Janus Henderson bond funds lose Titan ‘A’ rating
Titan Square Mile is to drop ‘A’ ratings from Janus Henderson’s Strategic Bond and Fixed Interest Monthly Income funds on account of the imminent departure of Jenna Barnard, the group’s head of global bonds, who is set to retire by the end of 2026.
Schroders’ assets hit £867.8bn
Schroders has reported record assets under management of £867.8bn for the first half of 2026. Market movements and investment performance added £51.4bn during the period, while foreign exchange movements contributed a further £3.7bn.
Two space ETFs launch
First Trust and Global X have each launched space-themed ETFs. The First Trust Bloomberg Space Economy ETF has listed on the London Stock Exchange (LSE) and Borsa Italiana with a TER of 0.65% while, the Global X Space Tech UCITS ETF has listed on the LSE and Deutsche Börse Xetra with a TER of 0.5%.
Neuberger Japan fund targets ‘mispriced’ assets
Neuberger has launched a Japan Equity fund for international investors to identify “mispriced” companies. Led by senior portfolio manager and head of Japanese equities Keita Kubota, the UCITS vehicle will target a portfolio of some 35 to 65 Japanese companies across the market capitalisation spectrum.
Aberdeen outflows accelerate
Aberdeen saw outflows of £3bn across the group in the first half of 2026 – up from the £900m recorded in the same period last year. CEO Jason Windsor said the group’s adviser business saw net outflows of £1.3bn in the period, compared with £0.9bn in the first half of 2025.
BlackRock launches infrastructure ETF
BlackRock has launched the iShares Europe Infrastructure Builders UCITS ETF, which aims to provide investors with exposure to European companies involved in building, upgrading and modernising the region’s infrastructure. The new fund will track the STOXX Europe Infrastructure Builders index.
… and the week that will be
US employment data
Consensus expectations for the July US employment report have non-farm payrolls rising by 91,000 – up from 57,000 in June. The unemployment rate is meanwhile expected to edge higher to 4.3%, from 4.2%, and average hourly earnings are forecast to remain unchanged at 0.3% month-on-month. A stronger-than-expected employment report could reinforce expectations the Federal Reserve will raise US interest rates before the end of the year, which may weigh on risk assets. Read more from CMC Markets here
‘Peak earnings’ season
This week brings ‘peak earnings’ season, including an update from SpaceX. The Elon Musk-founded group’s results, due on Tuesday, come as investor opinion has hardened on tech companies splurging cash on AI. Results from AMD, ON Semiconductor and Palantir will also calm or inflame the market’s AI jitters. A range of blue chips are also set to report, including BP, HSBC, Kimberley Clark and McDonald’s. Read more from the FT here
The week in numbers
UK construction: Consensus expectations are that the UK construction purchasing managers index (PMI) will rise to 38.6 in July – up from 38.4 the previous month – suggesting a slight increase in activity in the sector.
US employment data: Consensus forecasts have US non-farm payrolls up 79,000 in July, compared with 57,000 in June, while the unemployment rate holds at 4.2%. Average hourly earnings are expected to rise 0.3% month-on-month and 3.5% year-on-year – in line with last month’s numbers.
US business sentiment: Consensus expectations have the US ISM manufacturing PMI edging down to 53 in July, from 53.3 in June, while the services equivalent rises from 54 to 55.
China manufacturing: Consensus expectations have the China RatingDog manufacturing PMI ticking down to 51.5 in July, from 51.7 the previous month.
In focus: AI v FI
A reappraisal of the risks associated with artificial intelligence has created plenty of problems for equity markets but could there also be a similar impact on fixed income investors? AI-related issuance has soared in 2026, with Alphabet, Amazon, Meta and Oracle between them issuing some $194bn (£144bn) of debt over the year to date. The success – or otherwise – of AI has now become a crucial consideration for corporate bond markets.
On the face of it, there ought to be ‘little to see here’ – after all, thanks to their strong balance sheets, cashflow and dominant market positions, large US technology firms generally enjoy high credit ratings. Microsoft, for example, is AAA-rated by Standard & Poor’s – putting it ahead of the US government – while Alphabet is rated AA+ and Amazon AA.
And yet storm clouds appear to be gathering. Alphabet’s latest results showed negative free cashflow for the first time in its 22-year history while surging capital expenditure more broadly has prompted Moody’s to warn on the credit quality of the hyperscalers.
“Previously, these companies relied on asset-light structures centred on software, intellectual property and scalable cloud services that required modest capital investment,” the agency stated in a recent note. “The transition from asset-light to asset-heavy models requires unprecedented levels of investment and capital-raising.”
Moody’s also noted the hyperscalers were leaning on long-term data-centre leases as a way to keep debt off their balance sheets. Pointing out that lease commitments for a group of six companies – Microsoft, Amazon, Alphabet, Meta, Oracle and CoreWeave – now total more than $1.2tn, it has labelled these as “debt-equivalent liabilities”.
To be fair, Moody’s has emphasised these businesses still have strong balance sheets, even if their financial profile is shifting. For its part, Reuters reports Goldman Sachs expects bond issuance by the five main hyperscalers to reach roughly $250bn this year and $400bn in 2027 – albeit this is seen as manageable in the context of their current balance sheets and there are no immediate signs of a downgrade from any of the major credit rating agencies.
Bond markets are now saying there is a near 1% chance each year Meta goes bust – that is starting to get close to junk bond territory.”
Nevertheless, there has been a clear shift in perception from the market. For new issuance, for example, spreads over government bonds have risen by around 10 basis points across the various maturities over the past 12 months. In the secondary market, the rise in yields is even higher. Reuters analysis of LSEG data showed: “78 of 91 hyperscaler bonds issued in 2026 with comparable pricing data were trading at higher yields on July 28 than at issuance. ” The median increase was about 22 basis points.
There is clearly a danger the hyperscalers and other AI giants start to dominate the corporate bond market in the same way they have for equities – bringing volatility in their wake. SpaceX, for example, has started to issue debt on the bond markets and has given investors a rollercoaster early ride.
“While it appeared that investors happily piled into the deal initially, three days later they wanted to be paid as if they were lending to a non-investment grade rated company,” observes Matt Rowe, managing director, solutions at Man Group. “The 30-year paper is now yielding 2.01 percentage points above equivalent US government debt – against 1.67 percentage points for the average speculative-grade borrower.
“The disconnect between an almost $3tn market cap and bonds trading closer to high-yield territory could invite at least three readings: is it a market comment on governance and management concentration; a genuine reassessment of default probability beneath the headline valuation; or simply the reality of a near-term gold rush in which equity investors chase the price jump while bond investors price the 30-year reality?”
Arguing the SpaceX issuance has contributed to the volatility in corporate bond markets, meanwhile, Nedgroup Investments head of fixed income David Roberts, is steering clear of this and other technology issuers. “We have no exposure to any of the AI-heavy tech or hyperscalers other than a small position in Amazon – which as we all know has multiple earnings sources,” he elaborates.
“We also have zero exposure to data-centre structured bonds. SpaceX issued bonds in June – in what was a near record month for corporate bond supply – and that excess supply in part contributed to the downward spiral in US bond prices seen since then.”
Roberts maintains the race to play in the AI game risks destroying the balance sheets of former cash-rich companies. “Mighty Meta spent so much on capex last quarter that its free cashflow collapsed more than 90%,” he notes. “That makes it way harder to service its debt – and that is reflected in the cost of ‘insuring’ against default. Bond markets are now saying there is a near 1% chance each year Meta goes bust – that is starting to get close to junk bond territory.”
It is a reminder that, while equity investors can get very excited about the potential upside for a SpaceX or one of the AI hyperscalers, bond investors just need their money back”
The other key problem is supply. Bryn Jones, head of fixed income at Rathbones Asset Management, points out the hyperscalers had to offer bonds in a range of currencies because even the giant US dollar market could not absorb that level of issuance. Eventually, he believes, there will simply be too much for corporate bond investors to digest and they will become more discerning on what they hold.
Overall, it is a reminder that, while equity investors can get very excited about the potential upside for a SpaceX or one of the AI hyperscalers, bond investors just need their money back – which in turn is a reminder as to why passives are a tougher proposition in bond markets.
“It does not matter how cheap they are – passives do not work in this asset class,” states Church House Investment Grade Fixed Interest fund manager Jeremy Wharton. “Benchmarks in this asset class lead people down the wrong rabbit holes – too much duration, the wrong type of credit risk or too much exposure to different sectors.
“An equity investor is looking for all of the upside, a credit investor is trying to avoid the downside.” If bond funds are giving investors equity-like volatility but with no extra return, he adds, what is the point of their inclusion in portfolios?
AI-related companies are changing bond markets just as they have changed equity markets. Their credit quality is under threat and this is starting to be reflected in pricing. At the very least, investors need to be increasingly discerning in navigating this part of the market.
Read more on this from CNBC here and from Yahoo Finance here
In focus: Lost in the Warsh
As had been widely expected, the Federal Reserve kept US interest rates on hold after its meeting last week. While this should have been a non-story, though, the approach to communications and ‘guidance’ of new chair Kevin Warsh is unsettling investors – and is at least partly responsible for a sell-off in bond markets.
From 4.55% on 17 July, the US 10-year treasury yield ended the week at 4.74% while the spike in the 30-year yield has been even more extreme. Notably, the recent moves in US yields have been stronger than those in the UK or Eurozone, suggesting it is not just an Iran war/inflation response.
The problem has been Warsh’s new ‘less information’ strategy. Bond markets were rattled by the gap between Warsh’s stated commitment to driving down inflation, and his keeping rates on hold. His refusal to show the Fed’s workings and an implausible explanation that the markets had already done the Fed’s work by raising borrowing costs troubled investors.
Alberto Musalem, president of the St Louis Fed, then warned the sell-off in US treasuries showed the central bank must earn its “credibility” on fighting inflation. “Mr Market spoke this week and I took a signal from it,” he told the Financial Times. “The signal emphasised to me that we need to continue to earn our credibility every day with both effective communications and actions as needed.”
Quilter Cheviot head of fixed interest research Richard Carter notes: “Warsh is still to set out his strategy when it comes to combatting inflation and the general path for interest rates. Some of that is due to potential dissenting views on the Board of the Federal Reserve, but Warsh also appears to want to get markets focusing on the actual economic data, rather than the words he delivers.”
There is an alternative view though – that Donald Trump could be pulling the strings and Warsh is holding back on rate rises to keep the US president happy. The mid-terms are looming and Trump will want better news on the economy. Of course, this is damaging even as a rumour because it puts central bank credibility in doubt.
Perhaps this is simply the uncomfortable transition period between two governance styles. Markets have grown used to a certain level of information and they may well be able to readjust. Nevertheless, investors and commentators alike have been increasingly critical of Warsh’s stance, accusing it of raising borrowing costs. The new Fed chair may well be the one who has to adapt.
