The week that was …
Economic round-up
UK GDP sees fastest growth in 18 months
Britain’s economy grew at its fastest annual pace in 18 months in July, helped by a boost from artificial intelligence. UK GDP was 1.6% higher than a year ago – and up 0.4% on the month – despite ongoing headwinds from the US-Iran war. The growth, which was significantly ahead of market expectations, offers chancellor John Healey some flexibility ahead of his first budget on 28 October. Read more in ‘In focus’ below and from Reuters here
ECB ups Eurozone rates to 2.5%
As had been widely expected, the European Central Bank raised Eurozone interest rates by a quarter point to 2.5%. The bank also warned that the risk of higher inflation over the next year had risen following renewed fighting in the Middle East. Read more from the Guardian here
US inflation concerns raise rate-rise expectations
Amid soaring energy costs, US inflation remained stubbornly elevated at 3.4% over August. Core inflation, which strips out volatile food and energy prices, was 2.4% – down slightly from the 2.5% reading in July. The data further pushed up expectations in financial markets of a rate increase at this week’s Federal Reserve meeting. Read more from the FT here
Energy costs continue to erode US consumer sentiment
US consumer sentiment deteriorated in early September as higher energy costs and ongoing trade tensions stoked fears of higher inflation over the coming 12 months. The University of Michigan’s Consumer Sentiment Index dropped from 51.7 in August to 47.8 this month. Economists polled by Reuters had forecast a reading of 51.0. Read more from Reuters here
China inflation climbs higher over August
China’s annual inflation climbed to 0.8% in August – from July’s six-month low of 0.5% – which was in line with market estimates. Non-food prices rose at a steeper rate – 1.2% versus 0.9% the previous month – with higher fuel prices prompting a sharp increase in transport costs. Read more from Trading Economics here
Markets round-up
Wall Street bounces after tough week
Stocks rose on Friday as oil prices retreated, ending four straight days of declines. Traders also looked past growing expectations of a Federal Reserve rate hike following the latest US inflation reading. The Dow Jones Industrial Average advanced 509.19 points, or 0.98%, while the S&P 500 climbed 0.86% to 7,656.98. Read more in ‘In focus’ below and from CNBC here
Bond market rout on pause
The sell-off in global bond markets paused on Friday after the US inflation report met economist expectations. The respite was good news for Trump administration officials, who had been trying to push down borrowing rates to little effect through a buyback scheme. The move had failed to ease investor anxiety over yawning US fiscal deficits. Read more from Reuters here
IEA says Hormuz will not reopen this year
The International Energy Agency (IEA) no longer expects the Strait of Hormuz to reopen to shipping this year and has written off 2026 and 2027 as “a lost period” for growth in global oil demand. It expects global demand to fall by 2.5m barrels a day this year, as soaring prices for refined fuels put a brake on consumption. Read more from the FT here
Diesel tops $6 a gallon at US pumps
US diesel prices have hit a record $6 (£4.45) a gallon as the war in Iran and Ukrainian attacks on Russian refineries choke fuel supplies globally, triggering new fears of inflation. The diesel pump price has surged this year and rose to $6.06 on Friday, motorist group AAA said – topping the previous record high of $5.82 in 2022 in the wake of Russia’s full-scale invasion of Ukraine. Read more from the FT here
“The US is the deepest and most sophisticated capital market in the world but investors should at least be pausing for thought on whether it should represent 70%-odd of their portfolios.
Selected equity and bond markets: 04/09/26 to 11/09/26
| Market | 04/09/26 (Close) |
11/09/26 (Close) |
Gain/loss |
|---|---|---|---|
| FTSE All-Share | 5836 | 5734 | -1.75% |
| S&P500 | 7719 | 7657 | -0.8% |
| MSCI World | 4987 | 4906 | -1.6% |
| CNBC Magnificent Seven | 448 | 451 | +0.6% |
| US 10-year treasury (yield) | 4.80% | 4.97% | |
| UK 10-year gilt (yield) | 5.06% | 5.28% |
Investment round-up
ETFs continue record-breaking streak
Europe’s total ETF assets have growth to almost $4tn (£2.97tn), with year-to-date net flows above $380bn as of the end of August. This reflects significant growth in the number of products available to investors, with thematic and active ETFs rising in popularity in recent months.
Fidelity’s Morse sets retirement date
Fidelity International fund manager Sam Morse is to retire in October 2027. Over the next 12 months, Morse’s duties will pass to Marcel Stötzel, his co-manager on the Fidelity European trust and Fidelity European fund, and Alexander Laing, who is joining the team from elsewhere in the business.
VanEck readies agribusiness ETF launch
VanEck is preparing to launch an agribusiness ETF in Europe, giving investors exposure to companies operating across the global agricultural supply chain. The VanEck Agribusiness UCITS ETF has been registered with the Irish regulator.
Neuberger PE fund to sit on Wealth Club platform
A Neuberger private equity fund is to be made available on Wealth Club’s private markets investment platform as investor interest in the asset class grows. According to Wealth Club’s most recent investor survey, more than a third (35.8%) of its high-net-worth clients plan to invest in private markets this year.
Trio of managers depart Aegon AM
Three fund managers have left Aegon Asset Management in recent months amid weak fund performance. Sajeer Ahmed, Malcolm McPartlin and Claire Marwick have all left the business, with head of equities Neil Goddin and investment manager Peter Dobson replacing Ahmed on the CG Aegon UK Smaller Companies fund.
UK investors back away from equities
UK investors continued to sell down equities in August, with net outflows of £315m during the month, according to Calastone. UK equity funds bore the brunt of outflows, dropping £601m, while European funds shed £145m.
SMID pair set to exit Jupiter
Investment managers Tim Service and Matt Cable are to leave Jupiter Asset Management in early 2027 as part of a wider restructure. The managers are part of the UK small and midcap equities team at the helm of the Jupiter UK Mid-Cap, Smaller Companies and UK Specialist Equity funds. The pair also managed the Rights & Issues investment trust.
Guinness finalises Foresight deal
Guinness Global Investors has finalised its acquisition of Foresight Capital Management (FCM), the public markets arm of Foresight Group. The acquisition includes FCM’s listed real assets funds, as well as the WHEB sustainability and impact strategies.
… and the week that will be
All eyes on the Fed …
The Federal Reserve meets on Tuesday and Wednesday this week, with markets bracing themselves for a rise in US interest rates. Bets have grown the Fed, which has held rates steady in 2026, will hike at the end of its two-day meeting although some investors remain dubious it will take the plunge. Not raising, on the other hand, could have its own consequences for the US central bank’s credibility. Read more from Reuters here
… and everyone else
The central banks of the UK and Japan and have their own meetings this week. The Bank of England is expected to leave UK interest rates unchanged, instead looking to raise in November. For is part, the Bank of Japan is expected to raise its policy rate on Friday to 1.25%. Expectations of an increase were fuelled by the publication of a hawkish summary of expectations, with rate-setters noting risks to inflation were still to the upside. Read more from the FT here
The week in numbers
US interest rates: A 25 basis-point (bps) rise to 4% from the world’s most powerful central bank is being seen as increasingly likely. Commentary at the US Federal Reserve’s 15/16 September meeting around the potential for more hikes is likely to drive market volatility.
UK interest rates: While consensus expectations are for no increase in UK interest rates by the Bank of England, a rise in Monetary Policy Committee members arguing for a hike could drive upside in the pound. Japan interest rates: Consensus expectations have the Bank of Japan raising Japan interest rates 25bps to 1.25%.
UK inflation: Consensus forecasts have UK prices in August up 3.1% year-on-year – from 2.9% in July – and 0.5% month-on-month, up from 0.3%. Core inflation is expected to be 2.6% year on year, in line with the previous month.
UK employment data: Consensus expectations are that the UK’s July unemployment rate will hold steady at 4.9% while average earnings are expected to rise 4%.
UK retail sales: Consensus expectations for UK retail sales growth in August is a month-on-month rise of 0.7%, compared with a drop of 0.5% in July.
US retail sales: Consensus forecasts have US retail sales in August up 0.3% month-on-month.
Japan inflation: Consensus expectations are that prices in Japan rose 2.1% year-on-year in August.
China industry data: Consensus forecasts have industrial production in China up 5% year-on-year over August and retail sales for the same period up 1% year-on-year.
In focus: American dream?
US stocks have richly rewarded investors’ confidence for much of the past decade. The US’s corporates have proved endlessly regenerative and innovative while its economy has brushed off almost every challenge thrown its way. Investors have been willing, even happy, to pay a premium for this superiority – and yet, as management of the economy looks increasingly suspect and AI upends the all-important technology sector, they should at least be questioning whether US equities still merit their high rating.
The strength and dynamism of the US corporate sector and its technological prowess remain the strongest arguments for the country’s ongoing premium to other markets. It is just better at doing business than almost anywhere else. Factset data shows second-quarter earnings for the S&P 500 index grew by 50.4%, marking the highest earnings growth rate since the same period in 2021.
According to Will McIntosh-Whyte, fund manager on the Rathbone Multi-Asset Portfolio funds, there are cultural reasons for this strength, with a focus on tax cuts and deregulation. “There have been massive tax cuts for corporates particularly on R&D and capital expenditure,” he says.
“That is part and parcel of why the US economy is continuing to grow so strongly. Some of this is tied to the AI trade – but that is being boosted because 26% of every dollar businesses spend, they can knock off their tax bill. It is a massive incentivisation to invest in the economy.”
Equally, the US economy seems to weather the brickbats – in spite of tariffs, high inflation and the war in Iran, GDP growth was still running at around 1.5% in the second quarter of this year. Jobs growth meanwhile continues at pace and the consumer has continued to spend, even though credit card debt – at $1.26 trillion (£930bn) – is close to a record high.
The US economy may be more reliant on the consumer than is widely believed – in turn meaning it is more impacted by high inflation and interest rates.”
Nevertheless, some cracks are appearing. Walmart’s recent results sent its shares tumbling as the consumer bellwether reported its weakest US sales growth in more than six years and issued gloomy forward guidance. Overall retail sales growth for July was negative – down 0.6%. “This is all the more surprising given the FIFA World Cup, which had lifted tourist numbers, and the country’s 250th independence anniversary celebrations,” notes James Knightley, chief international economist at ING.
There is a view this does not matter terribly much because AI is now doing the heavy-lifting on economic growth – although J.P. Morgan argues this is not necessarily the case. “AI-related investment contributed 0.47 percentage points to the 2.1% pace of US real GDP growth over the past year – roughly one-fifth of growth, after netting out imported hardware,” it observes. “Consumption contributed over three times as much.”
The group goes on to point out that, as US hyperscalers are multinational companies, not all of their spending is domestic. Estimates suggest roughly 30% of their capex goes to overseas data-centres, which means the US economy may be more reliant on the consumer than is widely believed – in turn meaning it is more impacted by high inflation and interest rates.
Then there is the politics. With his recent pledge of a $5,000 dividend for voting Republican, US president Donald Trump may have shot any fiscal credibility he has ever had. Government bond yields continue to rise and it appears that markets may be starting to lose faith in US institutions.
Not entirely unconnected to the dividend promise, the US midterm elections are looming – and this has not generally been a good time for investors. “Markets tend to be more volatile with lower returns during mid-term years,” says Meera Pandit, global market strategist at J.P. Morgan Asset Management. “Since 1937, returns in midterm years were 9.2% on average versus 13.3% in non-midterm years. Realised volatility was also higher.”
Like all booms, this will inevitably come to an end, with potentially serious implications for assets that have been bid up in the current excitement.”
Pandit adds the caveat that simple averages do not tell the full story, however. “Midterm years have also coincided with particularly choppy years in the markets,” she continues. “2018 and 2022 were both midterm years in which the stockmarket suffered negative returns. The sell-offs, though, were triggered by the Fed hiking interest rates.” US interest rate rises do appear an inevitability over the next few months.
While Pandit stresses it is fundamentals, not elections, that are the more important factor when assessing the investment climate, it is unlikely to help an already febrile environment – plus the fundamentals do not look that great either.
“Investors face a market that is fully valued and exhibits high levels of correlation and concentration risk owing to the dominance of the artificial intelligence boom,” says James Harries, manager of the STS Global Income & Growth Trust. “Like all booms, this will inevitably come to an end, with potentially serious implications for assets that have been bid up in the current excitement.”
The hyperscalers that have driven the market higher for much of the past decade have started to weaken, with the Mag7 grouping underperforming the S&P 500 by around 50% since the start of the year. The CNBC Mag7 index’s year-to-date rise of 6.4% compares with a return from the S&P 500 of 11.85%. Investors have been worried about the hyperscalers’ capital spending – and the extent to which they are taking on debt to support it.
The recent hike in treasury yields raises the cost of new debt and could slow enthusiasm for further capex. The new generation of leaders also appears more precarious. While the previous cohort had monopolistic characteristics – Meta in social media, Alphabet in search – the new wave of semiconductor and memory groups are operating in a more competitive and cyclical industry. It is not at all clear that they will be able to dominate in the way their predecessors did.
The US is the deepest and most sophisticated capital market in the world but investors should at least be pausing for thought on whether it should represent 70%-odd of their portfolios – the current weighting in the MSCI World index. The economy rests on an indebted and increasingly nervous consumer, while the AI trade looks precarious. Add in the backdrop of wobbly politics and the US’s veneer of invincibility may prove to be no more than that.
Read more on this from ING here, from Interactive Investor here and from J.P. Morgan AM here
In focus: Confidence trick
For some years now, the prevailing narrative on the UK economy has been it is irredeemably slow-growing and weak – so the recent economic bounce has caught economists by surprise. Last month’s GDP figures defied the drag from the war in Iran to outstrip expectations by a significant margin. For investors, then, the question is whether this surprise boost is temporary or structural.
UK GDP grew by 0.4% over July – consensus expectations among analysts having been for no growth, or even a negative figure, after punchy growth of 0.6% in Q1 and 0.4% in Q2. For its parts, the IMF had been forecasting 1% growth for the whole of 2026 while the Bank of England had expected no growth for the third quarter. This has left forecasters scratching their heads.
It seems plausible that AI is having an impact. The data showed output from computer programming and consultancy grew 4.4% in the three months to July, for example, while the manufacturing sector was buoyed by computer and electronics production. Again, the UK has a misplaced reputation as an AI laggard, so economists may have missed the impact.
There may also be a confidence factor at play here, however. For some time, fund managers have suggested the UK would be in decent shape if only consumers had sufficient confidence to spend some of their chunky savings pots. The World Cup gave spending a boost, for sure, but there are signs that spending could be on a more permanent uptick.
It does give the Bank of England a greater dilemma. “These figures will go some way to reassuring Bank of England policymakers that the current level of rates is not meaningfully restricting growth, which in turn suggests that rates could be moved higher without causing undue economic scarring,” observes Felix Feather, economist, at Aberdeen. “We therefore expect the Bank to move to contain high inflation with a 25 basis point hike in November after holding at its September meeting.”
There are likely to be implications too for chancellor John Healey as he prepares for his debut Budget next month. The focus so far has largely been on his economic blackhole as a result of rising bond yields. Growth would certainly make his sums easier, which in turn could mean fewer tax rises and so keep the UK economy on track.
Either way, it is a long time since the UK has had any economic good news. Certainly, there are plenty of reasons to think it cannot last – the war in Iran, higher inflation, rising energy costs and so on – but it at least suggests the UK economy may not be in terminal decline quite yet.
