It was a difficult week for risk assets as the combination of higher borrowing costs and rising energy prices weighed heavily on investor sentiment. US Treasury yields moved higher across the curve (bond prices move inversely to bond yields) as investors became increasingly concerned that the recent rise in oil prices could reignite inflationary pressures and complicate the outlook for monetary policy. With inflation already proving more persistent than many had hoped, markets began to reassess the possibility that the Federal Reserve (Fed) may be forced to maintain a restrictive stance for longer or potentially tighten policy further should energy-driven price pressures continue to build. The Fed meets later this week.
The backdrop in energy markets remained particularly challenging. Hostilities in the Middle East intensified once again, with attacks escalating around the Strait of Hormuz and extending to key Saudi energy infrastructure. Significant advances by Yemen’s Houthi rebels also tightened their grip on areas surrounding the southern Red Sea, increasing concerns over disruptions through the strategically important Bab al-Mandab Strait, another critical route for global energy shipments. Against this backdrop, fears surrounding the security of global oil supplies intensified, pushing Brent crude briefly above $110 per barrel before some profit-taking on Friday saw prices retrace a portion of those gains. Taken together, the result was a broad sell-off across both global equity markets and government bond markets, as investors grappled with the implications of higher energy costs, rising inflation risks and an increasingly uncertain geopolitical landscape.
Against the challenging backdrop discussed above, losses were widespread across global equity markets last week. In the US, the S&P 500 declined -0.8% (in dollar terms), with small-cap equities faring particularly poorly in what was a shortened trading week due to the Labor Day holiday on Monday. European markets also came under pressure, with the MSCI Europe ex UK Index falling -1.7% (in euro terms) as German and French equities retreated sharply amid concerns that higher energy costs could add further pressure to the region's inflation outlook. The FTSE 100 also fell -1.7%, with strong gains from oil majors insufficient to offset weakness elsewhere. In Asia, the Nikkei 225 declined -1.6% (in yen terms), as a stronger yen and rising expectations for further Bank of Japan policy tightening weighed on growth stocks. Higher oil prices were an added headwind given Japan's heavy reliance on imported energy. Meanwhile, Chinese equities also struggled, with the Shanghai Composite declining -1.1% (in renminbi terms) as weakness was broadly distributed across the market.
Macro Data
| Country | Indicator | Period | Actual | Forecast | Previous |
|---|---|---|---|---|---|
| UK | GDP MoM | July | 0.40% | 0.00% | 0.30% |
| Manufacturing Production YoY | July | 2.60% | 2.00% | 0.50% | |
| US | Consumer Price Index Inflation YoY | August | 3.40% | 3.40% | 3.40% |
| Existing Home Sales Annually Adjusted Units | August | 3.98m | 3.98m | 4.06m | |
| Producer Price Index Inflation YoY | August | 4.60% | 4.60% | 4.20% | |
| Europe | European Central Bank Monetary Policy Meeting | September | - | - | - |
| Revised GDP QoQ | Q2'26 | 0.60% | 0.40% | 0.40% | |
| Japan | Revised GDP QoQ | Q2'26 | 0.40% | 0.40% | 0.30% |
| China | Consumer Price Index Inflation YoY | August | 0.80% | 0.80% | 0.50% |
| Exports YoY | August | 25.00% | 25.00% | 23.90% | |
| Imports YoY | August | 28.20% | 30.00% | 27.50% | |
| Producer Price Index Inflation YoY | August | 3.80% | 3.60% | 3.50% | |
| Source: Refinitiv Workspace | |||||