Weekly market commentary

September has a well-earned reputation for being a challenging month for markets, and this week has lived up to that, with continued volatility in bond markets and mixed performance across risk assets. Inflation concerns dominated, as escalating tensions in the Middle East pushed energy prices sharply higher. Brent crude briefly rose above $108 a barrel and is set to end the week above $100 for the first time since May, while natural gas prices reached post-2022 highs, adding pressure to risk assets and driving bond yields higher.

Market attention has increasingly shifted towards September’s central bank meetings. Thursday saw the European Central Bank hike rates by 0.25%, in line with expectations, and marks the second hike since the outbreak of the Iran-US conflict, with ECB President Lagarde describing the move as a "no brainer". The Bank of Japan, Bank of England, and the Federal Reserve have their meetings next week, with Friday’s US CPI release expected to be a key determinant for the probability of a September hike from the Fed following last week’s robust Non-Farm Payrolls.

Equity markets struggled amidst the challenging macro backdrop, with concerns around geopolitics, inflation, and higher rates weighing on sentiment, though AI remains a supportive structural theme. UK economic growth data for July, released this week, surprised to the upside with GDP rising 0.4% month-on-month and 1.6% year-on-year, the strongest annual growth in 18 months, with much of the growth appearing to come from businesses involved in computer programming. Strong earnings from Oracle, where Cloud infrastructure growth accelerated to triple-digits, alongside new AI product launches from Meta (Muse AI) and Open AI (ChatGPT6) highlighted continued momentum despite potential near-term macro headwinds.

Yield moves were particularly notable in Europe and the UK, where government bond yields continued to push towards multi-year highs. Japan also remained in focus. Expectations for further Bank of Japan tightening supported the yen, which strengthened further against the US Dollar, alongside continued sensitivity to potential official intervention, with US Treasury Secretary Scott Bessent underscoring his commitment to coordinating intervention, and speculation of domestic capital repatriation by Japanese pension funds.