Central banks turn more hawkish

Source: Bloomberg

Middle East/Energy

Talks between the US and Iran over reopening the Strait of Hormuz dominated Middle East developments, with Tehran proposing a seven-day roadmap under which it would reopen the vital shipping route and restart nuclear negotiations if Washington agreed to lift its naval blockade of Iranian ports, ease sanctions on oil exports, release frozen Iranian assets and observe a regional ceasefire. Abbas Araghchi, Iran's foreign minister, said the proposal had been passed through mediators, while both sides continued indirect discussions involving regional intermediaries. However, Donald Trump rejected the initial Iranian proposal, arguing it failed to meet US objectives, although reports suggested further talks were still expected. The continued impasse has kept uncertainty high in energy markets because the Strait of Hormuz is a critical route for global oil exports, with investors closely monitoring negotiations for signs of de-escalation after months of disruption to shipping and heightened military tensions in the Gulf.

Concerns are mounting about a shortage of diesel worldwide. Refinery outages, war-related disruptions in the Middle East and Russia, reduced refining capacity in Europe, low diesel inventories and shipping bottlenecks have all tightened supplies of middle distillates such as diesel and jet fuel. As a result, diesel prices have surged globally, with inventories in major markets sitting below normal levels and some regions facing severe supply constraints.

The debate in Washington has centred on whether the US should temporarily restrict diesel exports to keep more fuel at home and lower domestic prices. Supporters argue that diverting exports into the US market could ease shortages and reduce costs for consumers and businesses. However, the idea has prompted strong opposition from the energy industry, and the White House has so far stopped short of implementing a ban.

US oil majors and refiners argue that restricting exports could worsen the situation. Refineries produce diesel, petrol and jet fuel together, so they cannot simply increase one product without producing the others. Much of the US refining system, particularly along the Gulf Coast, produces more diesel than the domestic market can absorb and relies on exports to balance supply. If exports were blocked, storage tanks would fill up, forcing refiners to reduce overall throughput. That would mean less diesel, but also less petrol and jet fuel, potentially pushing fuel prices higher rather than lower. S&P Global estimates cited by industry groups suggest refiners could be forced to cut production significantly if exports were restricted.

Other geopolitics

Rising tensions between Nato and Russia have been fuelled by a series of large-scale allied military exercises in Poland and the wider Baltic region, alongside calls from senior Polish officials for more intensive drills near Russia's heavily militarised Kaliningrad exclave. Radosław Sikorski, Poland's foreign minister, has argued that stronger Nato exercises close to Kaliningrad could force Moscow to divert troops from Ukraine, while the alliance says the drills are purely defensive and designed to strengthen readiness on its eastern flank. Russia has historically viewed such exercises as provocative, and the latest activity comes amid heightened security concerns following reports that Western intelligence agencies believe Moscow could seek to test Nato's resolve through limited provocations against alliance members. The increased military activity has raised fears of miscalculation, while also reinforcing expectations that Nato will continue to bolster its deterrence posture across Central and Eastern Europe.

UK Prime Minister Andy Burnham sparked a political row this week after saying the UK should consider a range of options for its future relationship with the European Union (EU), including rejoining the bloc, arguing that Brexit has "done more harm than good" and that Britain needs a clearer long-term strategy for restoring growth and prosperity. The prime minister said options ranged from maintaining the current arrangement to joining a customs union, re-entering the single market or even "going all the way" and rejoining the EU, although he stressed that any decision would require careful consideration of the costs and benefits. The comments drew an immediate and mixed reaction. Pro-European politicians and some European leaders welcomed the reopening of the debate, while opposition Conservatives accused Burnham of trying to reverse Brexit and reignite a divisive issue that voters had settled in the 2016 referendum. Critics also questioned the practicality of rejoining, noting that any move would depend on the EU's willingness to accept the UK back and could potentially require another referendum, while supporters argued that closer ties with Europe could help boost trade, investment and economic growth.

Economics

A sharp sell-off in global government bond markets has pushed yields to their highest levels in decades, reflecting growing investor concerns that inflation will remain stubbornly high and that central banks may need to keep interest rates elevated for longer. In the US, the 10-year Treasury yield benchmark climbed above 5.2%, reaching levels last seen before the global financial crisis, while the 30-year yield touched its highest point in more than 20 years. Similar moves have been seen in UK gilts, German bunds and Japanese government bonds. Investors are demanding higher yields amid concerns about persistent inflation linked to elevated energy prices, strong economic growth, large fiscal deficits and heavy government debt issuance.

The implications for interest rates are significant. Higher bond yields tighten financial conditions by pushing up borrowing costs across the economy, including mortgage rates, corporate borrowing costs and consumer lending rates. Markets have already scaled back expectations for interest rate cuts and in some cases are again pricing in the possibility of further rate increases, particularly in the US, as central bankers remain focused on inflation risks. For policymakers, the rise in long-term yields may do some of the work of tighter monetary policy by slowing demand, but if inflation remains elevated and economic data stays resilient, central banks could be forced to maintain a "higher for longer" stance on interest rates into 2027.

Markets expect Friday’s US non-farm payrolls report to show that the economy added around 84,000 jobs in September, down from 162,000 in August, while the unemployment rate is forecast to remain at 4.1%, indicating a labour market that is cooling but remains relatively healthy. The data is particularly important because it will influence expectations for Federal Reserve interest rate policy at a time when investors are grappling with persistent inflation and rising bond yields. A stronger-than-expected report could reinforce the view that rates will stay higher for longer, while weaker jobs growth would support arguments for a more cautious approach to further tightening. As one of the last major economic releases before the Fed's next meeting, the report is likely to have a significant impact on bond markets, the US dollar and equity markets.

This week's HSBC/S&P Global manufacturing PMI surveys pointed to a broadly resilient global manufacturing sector, although performance varied significantly by region. Manufacturing activity remained in expansion territory across most major economies, with particularly strong readings from India, where the PMI rose to 55.7, while the US manufacturing PMI climbed to 57.0, its strongest reading for more than four years, highlighting robust demand and production growth. The eurozone manufacturing sector continued to expand, with the PMI holding at 52.7, supported by improving conditions in Germany and a return to growth in France. The UK PMI remained steady at around 52, signalling modest growth. Overall, the surveys suggested that global economic activity remains resilient despite higher energy prices, rising bond yields and geopolitical tensions, although businesses continued to report elevated cost pressures linked to energy, transport and raw materials.

The second reading of UK second-quarter gross domestic product (GDP) showed the economy grew by 0.5% between April and June, revised up from the initial estimate of 0.4% and ahead of expectations for no change to the preliminary figure. Annual growth was revised up to 1.4% from 1.2%, reflecting stronger performances across services, manufacturing and construction, as well as a notable improvement in business investment. The figures reinforced the UK's position as the fastest-growing economy in the G7 during the first half of 2026 and suggested the economy has so far proved resilient.

The third and final estimate of US second-quarter GDP showed the economy grew at an annualised rate of 2.2%, revised up sharply from the previous estimate of 1.5%, reflecting stronger consumer spending, business investment and government spending than initially reported. Growth slowed slightly from the revised 2.5% pace recorded in the first quarter but still pointed to a resilient economy despite higher interest rates, elevated energy prices and geopolitical uncertainty. The upward revision suggests domestic demand remains robust, with consumer spending and AI-related business investment providing key support, while exports also contributed positively.

Companies

Accenture reported stronger-than-expected fourth-quarter results, with revenue rising 6% to $18.7bn and new bookings increasing 4% to $22.2bn, reflecting broad-based growth across all geographic markets, industry groups and business lines. For the full year, revenue grew 6% to $74.2bn, adjusted EPS rose 8% to $13.97 and free cash flow reached $11.6bn. The consulting and technology services group returned a record $11.5bn to shareholders through dividends and share buybacks and announced a 5% increase in its quarterly dividend. Management struck an optimistic tone in the current year, forecasting revenue growth of 3% to 6% in local currency and further earnings growth, helped by continued demand for AI, cloud and digital transformation services.

Nike reported first-quarter results broadly in line with expectations, with revenue falling 4% to $11.2bn as growth in North America and its performance-focused sports categories was offset by continued weakness in Greater China, Nike Sportswear and Jordan Brand. Gross margin improved by 60 basis points to 42.8%, helped by lower logistics costs and disciplined inventory management. The sportswear giant highlighted encouraging momentum in running, football, basketball and other performance categories under its "Sport Offense" strategy but acknowledged that challenges remain in China and lifestyle products. Nike also unveiled its "Pace" transformation programme aimed at improving productivity and supporting long-term growth, while management said full-year performance is likely to remain under pressure as it works through the turnaround.

J D Wetherspoon delivered a strong full-year performance, with higher sales and profits driven by continued growth in like-for-like trading, particularly in its core drinks business. The pub operator benefited from solid customer demand and market share gains despite ongoing cost pressures, while maintaining investment in staff pay, pub refurbishments and new openings. Management highlighted resilient trading through the year, improved operational efficiency and a healthy balance sheet, and struck a confident tone on current trading, noting that recent sales trends have remained positive. Chairman Tim Martin reiterated his view that the company is well positioned for further progress, although he warned that labour, tax and regulatory costs continue to represent challenges for the UK hospitality sector.

Greggs reported a strong third-quarter trading update. The bakery chain said trading improved through the period, helped by successful menu innovation, including new drinks, healthier food options and seasonal products, alongside more favourable weather conditions. Greggs opened 95 new stores during the year-to-date, resulting in 57 net new openings, and remains on track to deliver 100-110 net new stores in 2026. Cost inflation expectations were unchanged at around 2%, and management said stronger recent trading and tight cost control mean it now expects a modestly improved outcome for the full year, despite plans to consolidate manufacturing operations and higher costs associated with new distribution centres in 2027.

Saga reported a strong set of interim results, driven by robust growth across its travel and insurance businesses. Revenue and profits benefited from higher cruise pricing, increased river cruise capacity, stronger holiday demand and improved insurance broking performance, while net debt fell by £86m year-on-year to £429.1m, reducing leverage to 2.7 times. Reflecting the stronger-than-expected first-half performance and continued progress with its strategic transformation, the over-50s travel and insurance specialist upgraded full-year underlying pre-tax profit guidance to £65m-£70m and said its medium-term financial targets are now expected to be achieved ahead of schedule.

AG Barr reported a solid set of interim results for the 26 weeks to 1 August 2026, driven by strong performances from its core brands, including Irn-Bru, Rubicon and Boost, alongside contributions from recent acquisitions Fentimans and Frobishers. Adjusted pre-tax profit increased 2.6% to £36.1m despite temporary supply chain disruptions during the summer trading peak, while the adjusted operating margin was maintained at 15.0%. The company said stock availability issues have now been resolved, acquisition integrations are complete and cost synergies should begin to benefit the second half. Management reiterated full-year guidance, expecting around 10% revenue growth and operating margins of about 15%, supported by continued market share gains and a stronger second-half trading performance.