Markets are being pulled in two directions

In brief

• Higher-for-longer interest rates stay in focus
• UK borrowing puts bond markets on alert
• Trump and Xi extend trade truce
• Oil prices swing on Middle East developments
• Budget speculation gathers pace
• AI remains a key investment theme

60-second market summary

Markets were pulled in two directions this week. On one side, economic data remained broadly resilient, with stronger-than-expected business activity in the US and parts of Europe supporting corporate earnings and helping major stock markets stay near record highs. On the other hand, investors faced rising bond yields, volatile oil prices and growing speculation ahead of the Autumn Budget.

In the UK, government borrowing came in higher than expected, putting the public finances back in focus and fuelling debate about potential tax changes. Bond markets also remained under pressure as investors adjusted to the prospect that interest rates could stay higher for longer.

Geopolitics continued to add a layer of uncertainty. World leaders gathered at the United Nations General Assembly and a US-China trade truce is expected to be extended until January. Developments in the Middle East drove sharp swings in oil prices, with Brent crude moving from below $100 a barrel to as high as $108 during the week.

Meanwhile, artificial intelligence remained a dominant investment theme, with governments, technology leaders, and businesses increasingly treating AI as a strategic economic priority rather than simply a new technology.

The key question for investors remains whether strong earnings can continue to offset the headwinds from higher borrowing costs, elevated energy prices, and geopolitical uncertainty.

The FTSE 100 was up 0.5% over the week by mid-session on Friday, with the more UK-focused FTSE 250 up 0.4%.

Further reading from the week:

• Why it pays to be wary of Budget speculation
• Is it better to invest a lump sum or in monthly instalments?
• How to invest small amounts of money in the UK
• Nine tips for inheritance tax planning
• Inheriting investments? Here are five tips to help you
• The week ahead in markets and economics

Market Dashboard 

Artificial intelligence remained firmly in the spotlight, with US President Donald Trump using his United Nations General Assembly address to argue that it should be renamed “superintelligence” and to reiterate his opposition to restrictions on the tech’s development.

In contrast, UK Prime Minister Andy Burnham said Britain was ready to help lead an international effort to establish AI standards, warning that advances in the technology could outpace existing safeguards and pose growing security risks.

The heads of three US-based AI businesses, OpenAI, Anthropic and Hugging Face, called for greater international coordination to address the risks posed by increasingly powerful AI systems.

Meanwhile, Australian Prime Minister Anthony Albanese revealed that an OpenAI agent gained access to Australia's universal health insurance system in June. The breach has prompted a review of the country’s AI governance framework.

Energy markets weigh diplomacy against disruption 

Oil prices remained volatile. Early in the week, oil prices fell as Iran signalled that the Strait of Hormuz could reopen and Saudi Arabia restarted its East-West pipeline, easing concerns over crude supplies. Before the conflict escalated, around one-fifth of global oil and liquefied natural gas supplies passed through the Strait.

Hopes of progress at the United Nations General Assembly initially eased concerns over Middle East energy supplies, but signs of limited progress in US-Iran talks later tempered optimism. It was reported on Thursday that Iran has proposed a seven-day plan to reopen the Strait of Hormuz and resume wider talks with the US, in a potential step towards ending the six-month conflict.

Markets also kept a close eye on reports that the US could restrict diesel exports. While Donald Trump has publicly backed a potential 90-day ban, Energy Secretary Chris Wright has warned such a move could backfire. The debate added to concerns about fuel supplies and heightened uncertainty in global energy markets.

Reflecting the shifting outlook, Brent crude traded from below $100 a barrel early in the week to above $105 by Thursday as hopes for diplomacy gave way to renewed supply concerns.

Economics and markets: resilient growth meets higher borrowing costs 

UK borrowing came in higher than expected this week, adding to concerns about the government's fiscal position ahead of the Autumn Budget. With the cost of UK government borrowing already near multi-year highs, further rises threaten to erode the Chancellor's fiscal headroom just as calls grow for additional spending on energy support and public services.

A Confederation of British Industry survey pointed to signs of weakness in the UK economy, with retailers reporting their biggest drop in sales since April and cutting orders from suppliers at their fastest rate since records began in 1983.

Elsewhere, economic data painted a more resilient picture. Purchasing Managers’ Index (PMI) surveys suggested business activity remains on a solid footing despite higher borrowing costs and energy prices. In the eurozone, manufacturing and services activity surprised on the upside, helped by stronger-than-expected readings from France and Germany. Meanwhile, US business activity remained particularly robust, with services activity strengthening sharply and manufacturing continuing its recent recovery. 

The Organisation for Economic Co-operation and Development (OECD) struck a cautiously optimistic tone, raising its forecast for global growth in 2026 to 2.9% and upgrading its UK growth forecast to 1.1% from 0.9%, citing stronger domestic demand. However, it expects growth to slow to 1.0% next year as higher energy prices and interest rates weigh on activity.

At the same time, Clare Lombardelli, Deputy Governor of the Bank of England, warned that persistently high energy prices could increase the likelihood of further interest rate rises if they begin feeding through into wages and prices.

Despite higher borrowing costs, volatile oil prices, and geopolitical uncertainty, equity markets remained remarkably resilient. Technology stocks continued to lead gains, supported by strong earnings expectations and ongoing enthusiasm around artificial intelligence. The S&P 500, the widely followed index of 500 large US companies, stayed close to its August record high, while the Nasdaq 100, which tracks 100 of the largest non-financial companies listed on the Nasdaq exchange and is heavily weighted towards technology stocks, reached a fresh all-time high on Tuesday.

Looking ahead

The key question for investors is whether strong corporate earnings can continue to offset the headwinds from higher borrowing costs, elevated energy prices, and geopolitical uncertainty.

In the US, attention will focus on a busy run of economic data. The latest University of Michigan Consumer Sentiment Survey is expected to provide further clues on the health of the consumer, with confidence remaining subdued amid higher fuel prices and rising inflation expectations. Employment and inflation data due next week will also be closely watched for signals on economic momentum and the path of interest rates. 

In the UK, investors will be watching the Labour Party Conference, which begins on Sunday, for signals on the government's priorities ahead of the Autumn Budget and any implications for public spending, taxation, and economic growth. Speeches from John Healey and Andy Burnham are likely to attract attention.

Company news

Company updates this week reflected several key themes shaping markets, including artificial intelligence, consumer spending, infrastructure investment and a revival in initial public offering (IPO) activity. Meta unveiled new AI-powered devices at its Connect conference, while H&M outlined how artificial intelligence is increasingly shaping retail operations. Construction group Balfour Beatty announced plans to expand its workforce as demand from major UK infrastructure projects grows, while planned stock market listings from African mobile payments business Airtel Money and cybersecurity firm Chaleit Holdings provided a welcome boost to London's IPO market.

Elsewhere, construction giant Vistry announced a major restructuring to improve cash generation and sharpen its focus on affordable housing, highlighting the tougher conditions facing UK housebuilders. Co-op reported strong growth at its funeral business as it continued its recovery from last year's cyber-attack, while Manchester United recorded a seventh consecutive annual loss. Meanwhile, takeover speculation surrounded Tesco's central European operations and miner BHP temporarily halted activity at the world's largest copper mine following a worker fatality. 

Kingfisher reports stronger first half and raises outlook

DIY retailer Kingfisher, which owns B&Q and Screwfix, reported higher sales and profits in the first half of the year. Sales increased 1.6% to £6.9bn, while profit before tax rose 9.9% to £404m, prompting the group to raise its full-year profit outlook. The company said demand for home improvement products remained steady, supported by both DIY and trade customers, while warning that planned changes to business rates could increase costs for larger stores.

JD Sports feels the pressure from cautious consumers

JD Sports' half-year results highlighted a tougher backdrop for discretionary spending. Sales slipped 0.7% to £5.9bn, while profit before tax dropped to £282m from £351m in the prior year. The retailer pointed to weaker consumer confidence in the US, softer demand for footwear and heavy discounting across the market, although sales were supported by strong demand for football shirts in the UK.

Costco reports higher sales as membership income grows

Warehouse retailer Costco reported higher fourth-quarter sales and continued growth in its membership business. Revenue rose 11.2% to $93.9bn. The company said membership income and customer demand remained strong, reflecting continued interest in its bulk-buying model as households seek value amid ongoing budget pressures.

Halma upgrades guidance after positive start to the year

Specialist technology group Halma said it expects low double-digit revenue growth this year and now anticipates slightly higher profit margins than previously forecast. The company said demand remained resilient, with new orders continuing to outpace sales. Halma also completed six acquisitions during the period, investing a record £515m, and continues to operate across sectors including safety, healthcare and environmental monitoring.

Raspberry Pi reports strong first-half growth

Raspberry Pi reported record first-half results, with revenue rising 90% to $256.9m. The company said growth was supported by demand across its industrial and commercial markets, where its products are used in applications such as automation, artificial intelligence and connected devices.