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29 Sept 2026 | 3 minutes to read
(All equity data is MSCI; all data in sterling unless stated)
A bilateral summit between presidents Trump and Xi last week was big on spectacle but short on substance. The biggest news – widely expected – was a two-month extension to their trade truce until 10 January. Xi reportedly wanted longer for more leverage, knowing that he will outlast Trump on the global stage. The pair have settled into a state of ‘managed competition’ in the near-term, the US with its chokehold over advanced chips, China over rare earths. Make no mistake, though, that the future looks more like ‘competitive confrontation’. Artificial Intelligence (AI) will confer great economic and military power on its masters. It’s no wonder then that the summit served up little by way of a shared vision for developing or regulating it. AI sovereignty is non-negotiable – a question of hegemony or survival.
Xi Jinping chose not to attend the UN General Assembly in New York during his visit. But UK Prime Minister Andy Burnham also met Trump. An uneventful encounter must pass as a win, given Trump’s caprice. The three leaders may yet meet several times in coming months: the G20 meet in Miami in December and in Manchester in November 2027 – Burnham’s home turf.
UK public sector borrowing reached a record £18.3bn in August, exceeding expectations of £15.5bn and £2.9bn higher than the same month last year. The figures further highlight the challenge facing the treasury, as it seeks to balance spending commitments with already elevated debt levels and rising borrowing costs ahead of the Autumn Budget.
Although cumulative borrowing over the first five months of the financial year has actually been £2.2bn lower than a year earlier, it is £8.1bn ahead of Office for Budget Responsibility (OBR) forecasts. Higher welfare spending, debt interest payments, and inflation-linked costs have outweighed higher tax receipts. Debt interest for August was the highest figure since monthly records began in 1997.
The figures will make unwelcome reading for Chancellor John Healey with the Budget looming on 28 October. And developed market governments’ fiscal outlooks faced renewed scrutiny last week, with warnings from both the Organisation for Economic Co-operation and Development (OECD) and International Monetary Fund (IMF). The influential bodies observed that weaker economic growth and rising borrowing costs mean that governments need to act further to contain debt servicing costs. The OECD downgraded its 2027 growth outlook for the UK to 1%, while the IMF urged indebted advanced economies, including the UK and US, to stabilise debt levels.
Running persistent annual deficits means debt increases and interest payments account for a growing share of government revenue. Government borrowing costs have shifted materially higher in recent weeks. Renewed tensions in the Middle East have reignited inflationary fears, pushing up bond yields. With much of the Chancellor's fiscal headroom likely exhausted, the room for manoeuvre is likely limited without incurring the wrath of Labour party backbenchers or breaking manifesto pledges.
Energy markets remained volatile last week. Developments at the UN’s General Assembly in New York, and on-going discussions involving Iran revived hopes of diplomatic progress. But familiar geopolitical tensions resurfaced. Brent crude traded back close to $105 per barrel by the end of the week.
It has gradually become clear that more oil has been flowing out of the Middle East during the Iran war than previously feared under a more drawn-out confrontation scenario. Both through the Strait of Hormuz itself, and via Saudi and UAE pipelines which allow exports to bypass the waterway. And, while Iran-backed militias have also threatened shipping through the Bab-el-Mandeb Strait – and initiated drone attacks on Saudi Arabia’s East-West Pipeline – some reports have suggested that the flow of oil and liquified natural gas shipments through the Strait of Hormuz had reached a six-month high in recent weeks. Full restoration of Saudi Arabia’s East-West Pipeline will take several more weeks, but partial flows did restart last week, alleviating some immediate supply constraints.
Meanwhile, President Donald Trump expressed support for restricting US diesel exports as a measure to moderate record high domestic prices ahead of midterm elections. A 90-day full or partial export ban has been suggested. The US currently exports nearly a quarter of its refining output. However, such measures could ultimately tighten global fuel markets. While it might offer short-term relief for US consumers, prices internationally would likely rise. The US has become an increasingly critical supplier of diesel for Europe following sanctions on Russian supply. Furthermore, Ukrainian drone attacks have damaged Russian refinery infrastructure, while Russia also has its own diesel export restrictions in place. As Russia has been one of the world's largest diesel suppliers, the cumulative effect has seen global reserves squeezed. For now, the geopolitical risk premium embedded in both crude prices and prices at the pump seems set to persist.
Flash Purchasing Managers' Index (PMI) data – preliminary forward-looking estimates of economic health – suggested a broadly robust global economy last week, despite the continued disruption to energy supplies. The US data suggested still-accelerating business activity and firmer hiring intentions. And euro area data pointed to improving momentum, with stronger services activity complementing a recovering manufacturing sector. Data for the UK and parts of Asia suggested a slower pace of expansion. And rising input costs for businesses were evident across regions.
Economic and labour market resilience – together with a renewed inflation impulse – have guided policymakers towards a more hawkish stance. And the growing recognition that economic activity remains robust on both sides of the Atlantic, despite expectations that interest rates will remain higher for longer, saw bond yields move higher still last week. A significant shift in rate expectations saw market pricing imply as many as four further US rate hikes over the next 12 months. Ten-year US government bond yields rose their highest level since 2007, at around 5.2%.
Higher interest rates and higher energy costs may, with a lag, moderate the economic activity which has provided policymakers with confidence to hike rates. But major global economies are far from overheating. And most economists still expect policy direction to be reflective of a mid-cycle tweak rather than the start of a more sustained move higher for interest rates. Central bankers cannot control the oil price. But they can take steps to prevent an energy price shock from permeating out more broadly and buy some time for oil prices to fall.
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