MARKET COMMENTARY – SEPTEMBER 2025

Investor sentiment remained broadly positive in August, with markets supported by resilience in economic activity, strong corporate earnings, and clearer signals on trade and industrial policy. While the US introduced new reciprocal tariffs on some trading partners, the extension of its trade truce with China reduced fears of renewed escalation and allowed investors to focus more on underlying fundamentals. Global equities advanced to fresh highs, buoyed by optimism around the technology sector, supportive policy measures, and a growing sense that the worst of trade tensions may be behind markets.

UK equity markets posted modest gains during August, supported by strength in commodity-linked sectors and a more stable outlook for global demand. Energy and materials stocks benefited from improving conditions in resource markets, while financials were helped by expectations that interest rates may remain higher for longer. Domestic economic data remained mixed, however, with persistent inflationary pressures keeping investors cautious about the trajectory of monetary policy. Government bond yields moved higher as markets adjusted to these dynamics, underlining the delicate balance facing the Bank of England as it weighs the risks of slower growth against the need to maintain credibility on inflation.

Japanese equities led global markets higher over the month, with investors encouraged by the recently concluded US–Japan trade agreement. This development provided a greater degree of clarity for exporters and reinforced confidence in the country’s trade outlook. Domestically, signs of stronger investment activity and healthier levels of corporate spending also bolstered sentiment. The combination of supportive external and internal drivers has helped Japan consolidate its position as one of the stronger performers among developed markets this year.

US equities continued their upward trajectory, with gains supported by robust earnings momentum. Around three quarters of companies reporting delivered results above expectations, reflecting healthy demand across many sectors. While early concerns emerged following softer labour market data and questions about the near-term revenue potential of artificial intelligence, these were counterbalanced by encouraging business surveys and renewed signs of economic resilience. Policy also played a role, with the government announcing a strategic investment in domestic semiconductor production, underscoring its commitment to reinforcing supply chains and strengthening the long-term growth outlook for the technology sector.

European equity markets delivered more modest returns in August. Economic data showed tentative improvement, with both services and manufacturing stabilising after a softer start to the year. Nevertheless, sentiment was undermined by political developments in France, where a surprise parliamentary challenge triggered renewed uncertainty and weighed on local markets. Investors also remain focused on the implications of US trade measures for European exporters, given the region’s reliance on global demand. Despite these headwinds, cautious signs of growth momentum provided some balance, supporting broader regional indices.

Emerging market equities once again outperformed their developed counterparts, helped by improving sentiment in China and ongoing enthusiasm for technology-related themes across the region. The extension of the US–China trade de-escalation was well received, easing concerns of renewed conflict and providing greater visibility for investors. Chinese authorities further bolstered confidence by pledging significant investment in the domestic semiconductor industry, a move that supported the technology sector. Taiwan continued to benefit from global demand tied to artificial intelligence, while other markets proved more mixed. South Korea came under pressure from domestic tax reforms, and Indian equities were weighed down by new US tariffs on energy imports, which raised concerns for its growth outlook.

In fixed income, government bond markets faced renewed selling pressure during August as investors adjusted to the resilience of economic data and persistent inflationary forces. UK gilt yields moved higher, reflecting expectations that the Bank of England may need to keep policy restrictive for longer to bring inflation under control. A similar trend was evident across the US Treasury market, where stronger growth signals and ongoing fiscal concerns pushed yields upward. In contrast, corporate bond markets proved more stable, supported by solid earnings reports and relatively healthy balance sheets, which helped contain the difference in yields even as government borrowing costs rose. The divergence highlighted how sovereign debt dynamics are increasingly sensitive to policy and fiscal developments, while corporate credit remains supported by strong company finances.

Commodities posted mixed returns in August amid shifting policy dynamics and uneven demand. Oil and natural gas prices drifted lower, reflecting imbalances between supply and consumption, while gold extended its rally as investors sought protection from ongoing geopolitical uncertainty. Industrial metals experienced renewed volatility, with prices sensitive to trade announcements and signs of slowing global activity.

Markets appear to be balancing optimism around growth and earnings with lingering risks tied to politics, policy, and valuations. Resilient economic data and targeted policy support continue to underpin sentiment, but high equity prices leave little room for disappointment should conditions deteriorate. For investors, maintaining diversification across regions, sectors, and asset classes remains an important strategy in navigating an environment characterised by both ongoing opportunities and persistent risks.

Total returns in GBP to 31/08/2025

*July 2025

Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk

This commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.