Market Review 26th August 2025

Everything you need to know, Simplified!

Summary

• Global markets were primarily driven by a significant shift in tone from the US Federal Reserve (Fed) this week, as Jerome Powell signalled that interest rate cuts may be warranted in the face of rising risks to the US labour market

• This dovish pivot sent US and European equity markets higher on Friday, reversing losses from earlier in the week as UK, US and European markets all ended the week in positive territory, with UK large caps once again reaching record highs

• In the US, mid-cap and value outperformed growth as mega-cap tech saw profit taking following recent post-earnings strength

• Economic data from the UK, Europe and Japan support a more hawkish tone from ex-US central banks and this divergence continues to support currency movements

• Sterling (+7.8%); euro (+12.6%); and yen (+6.7%) have all been notably strong against the US dollar year-to-date

• Oil prices rallied, recovering some of the losses seen since the start of August

• Gold prices also bounced slightly, responding to heightened equity market volatility and an increasing likelihood of US rate cuts

• Bitcoin and Ethereum also jumped on Friday – cryptocurrencies continue their strong run year-to-date albeit with significant volatility.

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Market Review

Shifting monetary policy dynamics

After a strong earnings season pushed US markets to fresh highs in recent weeks, this week started with a pullback. Economic data was mixed: an early reading of the S&P Global US Purchasing Managers Index (PMI) indicated that business activity in August grew at the fastest pace this year, while new applications for unemployment benefits came in higher than expected. Manufacturing output hit a 39-month high, but this came with the steepest increase in input prices since May, with companies passing these costs on to consumers in early signs that trade policy is starting to feed through.

The minutes from the Fed’s July meeting, released on Wednesday, showed diverging opinions from officials struggling to balance inflationary pressure with labour market weakness. It was noted that ‘a majority of participants judged the upside risk to inflation as the greater of these two risks’, although two governors voted to lower rates – the first time that multiple governors have voted against a rate decision in more than 30 years.

The picture became clearer on Friday, with Fed Chair Jerome Powell indicating that ‘the shifting balance of risks may warrant adjusting our policy stance’. Powell’s speech at the Jackson Hole summit increased the market’s probability of a September rate cut to c.80%, with short-term treasury yields pulling back, and sent stocks higher. The rally was led by value and cyclical sectors like energy, real estate, financials, and materials, while mega-cap tech and Artificial Intelligence (AI) related stocks underperformed.

Divergence between the US and other developed markets

While the Fed faces a balancing act, other central banks appear to be facing a different set of challenges. UK inflation accelerated to a one-and-a-half year high in July, with services inflation ramping up to 5% year-on-year. With growth weak and an increasing fiscal challenge for the UK Chancellor, the lead-up to the annual budget is likely to generate much noise. UK stocks were unperturbed, with both large and mid/small caps delivering healthy returns for the week and remaining amongst the top performing markets globally year-to-date.

Further clarity around US-European trade relations emerged on Thursday. A tariff cap of 15% on pharmaceuticals, lumber and semiconductors will ease uncertainty in some sectors; autos will face the same rate after the EU makes legislative changes to reduce industrial duties. European stock markets had a positive week, as investors reacted to strong eurozone business activity and hopes for lower US borrowing costs.

Japan was an outlier in equity markets, posting losses for the week. Yields on 10-year Japanese government bonds rose to levels close to those seen in 2008 on expectations that the Bank of Japan could raise rates as early as October. Chinese markets had a particularly strong week, led by rare earth and property stocks. Beijing announced new measures to tighten control over supply of rare earth metals on Friday, while Shanghai became the latest Chinese city to relax restrictions on home-buying.

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The week ahead

It’s a relatively quiet week ahead for major economic data, but US releases should give us some further colour around the equation for monetary policymakers in the upcoming September Fed rate decision.

Tuesday

US Conference Board Consumer Confidence Index: Forecast is for a decline in consumer confidence to 96.3 from 97.2 last month.

Thursday

US Gross Domestic Product growth for Q2: Consensus expectations are for 3.0% quarter-on-quarter.

US initial jobless claims: Expected to fall slightly from 235k to 231k.

Friday

US personal consumption expenditures inflation: Consensus expectations are for 2.6% year-on-year inflation.

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