Renewed tensions involving Iran have pushed oil prices higher once again, whilst the once-mighty ‘Magnificent 7’ have begun to lose their shine. We also look at the UK’s new Prime Minister, the latest round of US tariffs, and why investors are increasingly questioning who will ultimately benefit from the AI investment boom.
As Europe braces itself for yet more heatwaves, it’s perhaps Scotland’s weather on this isle of ours that is suddenly proving rather more appealing. Mind you, it does help if you’re one of the rare folk who look fetching in a waterproof…
Sadly, temperatures aren’t the only thing refusing to cool. Tensions in the Middle East remain elevated. June’s US-Iran Memorandum of Understanding remains the framework for negotiations, though fresh ‘misunderstandings’ continue to arise. As a result, oil prices, although still well below their spring highs, have begun creeping higher again, adding to concerns inflation could prove more
persistent than hoped.
Meanwhile, over in the US, the ‘Magnificent 7’ (Microsoft, Amazon and friends) have been bestowed with a new honorific – the ‘Lag 7’. Investors have become increasingly impatient, rather presumptuously questioning whether the eye-watering sums being invested in artificial intelligence ill translate into sufficiently strong and timely profits. Much of that spending is flowing into the coffers of chip makers in Taiwan and South Korea, boosting returns across the region. Strong performance has also attracted speculative retail investors, contributing to some fairly bumpy local markets.
And here at home, we’ve welcomed our very own Jon Snow to Number 10. PM Burnham arrived inLondon fresh from his northern kingdom as the sixth of his kind in the last ten years, only to promptly head back north again. With the cost of living in London what it is, who can really blame him? Among the early announcements were a 20% cut in business rates, giving pubs something to raise a glass to, and what some rather rude critics suggested (not me, of course) was a paltry cut to VAT on household
electricity bills. As for the bigger reforms, we’ll have to wait and see. More spending, and perhaps more taxes, seem likely, though any meaningful fiscal reform would probably be welcomed by bond investors – more on this below.
Finally, it’s déjà vu in tariff land, with a fresh round of tariffs of between 10% and 12.5% slapped on many US trading partners. Markets barely raised an eyebrow; tariffs are so 2025, and investors increasingly accept they’re here to stay in one form or another. The bigger question is no longer whether more tariffs are coming, but what living with them means for inflation, growth and company profits.
Bottom Line
This year has been a reminder that market leadership does change, even if it feels highly unlikely at the time and it’s easy to focus too much on today’s winners. Who will ultimately emerge victorious from the AI arms race remains to be seen. One lesson from history is that today’s spending and tomorrow’s profits don’t always end up in the same place. Dare we whisper, more in hope than expectation, that the ultimate beneficiaries may prove to be the many rather than the few?
Q&A
What’s on your mind?
What to expect from the UK’s new PM?
Andy Burnham’s first days in power have focused on modest, feel-good policy changes, including capping bus fares at £2, lowering business rates for pubs, and
cutting VAT on household electricity bills. The challenge now is whether he can deliver the wider reforms he has promised, described by Burnham as the ‘biggest
changes in 40 years’. While able to ignore the constraints imposed by Keir Starmer’s office, he has ruled out changes to the costly triple lock pension. Welfare
reform appears a priority, with Burnham aiming to curb the benefits bill by helping more people into work rather than through spending cuts. Other proposals
include meeting NATO spending targets, launching the largest council house building programme since the post-war era, devolving power from Whitehall and
ruling out an early general election. Despite criticism that his focus is primarily domestic, he has reaffirmed support for Ukraine and seeks closer ties with both
Europe and the US, while pledging to stand up to Washington where British interests differ. The first major test is on 28th October, with Chancellor John Healey’s
first budget showing whether the government can balance reform with the fiscal discipline needed to reassure investors.
Where next for UK interest rates after the Bank of England’s (BoE) latest decision?
The BoE kept interest rates unchanged in July, and as many readers will be pleased to hear, policymakers pointed to several encouraging signs for the inflation
outlook. Most notably being that the energy price shock doesn’t yet appear to be spilling over into higher prices elsewhere in the economy. While the BoE
remains alert to the risks around its inflation target, the bond market is now pricing in just one further quarter-point rate rise by year end – markedly fewer than
the four rises expected earlier in the year. In the accompanying press conference, the Bank also sought to manage expectations by publishing three separate
outlook forecasts. Under its main scenario, UK inflation is expected to peak at 3.2% by the end of this year (up from 2.6% currently), before falling back toward
the Bank’s 2% target next year. While economists’ forecasts have historically been as useful as (pick your expression) and the effects of the “Leader of the Free
World” cannot be included, the information is grounded in expert opinions and a shed load of data – so while the exact specifics may not come to pass, readers
can hopefully take some comfort in their current outlook.
How has the UK stock market been performing?
Over the last month, UK shares have outperformed many overseas markets, reaching new all-time highs and extending an impressive run of gains. One reason is
that the UK stock market looks very different from those in the US and Asia. Rather than being dominated by technology and AI companies, the UK has a much
greater weighting to sectors such as energy, mining and banking. Renewed tensions in Iran pushed oil prices higher, benefiting the UK’s large energy companies,
while stronger commodity prices also supported mining shares. At the same time, concerns that interest rates could stay higher for longer have been helpful for
banks, which generally earn more when borrowing costs remain elevated. UK companies also tend to carry less debt than many faster-growing firms overseas,
making them less sensitive to higher interest rates. Finally, despite recent gains, the UK market still looks relatively inexpensive compared with many of its global
peers, continuing to attract overseas investors.