Global markets were mixed, with US equities showing resilience while Europe and most Asian markets weakened. The S&P 500 gained 1.15%, but semiconductors fell 5.01% and South Korean equities declined 7.63%, suggesting increasingly selective risk appetite. Bond markets recovered modestly towards the end of the week, although elevated yields, a stronger US dollar and persistent energy supply concerns continued to weigh on investor sentiment.
1. Middle East conflict threatens energy supplies
Iran intensified attacks on commercial vessels around the Strait of Hormuz, disrupting oil shipments and driving tanker transport costs sharply higher, even after flows had previously recovered towards pre-war levels.
The renewed disruption highlights the fragility of global energy supplies and raises the risk of another inflationary shock, particularly if higher oil and transport costs persist.
2. Sovereign debt concerns drive global bond volatility
Government borrowing costs climbed to multi-decade highs amid persistent inflation concerns and fiscal pressures, with US 10-year Treasury yields briefly exceeding 5.3% and French borrowing costs approaching 5%.
Higher yields offer bond investors more attractive prospective income but also create valuation pressure on equities and increase refinancing risks for heavily indebted governments and businesses.
3. Germany’s recovery contrasts with France’s fiscal difficulties
Germany raised its 2026 economic growth forecast from 0.5% to 1.3%, supported by exports and government investment in defence and infrastructure, while France continued to face investor concerns over its budget deficit and political uncertainty.
The divergence highlights how fiscal spending can support near-term growth but may also undermine investor confidence when debt sustainability and fiscal credibility are in doubt.
4. US consumer weakness raises questions over economic resilience
Despite a relatively resilient labour market and continued economic expansion, weak consumer confidence and the cumulative impact of higher living costs have raised concerns about household purchasing power. The risk is that sustained energy inflation and high borrowing costs increasingly constrain consumption, weakening corporate earnings even if headline economic growth remains positive.
WATCH THIS NEXT WEEK
US Treasury yields and the September inflation report.
The US 10-year Treasury yield ended the week around 5.24%, having retreated from above 5.3%.
The upcoming inflation report will help determine whether higher energy prices are translating into broader price pressures and reinforcing expectations of restrictive monetary policy.
A renewed rise in Treasury yields, accompanied by weakness in equities and widening credit spreads, would be a more significant warning than higher yields alone. Conversely, stabilising yields and improving equity market breadth would suggest that markets are absorbing the energy shock without a broader deterioration in risk appetite.
INVESTMENT IMPLICATIONS
The combination of persistent energy inflation, elevated borrowing costs and narrowing equity leadership argues for a more selective investment approach rather than a broad reduction in risk. Investors should prioritise companies with strong balance sheets and pricing power, while remaining cautious about highly valued growth stocks and businesses sensitive to financing costs. Within fixed income, higher yields have improved prospective returns, but intermediate-duration, high-quality bonds may offer a better balance between income and interest-rate risk than long-duration securities.
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