September monthly market update - Reflections on August 2026

Why are global borrowing costs so high?

Global borrowing costs in some of the world’s biggest economies have hit multi-decade highs amid concerns over inflation, rising government debt levels and AI spending. Yields on 30-year US Treasuries hit their highest level since 2007 in August at 5.33%, while yields on 30-year UK bonds – known as gilts – climbed to 5.89%, their highest level since 1998. Germany and Japan have also seen similar rises in recent weeks.

Rising oil prices have been a key driver of the recent increase in bond yields, as investors fear a renewed rise in inflation. Concerns that central banks may keep interest rates higher for longer to prevent inflation from getting out of control have also pushed up yields.

Renewed tensions between the US and Iran have sent oil prices higher, reviving inflation fears and worsening bond market sentiment. Oil prices rose above $95 a barrel at the beginning of September as renewed fighting raised concerns about disruption to oil supplies through the Strait of Hormuz.

Heavy government borrowing is putting further upward pressure on bond yields, as governments issue more debt to finance persistent budget deficits. The increased supply of bonds can push yields higher as investors demand greater returns to hold them.

A surge in borrowing by large tech firms to fund AI infrastructure is also adding pressure in bond markets. Big Tech companies have issued over $236 billion in corporate bonds in 2026 to finance massive investments in AI infrastructure. Morgan Stanley predicts AI-related global debt issuance will more than double to nearly $570 billion by the end of the year.

Analysts have warned that if high bond yields persist, they could put further pressure on economies as higher borrowing costs feed through to mortgages, loans and business spending. Governments and companies raise money by selling bonds, which are effectively IOUs that pay investors interest.

Higher yields mean it costs more for companies to borrow, which could push up the price of goods and services. Investors typically demand higher yields on government bonds when inflation is high or expected to rise further.

Is the US labour market stronger than it looks?

US job growth accelerated in August, suggesting the labour market may be more resilient than first thought. Employers added 162,000 jobs last month, significantly beating analysts’ expectations. Meanwhile, the unemployment rate held steady at 4.1%.

August’s job gains were the strongest since March and marked a sharp rebound from July, which was revised up to a 21,000 job gain from a 23,000 job loss. June’s growth was also revised upwards, with an additional 31,000 positions, up from the original estimate of 20,000.

In recent months, labour market momentum has decelerated after surging in the spring, partly because of the oil price shock and supply strains caused by the USled war with Iran. Job growth was also hurt by President Trump’s tariffs in 2025. The US labour market has been stuck in what economists describe as a "slow hire, slow fire" pattern, with little change in jobs. At the same time, rising inflation is adding pressure on households.

The wider picture tells a similar story. While the US economy expanded more slowly than expected during the second quarter, consumer demand remains strong despite the war in the Middle East. Second-quarter GDP growth came in at just 1.5%, down from 2.1% in the previous quarter. There was a strong rebound in consumer demand, with annualised growth of 3.2% versus 0.5% in the first quarter.

Investment continues to grow, led by strong spending on technology. Massive AI investment is helping to keep the US economy resilient, with major tech companies projected to spend close to $700 billion on AI infrastructure this year.

US industry also benefits from substantially lower energy costs than Europe, giving it a cost advantage that is helping to support manufacturing and meet growing global demand for services such as e-commerce and generative AI.

What could the heatwaves mean for the UK and eurozone economies?

Europe’s extreme summer weather has taken a heavy human and economic toll, with more than 10,000 excess deaths during June’s heatwave. The disruption from heat, drought and wildfires has weighed on businesses and economic activity, with the effects potentially lasting well beyond the summer months. This comes after the wars in Ukraine and Iran have already put upward pressure on energy costs.

While stock markets have largely shrugged off the implications of weather-related disruption, the economic costs are mounting. Back-to-back heatwaves cost the UK economy an estimated £4.4 billion in lost output by the end of July, according to analysis from green think tank Verdant, with warnings that further losses are likely as scorching temperatures become more common.

Another study by Dutch bank Triodos estimates extreme heat could cost the EU about €180 billion in 2026, equivalent to around 1% of GDP. That’s a significant hit, given the EU economy is expected to grow by only about 1.1% this year.

Extreme heat is expected to reduce productivity across the economy, with additional damage from falling agricultural output. Direct costs arise as workers across many industries become less productive in the heat, while infrastructure and equipment overheat and have to be shut down. Further risks come from rising food and electricity prices, limits on electricity generation and disruption to transport.

Despite the heatwaves and tensions in the Middle East, things have been looking up for the UK and eurozone economies. UK consumer confidence hit a two-year high in August, with households more willing to make major purchases. Private sector output also grew at its fastest pace in four months, as stronger services activity offset weaker manufacturing.

In the eurozone, business activity picked up slightly, helped by a stronger manufacturing sector, particularly in Germany, where output grew at its fastest rate since January 2022. New orders rose for a second consecutive month and employment increased for the first time in 2026, while inflationary pressures continued to ease. The eurozone economy also grew 0.4% in the second quarter, despite ongoing energy market volatility from the US-Iran war.

Looking ahead

Geopolitical tensions look set to remain a key market driver, with investors closely watching developments in the Middle East and the risk of further disruption to oil supplies through the Strait of Hormuz. A prolonged conflict could add to volatility across equities, bonds and commodities.

The technology sector is also likely to stay firmly in focus as investors weigh whether strong demand for artificial intelligence can justify the huge sums being invested in data centres, chips and other infrastructure. Recent results have continued to point to robust AI demand, but investors will be watching closely for any sign that spending is beginning to outpace returns.

Elsewhere, government finances are likely to remain under scrutiny as major economies grapple with rising borrowing costs and growing debt burdens. Investors will also be watching China for signs that further government support can revive domestic demand and offset ongoing weakness in the property market.