Political uncertainty fails to stamp out market momentum
Despite emerging headline risks, global equities continued their positive momentum from the summer with equities broadly higher across major global regions.
US: Strong earnings, AI concerns
Starting with US markets, equities were flat in sterling terms (up 2% in US$) as we witnessed renewed investor scepticism over the commercial benefits of AI. Technology stocks suffered as a research paper from Massachusetts Institute of Technology (MIT) showed fewer than 5% of AI pilot programmes were profitable. Even Nvidia, which delivered one of the earnings season’s highlights with 56% year on year revenue growth, saw its share price fall after a data centre revenue miss - a reminder of the lofty expectations currently priced in.
Despite the relative “disappointment” of Nvidia’s earnings, it was another strong period for US corporates with 81% of companies reporting a positive earnings surprise with companies reporting greater earnings than the markets had been expecting. Furthermore, cyclical sectors - sectors which are sensitive to the health of the US economy improved in Q2 with financials and consumer discretionary sectors reporting higher earnings growth than in Q1.
In a case of “bad news is good news”, US unemployment rose to 4.2%, but equities found support after Federal Reserve Chair Powell’s Jackson Hole remarks signalled shifting economic risks - leading to a belief that this could justify interest rate cuts.
Japan: Growth surprise and political change
Japanese equities advanced on news of a trade deal with the US, easing pressure on export focused companies. Positive GDP growth also surprised to the upside, with the economy expanding 0.3% quarter on quarter. Meanwhile President Ishiba is likely to step down as his party, the Liberal Democratic Party, is looking to hold an internal leadership vote which would see him ousted following their loss of a majority in the recent lower house election. Markets have reacted positively to this news with the expectation that his replacement will be more market friendly and look to increase government spending.
Europe: Gains despite political turmoil
In Europe, political turmoil in France weighed on local markets, but at an aggregate level, European equities posted gains, building on strong year to date performance. This outperformance is a result of a combination of cheap valuations, increased fiscal stimulus and investors looking beyond the US for opportunities.
Figure 1. Regional equity returns (Source: Pacific Asset Management, August 2025).
UK Macro Economy and Inflation
The global economy continues to show resilience, but UK inflation once again surprised to the upside, reaching 3.8% in July versus expectations of 3.7%. Over the past year, UK inflation has more than doubled, while Eurozone inflation has risen more modestly from 1.7% in September 2024 to 2.1% (see Figure 2).
Figure 2. Inflation (Source: Pacific Asset Management, August 2025).
Drivers of the UK’s higher inflation include rising household costs such as electricity, water and utilities, faster wage growth than in Europe, and the impact of new taxes and regulations. This poses a challenge for the Bank of England, whose 2% inflation target remains a distant target at this time. The employment market is also showing signs of strain, with unemployment climbing to 4.7% - the highest in four years.
Rates, Yields and Fiscal Pressures
In early August, the Bank of England cut rates by 0.25% to 4%, a two year low, but cautioned that further cuts may be less likely than markets expect. Yields moved higher, with the 30 year gilt reaching a 27 year peak. This creates a vicious cycle for the UK government: higher yields raise borrowing costs, adding to the debt burden and pushing yields up further (see Figure 3).
Figure 3. 30yr UK Government Bond yield (Source: Pacific Asset Management, August 2025).
However, it is worth noting this is not a UK specific issue. Across developed markets, yields are rising as investors question long term government fiscal stability. Political consequences are also emerging in France, Prime Minister François Bayrou lost a confidence vote over a €43.8 billion budget cut aimed at reassuring markets about fiscal discipline. This means France will see its fifth Prime Minister in less than two years, adding to the feeling of political and economic uncertainty.
Attention will soon turn to the UK’s Budget announcement on 26 November, with speculation building over the measures that may be introduced to address fiscal challenges.
We will, of course, keep you informed as soon as we have more clarity. Until then, I’m reminded of a remark by former President of the European Commission, Jean Claude Juncker: “We all know what to do, but we don’t know how to get re-elected once we have done it.”
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This information in this article is correct as at 09/09/2025.
This market update is for general information only, does not constitute individual advice and should not be used to inform financial decisions. Investment returns are not guaranteed, and you may get back less than originally invested; past performance is not a guide to future returns.
