Written by Ashwin Gurung
The US market rallied on Friday, helping the week close slightly higher after a shaky start, following the US Federal Reserve Chair Jerome Powell’s comments that rate cuts could come as soon as September. At the Jackson Hole symposium, Powell highlighted rising risks in the labour market, suggesting the Fed might ease policy even before inflation falls fully back to target.
The S&P 500 ended the week up +0.6%, while smaller, domestically-focused US companies as measured by the Russell 2000 Index, rallied +3.6% as the sentiment towards riskier assets increased on hopes of lower borrowing costs. Larger, tech-heavy firms on the Nasdaq-100 lagged, returning -0.6%, with ongoing concerns about the long-term sustainability of their massive AI-related infrastructure spending. Global bonds, as measured by the Bloomberg Global Aggregate Index, also reacted positively, returning +0.2%, while the most interest rate sensitive segment of the market led the way, with the Bloomberg U.S. Treasury 20+ Year Index gaining +0.7% in US Dollar terms.
While markets welcomed the Fed’s shift in tone, with inflation still above target and key economic data on the horizon, including the Fed’s preferred Personal Consumption Expenditures (PCE) inflation measure and upcoming jobs figures, the sustainability of this rally remains uncertain and could influence the Fed’s next move.
Elsewhere in the UK, prices continued to rise in July, with inflation unexpectedly hitting 3.8% year-on-year, the highest in 18 months. The Bank of England now expects inflation to climb even further, potentially reaching 4% in September, considerably higher than its 2% target. Higher-than-expected prices, combined with expectations that rates are unlikely to be cut again soon after the 25bps reduction earlier this month, have pushed UK long-term borrowing costs to a 27-year high. This poses a clear challenge for the UK government, as a higher cost of borrowing leaves less room to spend from the budget it had set aside earlier this summer and raises the prospect of needing to raise taxes even further. As a reminder, our portfolios currently do not hold any dedicated UK bond managers. We see them as less appealing than global bonds or local-currency emerging market bonds when it comes to returns, risk, and liquidity.
Despite inflation and fiscal risks, UK equities continued to climb last week, with the FTSE All-Share returning +2.0% and now up +16.2% so far this year. This year’s rally has been supported by a combination of corporate earnings resilience and investor diversification away from the US.
With policymakers caught between tackling persistent inflation and addressing signs of weakness in the labour market, the road ahead remains unclear. In this environment, we believe that maintaining a diversified investment approach and staying invested is the most prudent way to navigate uncertainty.
All performance figures are stated in Sterling terms, unless otherwise specified.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 26th August 2025.
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