September Market Update

Cautious Momentum in a Diverging World

As we move into September, August offered investors a curious blend of steady gains and rising tensions. Markets pressed higher, but the drivers of those gains - shifting central bank policies, persistent inflation in some regions, and renewed geopolitical risks - underscore that the easy part of the rally may be behind us.

Equity Markets: Gains, but Unevenly Shared

Equities continued their advance through August, helped by a supportive backdrop of softer economic data and the growing expectation that central banks will begin cutting rates. U.S. markets ended the month higher, though the leadership was less concentrated in technology than earlier this year. Strong earnings from consumer-facing sectors and industrials provided breadth, even as valuations in large-cap growth stocks remain stretched.

Internationally, Japan and China stood out. Japanese equities climbed as investors responded to improving corporate reforms and steady economic data. Chinese markets surged once more, fuelled by hopes of further stimulus and record levels of household savings moving into equities. Europe’s story was more muted - solid business activity offered support, but political turmoil in France and ongoing debates about fiscal discipline weighed on sentiment.

The lesson for investors is clear: the rally is not universal, and gains are becoming more region-specific. Diversification remains essential.

Rates and Bonds: Policy Divergence Intensifies

Interest-rate policy is pulling economies in different directions. In the UK, the Bank of England cut rates slightly, despite inflation still running higher than peers. It was a finely balanced decision, reflecting the tension between sticky prices and a weakening economy. Across the Atlantic, the Federal Reserve chose to hold steady, with Chair Jerome Powell reiterating that decisions will remain driven by data, not politics - an important point given the ongoing pressure from President Trump.

These diverging paths matter for markets. UK government bond yields jumped to their highest levels in decades, reflecting investor anxiety about fiscal credibility, while U.S. Treasuries strengthened on expectations of coming cuts. In Europe, the ECB looks likely to hold fire for now, while Japan edges toward the first sustained tightening cycle in years. The common thread is that fixed income markets are finally beginning to offer both income and potential for capital gains, after years of difficulty.

Currencies: Dollar Weakness, Sterling Strains

Currency markets have been reshaped by these policy shifts. The U.S. dollar has weakened notably this year, reflecting expectations of Fed easing and worries over political interference in monetary policy. That has provided relief to emerging markets and lifted commodity prices. Sterling, meanwhile, has struggled under the weight of the UK’s awkward mix of high inflation and slowing growth. For internationally diversified portfolios, these moves are both a risk and an opportunity, influencing the value of overseas holdings once translated back into domestic currency.

Commodities: Gold Shines, Oil Steadies

Gold has been one of the standout assets of 2025, continuing its surge in August as investors sought shelter from political uncertainty and potential erosion of central bank independence. Some major banks now argue gold could rise further if investor confidence in monetary policy weakens. Oil, by contrast, has traded in a relatively narrow range. OPEC’s restraint has supported prices, but softer demand from China and steady supply elsewhere have kept crude from repeating the spikes seen in past years.

Geopolitics: Trade Tensions and Political Instability

The geopolitical backdrop remains unsettled. The U.S. and China extended their trade truce, preventing an immediate escalation in tariffs, but Washington’s surprise decision to impose steep tariffs on Indian goods widened concerns about broader protectionism. In Europe, France’s political struggles and questions over fiscal discipline in the UK have unsettled bond markets. Meanwhile, in Japan, the resignation of the prime minister added a layer of uncertainty just as the central bank was weighing its next steps.

These developments matter less for their immediate economic impact than for the uncertainty they inject into already fragile markets. Political shocks have a way of amplifying volatility, particularly when valuations are high.

Investor Takeaways: Balance and Discipline

August showed that markets can continue to rise even in the face of uneven data and political noise. But beneath the surface, divergences are widening. U.S. equities remain near record highs, Europe looks more fragile, China is attempting to reflate, and the UK is struggling with inflationary aftershocks. Bonds, once written off, are again a meaningful source of return. Gold and other hedges are performing their role as insurance.

For investors, the message is not to chase the strongest performers but to remain balanced. A portfolio spread across regions, asset classes, and styles is the best protection against an uncertain backdrop. Diversification also helps capture opportunity where it emerges - whether in recovering Japanese corporates, undervalued European sectors, or income opportunities in global credit.

Most of all, now is a time for discipline. Markets rarely move in straight lines, and after a strong run this year, a bout of volatility would be no surprise. Sticking to a long-term plan, rebalancing sensibly, and holding a mix of growth assets and stabilisers remains the best approach.

Disclaimer: This content is for your general information purposes only and does not constitute investment advice. The commentary is intended to provide you with a general overview of the economic and investment landscape. It is not an offer to purchase or sell any particular asset and it does not contain all of the information which an investor may require in order to make an investment decision. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

Past performance is not a reliable indicator of future results. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances. Your capital is at risk and the value of investments, as well as the income from them, can go down as well as up and you may not recover the amount of your original investment.