Market indices have been reaching new highs across the world. Investors are taking comfort in many encouraging economic signs in the UK. The UK economy is facing challenges, however, including rising inflation and questions over interest rates and future fiscal policy.
The UK is facing some complex issues. In Epping (and other areas), native protestors have been gathering outside asylum seeker hotels - challenging the government’s asylum policy in the High Court. Meanwhile, the Chancellor faces pressures from the economy.
Borrowing costs are now at a 27-year high for the government. Investors are increasingly asking if the UK can keep its finances under control, and asking for a premium before lending their money via gilts (UK government bonds).
The Deputy Prime Minister, Angela Raynor, is also under fire for using NHS compensation (for her disabled son) to buy a second home. Behind closed doors, major parties are likely panicking as polling shows Reform UK are polling at 35% - almost equal to that of the Conservatives and Labour Party, combined.
Geopolitical pressures also continue abroad, with US President Trump negotiating with Ukraine and Russia over potential territorial concessions and security guarantees (to try and agree on a peace plan). Meanwhile, Europe faces difficult questions over energy security as 50 billion cubic meters (bcm) of natural gas could now be piped to China each year, rather than eastward, as it had done for the last fifty years.
The UK is currently facing the fastest rise in borrowing costs in the G7. The rise comes amidst a Downing Street reshuffle, with yields on 30-year UK gilts now standing at 5.64%.
These soaring costs are weighing heavily on the Chancellor, who now faces a new £50bn black hole in the public finances (despite trying to plug a £22bn black hole in the Autumn Statement last year). The market is also jittering over instability in the French government, on our doorstep.
Prime Minister Starmer’s reshuffle has brought more supporters of “wealth taxes” into the government’s inner circle (e.g. Dan Tomlinson - expected to become Exchequer secretary, and Torsten Bell - former head of the Resolution Foundation).
In the background, cost-of-living pressures continue as recent CPI figures show inflation now at 3.80% for July (up from 3.60% in June). This, of course, continues to ride above the 2% target set by the Bank of England (BoE).
The BoE now faces a tough balancing act. Interest rates have been steadily falling over the last 12 months. Cutting them further could exacerbate a rise in the price level. However, holding the base rate steady (or raising it) might strangle the UK’s fledgling growth even further.
Remarkably, despite this backdrop, the UK market has performed well in August. Already, the UK’s leading index (the FTSE 100) had broken through the 9,000 level for the first time in July. Then, in August, it surpassed 9,300.
The strongest support has come from consumer and healthcare stocks - reflecting increasing investor appetite for defensives amidst the wider macro uncertainty highlighted above. Right now, more investors seem to be “rotating out” of the US due to policy unpredictability.
The FTSE 250 has been less positive - partly pulled down by a tank in WH Smith shares after the company cut its profit forecast (after revealing an accounting mistake that made American profits look better than they were).
On sterling, investors remain cautious but not panicked. The pound has fallen recently in light of higher UK borrowing costs, with the Chancellor now facing even less “fiscal headroom” under her own budget rules.
The UK is not alone. Borrowing costs have been rising across big economies. German 10-year Bund yields are up by 0.04 percentage points, and the benchmark 10-year Treasury in the US is up by 0.05 percentage points.
In Germany, an expanding spending plan on defence and infrastructure is partly why yields are the highest since 2011. In the US, investors are fretting over President Trump’s threats over the central bank’s continuing independence.
The UK is mainly “sticking out” on the world stage for its debt pile due to its standout recent rise in inflation. Calm will hopefully return once the Chancellor announces her date for the Autumn Statement (so far, all is quiet).
In the US, the S&P 500 continues to rise month by month - now standing at an impressive 6,448.26 (up from a low of 4,982.77 in April 2025). Other global markets have also been doing well, with Australia’s S&P/ASX 200 briefly trading above 9,000 for the first time.
Geopolitics continues to hang over the world economy. A ceasefire is still yet to be agreed over Russia-Ukraine, and uncertainty hangs over Israel’s war with Hamas as the former approves an escalatory plan to take control of Gaza City.
So far, however, investors have largely met these events with calm. Hopefully, a long, positive summer will continue into the coming months.
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