UK markets made further progress this week, with the FTSE 100 Index rising 2.67% to trade at 10,980 points.
The Bank of England held interest rates at 3.75%, but signalled it could still need to raise borrowing costs if renewed hostilities in the Middle East fuelled more persistent inflation. The Monetary Policy Committee voted six to three on Thursday to leave rates unchanged, with the majority arguing borrowing costs were already high enough to keep price pressures in check.
At the post-decision press conference, Bank of England governor Andrew Bailey said there was “little as yet to suggest” that higher energy prices unleashed by the war were translating into broader domestic inflationary pressure.
UK inflation has undershot forecasts in recent months, while economic activity has remained relatively resilient, and investors continue to expect one or two 0.25% rate increases by year-end, though expectations for a September move have eased. The Bank’s central forecast on Thursday showed inflation rising from 2.6% to 3.2% towards the end of the year, before easing to average 2.7% in 2027 and dipping below the 2% target to 1.8% in Q3 2028.
Prime Minister Andy Burnham has ruled out an early general election, stating Labour will govern under its 2024 mandate and honour its existing manifesto, and dismissing speculation of a 2026 or 2027 poll in favour of focusing on the economy and “getting Britain working.” Reforming social care is a key personal commitment for Burnham; he believes substantial changes can be delivered before the next scheduled election, though he stopped short of promising a fully implemented new system.
He faces significant fiscal constraints, with the government’s financial headroom reportedly shrinking to around £7 billion amid recent spending commitments and geopolitical pressures, while his reaffirmed pledge not to raise income tax, national insurance or VAT further limits his flexibility. Opposition parties have questioned his mandate since succeeding Sir Keir Starmer, and while polling is divided, Labour has seen a modest improvement in support since he became Prime Minister.
Commodity markets
In commodities, Brent crude traded around $86 a barrel on Friday and is set for a weekly fall despite escalating Middle East fighting and widening attacks on regional energy infrastructure. The US launched a “heavy wave” of strikes against Iran late Wednesday in retaliation for missile attacks on American forces in the region, and Iran’s Islamic Revolutionary Guard Corps has threatened further escalation in response.
Egypt said two ships were hit by a drone attack at the Port of Damietta, the site of a Mediterranean LNG hub; nobody has claimed responsibility. The resumption of strikes marks the latest turn in a conflict that has whipsawed oil markets and disrupted Strait of Hormuz shipping since fighting erupted in late February – the US had paused strikes against Iranian targets for two weeks last weekend to give peace talks space.
Investors are also watching Sunday’s OPEC+ meeting, where the group is expected to announce a 188,000 barrel-per-day supply increase for September. Saudi Arabia has proposed a naval coalition to protect key trade routes after Iran’s Houthi allies in Yemen declared a maritime embargo of Saudi Arabia last week.
Gold traded around $4,060 an ounce on Friday, set to end the week little changed but on track for its first monthly gain in five months, supported by buying around $4,000 as investors weighed Middle East developments against the US rate outlook.
Equity markets
US equity markets rose on Friday as investors evaluated the latest batch of technology earnings. In Thursday’s session, the Dow Jones rose 1.19%, the S&P 500 gained 1.66%, and the Nasdaq Composite advanced 2.78%.
The US economy grew at an annualised 1.5% in Q2 2026, a slowdown from Q1’s 2.1% and below the 2% Bloomberg-poll forecast. Growth was dragged down by lower government spending and slower export and business investment growth, but consumer spending – boosted by hefty tax refunds – rose sharply despite higher petrol prices from the five-month Middle East war, suggesting the economy remains in robust shape.
Personal consumption expenditure rose at a 2.1% rate, up from 0.4% previously, while private investment growth (driven by AI infrastructure spending) slowed from 1.4% to 0.5%. Final sales to private domestic purchasers – a measure closely watched by the Fed – grew at 3.9%, up from 1.7%.
Separately, US borrowing costs hit their highest level since 2007 this week after the Federal Reserve held rates at 3.5% – 3.75% for a fifth straight meeting, underscoring fears it cannot contain the inflationary shock from the Iran war. The 30-year Treasury yield rose to 5.23% following Wednesday’s decision, climbing to around 5.24% on Thursday before easing slightly.
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