August 2026 has been a month of divergence between regions and asset classes. Equity markets remained resilient overall despite persistent geopolitical uncertainty, with the dominant narrative centred on the sustainability of AI-driven capital expenditure, rising long-term bond yields, and uneven economic momentum across major economies. While US markets pulled back modestly from recent highs in the second half, developed markets outside North America and emerging markets showed relative resilience, underscoring the importance of geographic diversification.
The final days of the month brought renewed US-Iran military action, pushing Brent crude above $90 a barrel and sending global bond yields higher. This reinforced concerns that the energy shock could slow the disinflation process and possibly delay the expected easing of monetary policy.
The US
The US economy continued to show considerable resilience, although the headline growth figures remained softer than earlier in the year. The major concern remained inflation. July PCE inflation was unchanged at 3.7% year-on-year, while core PCE remained at 3.3%, both substantially above the Federal Reserve’s 2% target.
The policy rate remained at 3.50%-3.75%, but expectations became increasingly divided over whether rates might need to rise again. The labour market provided some justification for caution, with unemployment at 4.1% and weekly jobless claims remaining relatively low, despite the weak July employment report.
Bond markets reflected these concerns. The US 10-year Treasury yield approached 4.75%, while the 30-year yield moved towards levels last seen nearly two decades ago. Higher long-term yields increase the discount rate applied to future corporate earnings and thereby adding pressure on higher value growth stocks.
The S&P 500 gained roughly 2.6%, while the Nasdaq Composite rose around 3.9%, although both pulled back towards month-end as oil prices rose and rate expectations shifted. AI remained central to the US market narrative. Nvidia’s Q2 earnings provided another indication of exceptionally strong demand, with quarterly revenue reaching $96.2 billion, up 106% year-on-year, while data-centre revenue rose 117%. The results exceeded Wall Street expectations causing an 8.7% surge in its stock price in a single day.
United Kingdom
The UK economy sent mixed signals in August, as GDP growth outperformed expectations but inflation ticked higher, complicating the Bank of England’s policy outlook. Q2 2026 GDP grew 0.4% quarter-on-quarter. Services drove most of the gain, adding 0.7% growth, while the economy weathered threats from Gulf-related energy price surges. The Bank Rate stood at 3.75% following the July decision, while inflation was expected to have risen to around 2.9% in July, from 2.6% in June. The Bank has warned that inflation could move above 3% later in the year as higher energy costs feed through into household bills and business costs.
The FTSE100 returns were flat, driven by mixed corporate earnings, shifting interest rate expectations, and global commodity pressures, resulting in a relatively muted overall performance. Consumer stocks witnessed a slump, while miners and energy firms provided support as gold and copper prices rebounded.
Europe
The Eurozone faced renewed macroeconomic challenges in August, as rising global energy costs caused headline inflation to pick up while overall domestic expansion remained sluggish.
Eurozone inflation accelerated to 3.3% year-over-year in August (up from 2.9% in July), primarily driven by a surge in energy prices linked to supply chain friction and energy market volatility. With inflation above the ECB’s 2% target rate, markets have already priced in a 25 bps increase at its upcoming September meeting, raising the bank rate to 2.50%.
European equity markets displayed divergent performance. Export-oriented and industrial benchmarks like Germany’s DAX performed strongly, benefiting from broader international earnings exposures and energy sector gains. However, broader pan-European indices were tempered by rising yields and looming monetary policy tightening.
Japan
Japan stood out among major economies in August, continuing a monetary policy normalisation cycle while benefiting from global demand for AI infrastructure hardware.
The Bank of Japan held its policy interest rate at 1.00% at its July 30–31 meeting, with annual inflation climbing to 1.9% in July slightly below the 2% target. The real policy rate remained negative at approximately -0.9 percentage points, keeping monetary conditions still accommodative for business investments. Hawkish comments out from the Fed Reserve, signalling US rates would stay higher for longer resulted in a dramatic sell-off in the Japanese Government bond market and a historic surge in yields of their longer-duration bonds.
Japanese equities, on the other hand, continued their dominant global performance run for the year. The Nikkei 225 ended August with a gain of +3.03%, bringing its year-to-date return to +27.93%. Japanese technology suppliers, cable manufacturers, and electrical equipment makers linked to global data centre construction saw double-digit rallies, underscoring Japan’s strategic positioning in the hardware side of the AI investment expansion.
China
Growth outlook in China remained uncertain and domestic policy stimuli worked to balance persistent real estate pressures and muted domestic demand. China maintained a low-inflation environment, with headline CPI hovering close to zero due to excess industrial capacity and restrained consumer demand. The People’s Bank of China (PBOC) maintained a dovish posture, implementing targeted liquidity injections and lowering bank reserve requirement ratios (RRR) to support industrial activity and state infrastructure spending.
AI-related hardware demand was an important source of support for China’s manufacturing sector. However, the official manufacturing PMI remained below 50, while services and construction activity remained weak, demonstrating that the recovery was still uneven. Chinese mainland equity indices underperformed developed-market peers in August. The Shanghai Composite Index pulled back 2.53% late in the month as international investors digested mixed manufacturing PMI readings and assessed the pace of government stimulus implementation. Nevertheless, select green energy, electrification, and domestic technology equipment segments saw specialised interest.
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The views and opinions expressed should not be construed as investment or financial advice. The information contained is for educational purposes only.