Markets Jolt as Long-Term Yields Break Higher

Markets Jolt as Long-Term Yields Break Higher

Global equities came under pressure last week as a renewed rise in US Treasury yields weighed on investor sentiment. Bond prices fell sharply across the curve, pushing yields higher (bond prices move inversely to bond yields), with the most pronounced moves seen at the long end of the market. Notably, the yield on the 30-year US Treasury climbed to its highest level since 2007¹, reflecting growing concerns about the outlook for inflation, fiscal sustainability and future government borrowing requirements. Several factors contributed to the sell-off. Investors remain increasingly focused on the deteriorating US fiscal backdrop and the substantial volume of debt issuance required to fund government spending. At the same time, enormous capital requirements associated with the buildout of artificial intelligence (AI) infrastructure continue to absorb investor capital that might otherwise be directed towards government bonds. Higher oil prices, renewed inflation concerns and the breakdown in trade negotiations between the US and Canada added further uncertainty to the outlook. Against this backdrop, risk appetite weakened and most major equity markets ended the week lower than where they began.

The rise in bond yields translated into broad-based weakness across equity markets. In the US, the S&P 500 declined -1.4% (in dollar terms), while the technology-heavy Nasdaq fell -2.1% as investors reassessed the outlook for growth stocks against a backdrop of higher long-term interest rates. European equities also moved lower, with the MSCI Europe ex UK Index retreating -0.8% (in euro terms). Losses were widespread across the region, with both France and Germany recording notable declines as risk appetite deteriorated. Weakness was even more pronounced in Japan, where the Nikkei 225 fell -3.9% (in yen terms). Technology stocks, particularly those linked to the semiconductor value chain, were among the worst performers, although it is worth noting that the index remains up more than +30.0% year-to-date. Chinese equities also lost ground, with weakness in technology names contributing to a -0.6% decline in the Shanghai Composite (in renminbi terms). One notable exception to the broader trend was the FTSE 100, which gained +0.6% over the week, supported by strength in commodity-related stocks as higher oil and resource prices boosted sentiment towards the sector.

Those higher commodity prices provided one of the few positive stories for investors last week. Brent crude rose +6.6% to $94.42 per barrel, extending the previous week's gains as markets continued to price in the risk of supply disruption stemming from the escalating US-Iran conflict. Sentiment was further supported by comments from President Trump, who threatened "economic warfare" against Iran and warned of potential action against US ally Oman should it impede future negotiations. As a result, geopolitical risk premiums continued to build across energy markets. Gold also advanced strongly, climbing to a three-month high above $4,500 per ounce. The precious metal benefited from a combination of US dollar weakness and rising concerns surrounding bond markets, with investors seeking the relative safety of defensive assets.

¹T. Rowe Price – Global Markets Weekly Update, 21/08/2026

The Week Ahead

Day		Period	Actual	Forecast	Previous
UK	Average Wages YoY	June	3.50%	3.40%	3.40%
	Consumer Price Index Inflation YoY	July	2.90%	2.90%	2.60%
	Flash Composite Purchasing Manager Index	August	52.50	51.60	52.20
	Producer Price Index Inflation YoY	July	3.10%	3.20%	3.50%
	Retail Sales YoY	July	1.60%	2.20%	4.20%
	Unemployment Rate	June	4.90%	4.80%	4.90%
US	Building Permits Seasonally Annual Adjusted Units	July	1.443m	1.370m	1.374m
US	Housing Starts Seasonally Annual Adjusted Units	July	1.239m	1.350m	1.427m
Europe	Flash Composite Purchasing Manager Index	August	52.10	51.70	52.00
Japan	Flash Composite Purchasing Manager Index	August	53.40	-	52.70
	GDP QoQ	Q2'26	0.30%	0.50%	0.50%
	Nationwide Core Consumer Price Index YoY	July	1.80%	1.80%	1.00%
China	Industrial Production YoY	July	4.50%	4.80%	5.30%
	Retail Sales YoY	July	0.60%	1.50%	1.00%
	Urban Unemployment Rate	July	5.20%	-	5.00%
Source: Forex Factory

The latest batch of UK economic data provided a mixed picture, with inflation pressures re-emerging even as parts of the economy continued to show reasonable resilience. Consumer price inflation rose to +2.9% in July, up from +2.6% in June, largely driven by higher housing and household-related costs². In contrast, producer price inflation eased to +3.1% in July, suggesting that some cost pressures further up the supply chain are continuing to moderate³. Meanwhile, the labour market remained relatively stable. Average wage growth accelerated modestly to +3.5% in the three months to June, while the unemployment rate held at 4.9%, broadly consistent with a labour market that is gradually cooling rather than deteriorating materially⁴.

Elsewhere, activity indicators also highlighted divergences. The flash Composite PMI rose to 52.5 in August, comfortably above expectations and indicative of continued expansion across the private sector⁵. Retail spending meanwhile surprised on the downside, with July retail sales increasing +1.6% year-on-year, growth remaining below the levels seen earlier in the summer⁶. Taken together, the data suggest the UK economy continues to grow at a modest pace, supported by resilient consumer demand and improving business activity.

However, the renewed rise in inflation is unlikely to be welcomed by the Bank of England, particularly given recent concerns around higher energy prices and the risk of second-round inflationary effects feeding through the economy.

² ONS – Consumer Price Index Inflation, July 206
³ ONS – Producer Price Index Inflation, July 2026
⁴ ONS – Labour Market Overview, August 2026
⁵ S&P Global – Flash UK Composite Purchasing Manager Index, August 2026
⁶ ONS – Retail Sales, July 2026

Housing sector related data were the standout releases in the US last week. On the positive side, building permits increased to an annualised rate of 1.443 million units, comfortably ahead of expectations and up from 1.374 million in June⁷. As permits are often viewed as a leading indicator of future construction activity, the rise suggests there could be a modest increase in fresh activity on the horizon. That said, new residential construction fell to an annualised 1.239 million units last month, missing expectations and declining from 1.427 million in the previous month⁸. The divergence between permits and starts suggests that while builders continue to plan new projects, higher financing costs and ongoing uncertainty may be delaying the commencement of construction.

⁷ US Census Bureau – Building Permits Survey, July 2026
⁸ US Census Bureau – New Residential Construction, July 2026

The flash Eurozone Composite PMI edged higher to 52.1 in August from 52.0 in July, reaching its strongest level in nine months and comfortably beating expectations⁹. The improvement was driven primarily by a strengthening manufacturing sector, with factory output expanding at its fastest pace in more than four years. Encouragingly, new orders continued to improve and export demand returned to growth, suggesting activity is becoming more broad-based.

⁹ S&P Global – Flash Eurozone Composite Purchasing Manager Index, August 2026

There were further signs of divergence within the Japanese economy last week. On the one hand, second-quarter GDP rose by +0.3% quarter-on-quarter, marking a notable slowdown from the +0.5% growth recorded in the first quarter and highlighting the headwinds facing domestic demand and external trade¹⁰. Meanwhile, nationwide core CPI rose to +1.8% in July, up from +1.6% in June, suggesting inflation pressures continue to build gradually, albeit remaining below levels seen in many other developed markets¹¹. More encouragingly, forward-looking indicators remained robust. The flash Composite PMI climbed to 53.4 in August from 52.7 in July, its strongest reading since February¹². Growth was supported by both manufacturing and services activity, with new orders accelerating and business confidence improving.

¹⁰ Cabinet Office – Quarterly Estimates of GDP, Second Quarter
¹¹ Statistics Bureau of Japan – Nationwide Core Consumer Price Index Inflation, July 2026
¹² S&P Global – Flash Japan Composite Purchasing Manager Index, August 2026

China’s latest economic data highlighted the ongoing challenges facing the country’s economy. Industrial production growth slowed to +4.5% year-on-year in July, down from +5.3% in June and below expectations, suggesting manufacturing activity continues to face headwinds from softer domestic demand and a challenging external environment¹³. Consumer spending also disappointed, with retail sales rising just +0.6% year-on-year in July, a notable slowdown from the +1.0% recorded in June and well below forecast levels¹4. The labour market also showed signs of softening. The urban unemployment rate increased to 5.2% in July from 5.0% previously, reversing some of the recent improvement and pointing to continued weakness in job creation¹5.

¹³ National Bureau of Statistics of China – Industrial Production, July 2026
¹⁴ National Bureau of Statistics of China – Retail Sales, July 2026
¹⁵ National Bureau of Statistics of China – Urban Unemployment Rate, July 2026

SJP Approved: 24/08/2026

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