Markets Retreat After Brief Rebound, UK Stagnates, and Fed Signals Further Easing

Markets ended the week lower after another spell of volatility. Early optimism, sparked by dovish comments from the Federal Reserve and signs of a pause in U.S.-China tensions, gave way to renewed risk aversion as regional-bank stress resurfaced and economic data offered few clear positives.

This week, we begin in the UK, where growth remains muted, before turning to Europe’s industrial slowdown, the Fed’s shifting tone, and the broader global picture.

UK - Growth stalls, labour market softens

The UK economy showed little sign of acceleration as GDP grew just 0.1% in August, following a 0.1% contraction in July. Over the three months to August, output expanded 0.3%, pointing to an economy treading water.

Industrial and manufacturing activity both recovered modestly from summer weakness, but the broader message is one of stagnation. The labour market also softened, with unemployment rising to 4.8%, its highest level since early 2021. Wage growth (excluding bonuses) eased slightly to 4.7%, down from 4.8%, suggesting pay pressures may finally be cooling.

The data give the Bank of England some reassurance that policy is restrictive enough, but the Monetary Policy Committee remains cautious. Rate cuts are unlikely before early 2025 as policymakers await more convincing signs that inflation is anchored near target.

The FTSE 100 slipped 0.8% on the week, with energy and financials leading losses. Sterling was little changed, finding balance between softer growth at home and a more dovish tone from the Fed abroad.

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Europe - Manufacturing contracts as politics steadies

European equities ended mixed but broadly weaker, with the STOXX Europe 600 down 0.4%, retreating from record highs. The pullback followed disappointing industrial data and lingering political tension in France.

Eurozone industrial production fell 1.2% in August, driven by sharp declines in capital and durable goods output. Germany’s 5.2% contraction, led by the automotive sector, reignited fears of recession in Europe’s largest economy. In France, Prime Minister Sébastien Lecornu narrowly survived confidence votes after suspending a controversial pension reform, temporarily stabilising the political backdrop but highlighting the fragile balance of power in Paris.

Across the region, the European Central Bank maintained its message that inflation risks are “contained in both directions” and that the current 2% policy rate leaves it “well placed to respond” to future shocks. Investors continue to expect the next rate cut by mid-2025, although slower global trade and patchy domestic data reinforce a cautious near-term outlook.

United States - Markets turn lower as credit concerns resurface

After starting the week with strong gains, U.S. equities reversed course and finished lower. The S&P 500 and Nasdaq Composite both declined, erasing earlier advances driven by optimism around artificial intelligence and solid early-season corporate earnings.

The initial lift came from a softer tone in U.S.–China relations and dovish comments from several Federal Reserve officials. Chair Jerome Powell reiterated that “downside risks to employment” have risen and that further rate cuts this year remain likely. Fellow policymakers Christopher Waller and Stephen Miran echoed his remarks, supporting the view that the next move will be a reduction in borrowing costs.

However, sentiment shifted mid-week as fresh stress emerged in the regional-banking sector. Two lenders disclosed problem loans linked to alleged fraud, following earlier bankruptcies among smaller finance and auto firms. The news revived concerns about credit quality and the health of mid-sized banks, sending the CBOE Volatility Index to its highest level since April.

The Fed’s Beige Book, released Wednesday, painted a mixed economic picture: employment steady but consumer spending “inching down” and more firms reporting layoffs. The data reinforced expectations that the Fed will maintain an easing bias, even as inflation stays above target.

Safe-haven demand drove U.S. Treasuries higher, pushing the 10-year yield to its lowest level in twelve months. Corporate bonds underperformed amid light volumes, and high yield debt weakened as risk appetite faded.

On the corporate front, roughly 12% of S&P 500 companies have reported third-quarter results so far, with 86% beating estimates, according to FactSet. Yet investors showed limited enthusiasm - a sign that earnings strength may already be priced in.

What It Means for You

For UK private investors, several themes stand out this week:

1. The UK remains in a holding pattern. Economic growth is minimal, and while wage pressures are easing, any BoE rate cuts will likely be slow and measured.

2. Europe’s rebound has stalled. Weak industrial output and patchy data suggest growth headwinds persist. Selectivity across regions and sectors remains crucial.

3. U.S. volatility is back. The Fed’s dovish tone is supportive, but bank-sector worries and elevated valuations are keeping markets on edge.

The bigger picture remains unchanged: inflation has moderated, central banks are edging toward easing, and investors are caught between soft-landing optimism and cyclical fatigue. Staying globally diversified, maintaining balance between equities and quality fixed income, and focusing on long-term opportunities remains the most resilient approach.