Please see the below article from Tatton Investment Management discussing the impact of the Middle East energy shock, tighter monetary policy, UK gilt resilience and the fragile US–China trade truce, received this morning – 14/09/2026.
Tightening up
Bond pain spread to stocks last week. Middle East re-escalation pushed Brent crude oil well above $100 a barrel with natural gas also sharply higher, even as US core inflation held steady at 2.4%. That was enough to push the European Central Bank into its second rate rise of the year, ahead of the US and UK decisions this week. The larger cap tech stocks stayed relatively calm, helped by strong Oracle earnings, but rate-sensitive sectors outside tech struggled and, generally, broad stock performance is weaker.
Separately, markets are unsure of what to make of Anthropic CEO Amodei’s request that major AI model developers jointly slow progress. Other AI firm leaders have agreed with his call, citing worries about uncontrolled model “breakouts”. However, Trump has said work must continue so that the US can stay ahead of China. Others suspect that the AI modellers are struggling to find resources and may be seeking to behave as an oligopoly.
The US and Iran traded strikes last week as Tehran tries to extend its Strait of Hormuz leverage across the Gulf. Flow through the Red Sea is sharply down after damage to the Saudi Arabia East-West pipeline and Houthi gains in Yemen. As we start the week, Brent is above $105pb and European gas is at its highest since late 2022. Gulf State-Iran talks and a rumoured deal to open a route through the Strait of Hormuz were planned for today (Monday 14th) and offered a sliver of hope but have been “postponed” from today.
With Eurozone energy inflation at 14.3%, the ECB felt it couldn’t wait out the crisis. We expect the Federal Reserve and Bank of England to follow this week with, at least, hawkish signals of their own. While the Bank of England may wait to hike at the start of November, the US Federal Reserve is more likely to raise rates this week.
Short-term yields rose to match rate expectations, but long yields rose just as much – a little counterintuitive, as you would expect hawkish policy to compress long-term inflation. Long-term bonds suffered partly from the liquidity effect (less money around to buy them) but also because ‘risk-free’ government debt is looking riskier, as energy costs strain public finances.
That tension showed up in UK political rhetoric over defence versus welfare spending, but much more flagrantly in Donald Trump’s pledge of $5,000 per adult, should Republicans win both houses of Congress in November’s midterms. No one expects that to happen, but it shows the White House’s disregard for fiscal restraint.
We’d still point to reasons for optimism: corporate earnings remain resilient, equities are only marginally off July’s highs, and a Trump-Xi summit later this month could deliver good news on trade. But tighter policy means tighter market liquidity – a real risk heading into autumn.
No Goodbye For Great Britain
With gilt yields at multi-decade highs, talk of a ‘doom loop’ in UK government finances is rife, with comparisons drawn to the 1976 sterling crisis and IMF bailout.
Gilts are what traders call a “high beta” bond market: they react more violently than others to bond volatility, due to structural imbalances (long average maturity and heavy inflation-linkage). Global bonds are suffering from tech-driven capital demand and the oil shock, but gilts are suffering more.
That sensitivity feeds back into borrowing costs – higher yields mean higher debt-servicing bills, which is more painful given debt sits at 93.8% of GDP. Sensitivity also amplifies the usual media talk of profligate government spending. This is the mechanism by which a doom loop can happen (higher yields force more borrowing, forcing higher yields) but that doesn’t mean the UK is in one or will be soon.
The 1976 comparison, though evocative, doesn’t hold up well. That crisis was fundamentally a currency crisis: an overvalued sterling, propped up under a fixed trading band after the gold standard’s collapse, became untenable once the current account and budget both swung into deficit following the 1973 oil shock. The Bank of England’s attempt to guide sterling lower coincided with traders already selling it, triggering a collapse that only an IMF loan could stem.
Nothing similar threatens sterling today. The chief risk to gilts now is contagion from higher US Treasury yields, which would actually tend to strengthen sterling against the dollar, cushioning the blow. And unlike Denis Healey’s 1970s Treasury, today’s fiscal policy is comparatively restrained – the UK’s primary budget (excluding interest costs) is close to balanced and forecast to move into surplus. Gilts are fragile, but not fractured. The conditions that led to the Wall Street Journal’s famously scathing headline “Goodbye Great Britain”, preceding the 1976 crisis, are largely absent this time.
Don’t be fooled by US-China détente
Xi Jinping and Trump will meet in Washington on 24 September, against a backdrop of relative calm between the two powers. That calm will likely continue through the summit, but the trade truce probably won’t continue indefinitely.
Tariffs have been less central to Trump’s 2026 agenda than in 2025. He imposed new levies in July – but these mostly just replaced tariffs struck down by the Supreme Court’s IEEPA ruling. The administration’s lighter touch on tariffs is partly due to their unpopularity – ahead of November’s midterm elections and amid the president’s unpopular Iran war. It’s also because the current regime works relatively well for Washington: steady revenue but limited economic pain.
So, we expect little of substance from the summit itself, with effective tariffs on China likely to stay near their current 22.8% average. Still, extending the trade détente that has informally been in place since May’s summit is significant.
It’s slightly odd that Beijing has escaped Trump’s recent ire, considering China has under-delivered on its purchase pledges. Many US partners have done the same, but China still buys 90% of Iran’s oil – exactly the behaviour Washington claims to be targeting with sanctions. The fact China hasn’t been more seriously sanctioned shows how important Chinese imports remain to US consumers and businesses.
We’re also sceptical that China’s negotiating position is as strong as it looks. Its trade surplus and reluctance to buy more US goods stem largely from a weak domestic economy that Beijing is still firefighting, including by shifting bad bank debts onto the state’s balance sheet. That leaves Xi needing exports, and hence trade détente, at least as much as Trump needs a deal. We suspect the White House may simply be waiting out the midterms – after which, in our view, tariffs could return to the top of the market’s worry list.
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Marcus Blenkinsop
14th September 2026