President Trump once again hijacked the headlines with a strike on Iran at the very end of the February. The full implications are yet to be understood as the conflict continues.
It took some attention away from the UK government’s latest headache, a by-election loss to the Green Party and a mixed bag of economic results.
Meanwhile, the FTSE 100 rumbles on. It hit new highs in February, shrugging off global worries about politics and Artificial Intelligence (AI).
UK
For once the Chancellor, Rachel Reeves, had been blessed with some positive news heading towards her next big speech – The Spring Statement which took place on the 3rd March with Reeves hoping the result would be less dramatic than November’s Autumn Statement fiasco.
This Labour government has been clear from the outset that a Spring Statement is not a budget or a fiscal event, so we should not have expected significant tax or spending announcements. It has to happen because is required by law for the Office for Budget Responsibility to produce economic and fiscal forecasts at least twice each fiscal year, and the Chancellor must respond to both.
What has released some pressure on Reeves for now is some good news sprinkled in amongst the persistent negativity.
Inflation fell to 3% in January, with food a major part of the reduction. Food prices are felt in voters’ pockets, so this is important.
The Bank of England’s (BoE) Monetary Policy Committee (MPC) held its base rate at 3.75% after a narrow 5-4 vote in favour, with strong hints for further cuts to come.
Commenting on the decision, BoE governor Andrew Bailey commented: “We now think that inflation will fall back to about 2% by the Spring. That’s good news. We need to make sure inflation stays there, so we’ve held rates unchanged at 3.75% today. All going well, there should be scope for some further reduction in bank rate this year.”
The consensus among forecasters is now for a cut in March or April, followed by another later this year.
The UK also recorded a record monthly budget surplus of about £30.4 billion in January 2026, driven by strong income and capital gains tax receipts. January is always a strong month for tax receipts, but this was still ahead of forecasts and has reduced expected borrowing for the year. Tax payers might be frustrated with the tax burden imposed by the Chancellor, but it has given her a better footing ahead of the Spring Statement. It has eased the debt burden and answered market concerns about UK debt sustainability.
The FTSE 100’s impressive performance in 2025 has continued into 2026, benefiting from money diversifying away from tech heavy US markets. It hit 10,000 points on 2nd January, only 171 days after it hit 9000 on the 15th July 2025. This was the shortest time to move from one 1000 mark to the next since it launched. By the end of February, it was already edging towards 11,000 having closed at 10,910.55 on 27th February. A new record seems imminent.
However, concerns about the underlying economy persist. Unemployment is creeping up, especially amongst young people, and growth is still relatively sluggish.
In anticipation of the BoE’s decision to hold rates, typical mortgage rates on offer have ticked up after months of falling. Mortgage rates are affected by the base rate but are more beholden to the wider ‘swap rate’ market which is how banks, building societies and other lenders finance their mortgage deals and lending.
Moneyfacts finance expert Rachel Springall said: “Lenders have been catching up to pass on increases in response to unsettled swap rates from a couple of weeks ago. However, shorter-term swaps appear to be moving back down again, whereas longer-term swaps are not quite following the same path. These moves could cause a diversion in the pricing between different mortgage terms in the weeks ahead.”
The month also saw more political problems for Prime Minister, Sir Keir Starmer. Having faced down a possible leadership challenge from Major of Manchester, Andy Burnham, Labour lost its seat in the Gorton-and-Denton by-election to the Green Party.
United States
On Friday 20th February the Supreme Court declared many of President Trump’s trade tariffs illegal due to the way in which his executive powers were used. The President retaliated in typical fashion by announcing he would impose a new 10% global tariff under Section 122 of the Trade Act of 1974, which allows the president to impose tariffs for 150 days without the approval of Congress. The next day he changed that to 15%, and by Tuesday the number was back to 10%. Markets, as you might expect, were volatile with this new, unpredictable turn. What it means for historic tariff payments and individual deals negotiated country by country we do not yet know.
Trump’s attention is now on Iran. Negotiations briefly appeared to be progressing towards a compromise agreement over Iran’s nuclear stockpile. Iran offered some economic sweeteners, such as such as access to oil and gas reserves and purchases of US products, in addition to a major reduction in nuclear materials. This seems to have been interpreted as Iran just buying more time and the US made their move with an attack on 28th February, resulting in the death of supreme leader, Ayatollah Ali Khamenei. Israel has played a pivotal part in the attack. Qatar, Bahrain, Jordan and Kuwait – all home to US military bases – have said they had intercepted missiles fired towards them, but falling debris appears to have caused widespread damage.
Once again, President Trump made a major move on a Saturday, when financial markets were closed. This is a pattern which has repeated since the ‘Liberation Day’ trade tariff announcements on Tuesday 2nd March 2025, when markets immediately went into turmoil.
US GDP growth slowed sharply at the end of 2025, with Q4 2025 expanding at just 1.4 % annualised, down from roughly 4.4 % the prior quarter. Optimists, including the President, will point to the government shutdown as the causes of this and expect a recovery in 2026. The underlying consumer and investment data suggests this may well be true, but many investors are mirroring the Fed’s ‘watch and wait’ approach to future action given the uncertainty around government policy and AI-led technology stocks.
US equity markets were under pressure in February. Financial results from the big US tech stocks have been heavily anticipated, few more so than Nvidia. The world’s most valuable company’s results outperformed market expectations, although such is the expectation around Nvidia that there was no immediate improvement in its stock price.
US tech stocks remain fragile because of concerns that AI powerhouses such as Nvidia are simply investing in their own infrastructure and customers in a way that is unlikely to generate cash returns for investors which correlate to their expensive stock prices. Other tech companies, such as Salesforce, have had their value damaged by speculation that AI will replace rather than enhance their products, and non-tech industries such as transport and logistics are fighting against the argument that AI will make these industries obsolete.
This implies that the market does not really understand what the long-term impact of AI will be, who the winners will be and whether it will benefit or dismantle the commercial models of other sectors. It will create ongoing volatility whilst the hype goes on. The ripple effect of AI hysteria goes way beyond technology stocks.
Europe
Cautious optimism continues to be the tone when assessing the economic performance of the Eurozone in 2026 so far.
As with the UK, it continues to benefit from a global investment desire to shift slightly away from US markets.
Unlike other economies which are still some way off normalised rates, the Eurozone has no concerns about the policy decisions of its Central Bank. Inflation fell to 1.7% in January, below the 2% target. The European Central Bank held rates and said, “Low unemployment, solid private sector balance sheets, the gradual rollout of public spending on defence and infrastructure and the supportive effects of the past interest rate cuts are underpinning growth”.
Some commentators view the drop in inflation as a sign of weak demand, but the counter point to that is there is now considerable predictability. For businesses, an environment where inflation is close to target improves visibility over costs and pricing, whilst borrowing costs are dropping and could ease further later in 2026.
Growth is still expected to be modest but there are signs that Germany’s defence and infrastructure spending is showing early signs of results, and the same is expected in France and the Netherlands.
In France, the budget saga continues. After failing to reach an agreement on the 2026 budget, the Prime Minister invoked article 49.3 to enact a revised 2026 budget without a vote in the national assembly. This required him to scale back all spending-reduction ambitions, and this year’s budget will do little to reduce the government deficit relative to GDP.
Whilst the EU has sown considerable resilience in recent times and completed two significant trade deals, the EU-India and the EU-Mercosur, global trade tensions continue to cast a shadow over the future.
Far East
China is nearing its annual “Two Sessions” meetings (which started on 4th March), when Beijing will formally set 2026 GDP, fiscal and monetary targets. Markets were focused on expectations the growth target might be lowered to “above 4.5 %” rather than the “around 5%” target of recent years. As the Purchasing Managers’ Index data has shown contraction for many months this would not be a surprise.
This will be the 15th Five-Year Plan, setting the stage for the next five years of China’s development. It will include fiscal targets such as the deficit-to-GDP ratio and bond issuance and potentially outline any new fiscal stimulus.
The IMF summarised what we already knew about China’s route to future growth. It must improve domestic demand and move from a reliance on exports to domestic consumption.
Following Prime Minister Sanae Takaichi’s landslide election win, she nominated dovish candidates to the Bank of Japan(BoJ) board, which weakened the yen and raised questions about the pace of future rate hikes.
Hawkish BoJ board member, Hajime Takata, warned that policymakers must stay alert to the risk of an inflation overshoot and continue raising interest rates gradually. He had previously proposed rate hikes which had been rejected by the majority.
Given the implications for global markets, emerging markets in particular, there is considerable interest in whether Takata’s minority view becomes the new Japanese policy direction over time.
Emerging Markets
Emerging markets continue to attract interest from investors whilst US equities remain unpredictable.
India has generated much of the attention because of its high growth economy, which we noted last month. However, it is not alone. The reasons for pockets of success in different economies are varied.
Taiwan and South Korea are key players in the AI supply chain.
South Korea’s performance is driven by dominance of chipmakers such as Samsung Electronics and SK Hynix, which are benefiting from strong global demand for AI-related memory and advanced semiconductors, boosting exports and corporate earnings.
Taiwan dominates advanced semiconductor production. It’s technology-related goods now account for roughly 80% of exports and the majority of its recent growth.
Commodity markets have favoured economies such as Brazil and Peru which have benefited from metals and agricultural demand. Thailand and Turkey have been helped by improved financial conditions and cyclical recovery dynamics.
As March unfolds we will begin to understand if the US conflict with Iran will create new threats and opportunities within emerging markets economies.
Summary
The US-Israeli strike on Iran adds more complexity to the political economics of 2026. There is clearly a danger that oil prices will soar, given they were already rising just before the strikes happened.
It is not yet clear how Iran’s oil infrastructure has been affected. In January, Iran produced 3.4 million barrels of crude oil per day, representing about 3% of global oil supply, according to the International Energy Agency. Much of this has gone to China via ‘shadow fleets’ to evade sanctions. Rather like Venezuela.
As with Venezuela, we will be left to speculate what might happen next and how the country will be governed.
We’ve seen over the past 12 months that there will always be volatility in financial markets, but the rewards can be notable for investors prepared to stay the course.
And finally…
Queen Elizabeth II’s face has been on more coins and notes than any other monarch in the world. It has featured on currencies in over 30 countries.
