Markets in September became more volatile as renewed escalation in the Middle East pushed energy prices higher and intensified concerns around inflation and interest rates. The combination of stronger oil prices, resilient economic activity and increasingly hawkish central banks drove a sharp sell-off in government bonds, while equity markets were more mixed.

Here's our look back at what happened over the month and why.

Equities: strength in US tech masked weakness elsewhere

Global equities declined modestly overall, although continued strength in large US technology companies masked greater weakness beneath the surface.

Equity market performance diverged significantly. The S&P 500 finished the month around 0.5% lower, while the technology-heavy Nasdaq gained approximately 1.9%. European markets were weaker, with the STOXX 600 falling around 2.5%, while emerging markets declined by approximately 1%.

Higher energy costs and bond yields were particular headwinds for more interest-rate-sensitive parts of the market.

Bonds and interest rates: a difficult month

Bond markets experienced a more difficult month as central banks responded to renewed inflation pressures.

The Federal Reserve raised interest rates by 0.25% to 3.75–4.00% and indicated that further tightening could be required. The European Central Bank also raised its policy rate by 0.25% to 2.50%, while the Bank of England held rates at 3.75%, albeit with three members voting for an increase. The Bank of Japan raised rates to 1.25%, their highest level in more than three decades.

US 10-year Treasury yields rose by more than 0.5 percentage points to around 5.3%, contributing to the worst month for US government bonds in four years, while German and UK yields also moved materially higher.

Commodities: oil up, gold down

Commodity markets reflected the renewed geopolitical uncertainty. Brent crude rose by around 11% during September, having traded above $109 per barrel during the month as renewed US and Iranian attacks increased concerns around Middle Eastern energy supplies.

Gold moved in the opposite direction, falling around 6.5% following its particularly strong August rally. Rising bond yields and a stronger US dollar outweighed the benefit from geopolitical uncertainty, illustrating the pressure that higher real interest rates can place on non-yielding assets.

The economy: growth holding up, but inflation is back on the agenda

Economic data remained relatively resilient but continued to highlight the tension facing policymakers. US headline inflation accelerated to 3.4% in August, with higher diesel and energy prices contributing materially to the increase, while US second-quarter economic growth was revised higher to an annualised 2.2%. UK second-quarter growth was also revised higher to 0.5%.

Looking ahead

Overall, September demonstrated that economic growth remains relatively robust, but renewed energy inflation, elevated government borrowing and rising interest rates are creating a more challenging backdrop for financial markets.

Strong corporate earnings and continued AI-related investment remain supportive, although elevated valuations and significantly higher bond yields leave markets increasingly sensitive to any deterioration in economic or earnings expectations.