Despite a summer of political upheaval, war in the Middle East, and a wobble in AI stocks, the FTSE 100 quietly hit a new all-time high in July – a reminder that headlines and markets don’t always move in step. Here’s our Questa August Market Commentary 2026.

A new Prime Minister, and markets pay attention

Andy Burnham became the UK’s seventh Prime Minister in a decade on 20 July, taking over from Sir Keir Starmer. His opening tone was conciliatory – “we have not been good enough,” he admitted outside Number 10 – but his Cabinet reshuffle was swift and severe, and the outgoing Chancellor was gone by the end of the day.

The bigger story was who replaced her. Rachel Reeves was succeeded by John Healey, previously Defence Secretary – a surprise pick that markets initially read as a safe, fiscally cautious choice. That calm didn’t last long. Within hours, Burnham told reporters his government would stick to Labour’s existing fiscal rules but “use any flexibility within them.” Those three words were enough to spook the bond market: yields on 10-year UK government debt rose above 5%, and the pound gave back its earlier gains. It’s a sign of how sensitive markets remain to government borrowing plans since the 2022 mini-budget crisis – and investors will be watching Burnham’s first Autumn Statement very closely, especially on capital gains tax, pensions and property, all areas he has previously suggested are undertaxed.

Inflation: better news, with a catch

UK inflation fell to 2.6% in June – its lowest level in 15 months – thanks to softer food and fuel prices. It’s a welcome data point for a brand-new government, but the relief may be temporary: rising energy bills are expected to push inflation back above 3% later in the year.

The Bank of England held interest rates at 3.75% at its end-of-July meeting, as widely expected – the fifth hold in a row. But there are signs the mood inside the Bank is shifting. The Bank’s Chief Economist has said rates may need to rise again, and markets are pricing in the possibility of a move towards 4.00–4.25% within the next year if underlying inflation pressures don’t ease. A lot hinges on oil prices, which spiked above $100 a barrel in mid-July as fighting between the US and Iran flared up again, before easing slightly as a fresh pause took hold.

The FTSE quietly hits a record

Amid all this noise, UK shares had a genuinely strong month. The FTSE 100 reached a fresh intraday record of 10,989.45 on 31 July – helped, in part, by investors shifting money away from expensive technology stocks and into steadier UK companies, as worries about AI spending grew elsewhere in the world.

The US: a strong start, then a sharp wobble

American shares had a similar story in miniature. The Dow Jones hit a record above 53,000 early in the month, before a rough final week wiped out much of the gain.

The trigger was the technology sector – specifically, the computer chip companies that have powered much of the recent stock market rally. News that a major chipmaker, SK Hynix, plans to slow its expansion, combined with reports that a Chinese manufacturer has made unexpected progress on advanced chip-making equipment, spooked investors. Concerns about China catching up faster than expected wiped more than $1 trillion off the combined value of the world’s biggest chip companies in just a few days. Most analysts see this as a correction of very high valuations, rather than a sign that demand for AI technology is actually falling.

The US Federal Reserve, under its new Chair Kevin Warsh, held interest rates steady for a fifth straight meeting, though three policymakers wanted a rise. Warsh is deliberately saying less between meetings than his predecessors, which has left markets with fewer clues about what comes next.

Adding to the uncertainty, the ceasefire between the US and Iran – agreed back in June – broke down in early July after Iran targeted shipping in the Strait of Hormuz, a critical oil route. Fighting resumed, paused, and resumed again by month-end, keeping oil markets on edge throughout.

Europe: steady, but watchful

The European Central Bank held rates unchanged in July, having already raised them once in June for the first time since 2023. Growth across the eurozone was better than expected, but patchy – Ireland grew strongly while Germany, France and Italy barely moved. As in the UK, the direction of energy prices over the coming weeks will likely decide whether growth and inflation head in a better or worse direction into autumn.

Asia: a rough few weeks

China’s economy grew more slowly than expected, at 4.3% for the year to June – a reminder that weak domestic spending remains a persistent challenge for the world’s second-largest economy.

Japan’s stock market had a genuinely volatile month: a record high in June, a sharp fall as the global chip sell-off hit, and a partial recovery by month-end. The Bank of Japan held rates but signalled it may raise them again if inflation keeps climbing.

The sharpest single move of the month came in South Korea, where the stock market fell more than 10% in a single day – its worst day since the early weeks of the Iran conflict in March. Samsung and SK Hynix, the two companies at the heart of the global chip industry, each lost well over a tenth of their value in one session. Because these two firms make up close to half of the South Korean index, and Taiwan and South Korea together account for over half of the entire emerging markets index, this is a reminder of just how concentrated – and exposed – the “AI trade” has become in that part of the world.

A weather warning worth watching

One less obvious risk for later in the year: forecasters are increasingly confident that a very strong El Niño weather pattern will develop between October and December, potentially one of the most powerful on record. This matters economically because it threatens rainfall-dependent agriculture in several regions – India’s monsoon season in particular – which could push up food prices and complicate central banks’ efforts to bring inflation down further. Other regions likely to be affected include parts of Latin America and East and Southern Africa, while a small number of countries, including Argentina, could actually benefit from extra rainfall.

The bottom line

July was shaped by two themes that have defined much of 2026 so far: a Middle East conflict that keeps reigniting just when it looks resolved, and growing doubts about whether AI-related stock valuations have run ahead of reality. Both kept central banks cautious, even as headline inflation figures in the UK and eurozone improved. Add a new UK Prime Minister whose every word is being scrutinised by bond markets, and August begins with plenty still unresolved: will the Iran conflict actually end this time, will central banks start raising rates again, and was the AI sell-off a healthy reset or the start of something bigger?