Canada's GDP weaker than expected, Canadian dollar shrugs

Economic

Summary:

Canada’s GDP contracted 0.1% in June and 1.6% in Q2, its first decline in seven quarters, pressured by U.S. tariffs. Markets raised BoC rate-cut odds, while USD/CAD stayed steady.

The Canadian dollar is coming off its first winning week since July. USD/CAD is calm on Monday, trading at 1.3739, down 0.04% on the day.

Canada's GDP for June was a disappointment, declining 0.1% m/m in June. This was unchanged from May and missed the market estimate of 0.1%. The decline was driven by decreased activity in manufacturing, as US tariffs made themselves felt in the Canadian economy.

Quarterly, GDP fell by 1.6% in Q2, after a downwardly revised gain of 2% in Q1. This missed the market estimate of -0.6%. Notably, this was the first quarterly contraction in seven quarters, as US tariffs took a toll on Canadian exports.

The weak GDP release has raised expectations of a Bank of Canada rate cut at the September 17 meeting. The money markets have raised the likelihood of a quarter-point cut to 48%, up from 40% just prior to the GDP report. The BoC has maintained rates at 2.75% at three consecutive meetings and the employment and inflation data for August will be critical in determining whether the central bank holds or cuts rates.

US PCE core inflation hits five-month high

The US core personal consumption expenditures price index (core PCE) the Federal Reserve's preferred inflation indicator, crept higher to 2.9% in July, up from 2.8% in June. This was the highest level since February and matched the market estimate. Monthly, core PCE rose 0.3%, unchanged from June and in line with the market estimate.

USD/CAD Technical

USD/CAD is testing resistance at 1.3742. Above, there is resistance at 1.3751 and 1.3761

Below, there is support at 1.3732 and 1.3723

Canada's GDP weaker than expected, Canadian dollar shrugs_1

USDCAD 4-Hour Chart, September 1, 2025

Source: marketpulse

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Samantha Luan

Economic

Commodity

Forex

Iran remains a major oil producer, but its actual influence on global oil markets has declined considerably. This stems not only from sanctions, which have often fallen short of their goals, but also from fundamental structural changes in the global oil landscape. The rise of new producers, the diversification of supply chains and slower demand growth have all reduced the market’s sensitivity to any single country, including Iran.

This shift was evident during recent tensions involving the United States, Israel and Iran. While the rhetoric and military posturing raised concerns, oil markets remained largely calm. Critically, there were no direct disruptions to oil production or trade routes – particularly the Strait of Hormuz, which Iran itself relies on to export crude. As a result, there were no significant supply losses. Oil prices spiked briefly, but the reaction was modest and short-lived. The oil market’s restraint reflected not Iranian deterrence or strength, but an increasing global capacity to absorb shocks.

Nevertheless, Tehran was eager to project an image of resilience and victory. Yet behind the political narrative, its sway in oil markets and its ability to influence prices or global supply dynamics has steadily eroded. The strong cards it once held as a producer have been weakened by internal issues, including chronic underinvestment, and more importantly, by external factors beyond its control.

Sanctions have undoubtedly constrained Iran, but they are porous. China’s continued purchases of Iranian oil, often at a discount, and its role in helping Iran circumvent restrictions have kept export volumes afloat. Nonetheless, this has not translated into real market power. With enforcement spread thin and global supply tightening at times, Iran has remained relevant but not dominant.

If sanctions on Iran are lifted, neither a rapid surge in production nor exports is likely. The country is already producing and exporting at relatively high levels, and any further increase would require substantial investment and time. Conversely, if sanctions are tightened, Iran’s economy would face further strain, but the global oil market would be unlikely to experience a major disruption, particularly if other Organization of Petroleum Exporting Countries (OPEC) members continued to raise output.

If stricter sanctions on Tehran coincide with a substantial curtailment of Russian oil, the world’s third-largest producer, Iranian barrels could temporarily gain strategic value. Still, this effect would probably be short-lived, as other producers, including the U.S. and Gulf states, can compensate. In short, the global oil market is well-supplied.

Iran is rich in oil and gas

Iran possesses the world’s fourth-largest proven oil reserves, accounting for 9 percent of the global total, behind Venezuela, Saudi Arabia and Canada. It also has the second-largest proven natural gas reserves, with a 17 percent share, second only to Russia. It is the third-largest crude oil producer within OPEC and is the fourth-largest exporter.

As a founding member of OPEC, Iran once held considerable influence within the organization, at times nearly rivalling Saudi Arabia’s dominance. At its peak in 1974, Iran was producing over 6 million barrels per day (mb/d), second only to Saudi Arabia’s 8.4 mb/d, while Iraq trailed at just 1.9 mb/d. However, the Iran-Iraq War (1980-1988), prolonged sanctions and limited foreign investment have since constrained the country’s production potential.

Despite these setbacks, Iran has repeatedly demonstrated resilience. Following the imposition of sanctions on its energy sector by the U.S. and the European Union in 2011 and 2012, the country’s oil exports were cut in half by 2015. But after the Joint Comprehensive Plan of Action (JCPOA) was signed in 2015, where Iran agreed to limit its nuclear program in exchange for the lifting of economic penalties, oil production rebounded swiftly. Within two years, output rose by 1.3 mb/d, and crude oil exports increased by over 1 mb/d within a year, returning to pre-sanctions levels.

The U.S. withdrawal from the JCPOA in 2018 during the first administration of President Donald Trump and its reinstatement of unilateral sanctions targeting Iran’s oil sector caused another sharp decline. Production fell by 1.9 mb/d within a year, and in October 2020 reached its lowest level since 1989.

Even so, Iran has gradually rebuilt output, recording one of the largest increases in oil production among OPEC members between 2021 and 2024. Notably, Iran is exempt from OPEC production quotas due to the ongoing sanctions, allowing it to maximize production and exports. In 2024, its oil output reached a post-sanctions annual high of 4 mb/d.

China has helped Iran evade sanctions

Iran’s oil exports have surged in recent years, tripling from approximately 400,000 barrels per day during the height of the Trump administration’s “maximum pressure” campaign to around 1.5 mb/d in 2024. This resurgence has been enabled by a combination of lax sanctions enforcement and Iran’s persistent efforts to circumvent restrictions, often with the support of key trading partners such as China, the world’s largest crude oil importer.

Today, China is the primary destination for Iranian oil, while smaller volumes are also directed to countries like Syria, the United Arab Emirates and Venezuela. To avoid detection and obscure the origin of shipments, Iran relies heavily on a so-called “shadow fleet” of tankers that operate without transponders and often engage in ship-to-ship transfers, tactics that Russia has since emulated.

Financial transactions related to these exports are typically conducted in yuan through smaller Chinese banks, a system that limits the ability of Western authorities to track payments and enforce sanctions. Once Iranian oil reaches China, it is reportedly rebranded – often as Malaysian or Middle Eastern crude – and sold to independent Chinese refineries, known as “teapots,” which operate with fewer regulatory constraints.

It is widely believed that this trade arrangement has allowed Chinese companies to save billions of dollars. At the same time, Tehran has greatly benefited from the continued revenue. According to the U.S. Energy Information Administration (EIA), Iran’s oil export revenues reached an estimated $43 billion in 2024, marking a $1 billion annual increase. This accounted for more than 57 percent of the country’s total export revenue in 2024, the highest share since the reimposition of U.S. sanctions in 2018, according to the World Bank.

Iran is a vulnerable giant

Despite its apparent resilience, Iran remains far more vulnerable than it appears. Although it continues to bypass sanctions, the crude oil it exports is sold at steep discounts, raising questions about the accuracy of reported revenue figures. As confirmed by the EIA, official estimates of Iran’s oil income do not reflect the price reductions offered to buyers of sanctioned crude. Iran has further increased its discounts to remain competitive with Russia in the Chinese market.

This reliance is compounded by the concentration of Iran’s export destinations. While Beijing has a diversified portfolio of energy suppliers, Iran is heavily reliant on China for its oil exports. The same vulnerability applies to non-oil trade. According to the World Bank, Iran’s top three trading partners, China, Iraq and the UAE, account for 60 percent of its exports and 70 percent of its imports.Iran’s oil revenues in the financial year 2023-2024 reportedly fell well short of expectations, covering only about half of the amount projected in the national budget.

As a result, the government was forced to reduce spending to help contain the deficit. According to the International Monetary Fund, Iran would need oil prices to exceed $163 per barrel to balance its budget in 2025, the highest fiscal breakeven oil price among Middle Eastern oil exporters.

Structural constraints hinder Iran’s production

Although Iran’s oil production has increased in recent years, it remains well below its peak levels of the 1970s, even with the country’s large reserves and the advancements in drilling and extraction technologies since then.Iran nationalized its oil industry in 1951, and the sector remained open to foreign investment for several decades. This changed after the 1979 Islamic Revolution, when international investment in oil and gas was largely prohibited under the Iranian Constitution. The Iran-Iraq War further devastated the oil sector, leaving it in urgent need of rebuilding.

In response, the government adopted a more flexible stance toward foreign investment and introduced a new contractual framework known as the buyback contract. Under this model, international oil companies were permitted to invest only up to the point of first production, at which time the project would be transferred to the National Iranian Oil Company in exchange for a pre-agreed fixed fee.

However, these terms have historically been unattractive to international investors. Even after the JCPOA agreement in 2015, Tehran struggled to secure major international deals. This was due in part to internal divisions over the role of foreign capital in the energy sector, as well as lingering U.S. secondary sanctions that continued to limit access to global financial and banking systems.

In the absence of foreign investment, especially in recent years, Iran has increasingly relied on domestic firms to develop its oil projects. But these companies often lack the capital, advanced technology and technical expertise required to sustain output, particularly from mature fields. Sanctions have further exacerbated these challenges by limiting access to financing, curtailing technology transfers, raising trade costs and reducing overall competitiveness.

Meanwhile, as its production capacity has stagnated, other OPEC members, such as Iraq and the UAE, have expanded their market share, often at Iran’s expense.One strategic asset Iran still controls is the Strait of Hormuz. Disruption to this key maritime passage could significantly affect worldwide energy supplies and prices, especially for major importers like China. Regardless of occasional threats from Iranian officials to block the strait, such actions have never materialized.

Source: GIS

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Adam

Stocks

The cloud division, up 26%, significantly exceeded forecasts (18.4%) to reach 33.4 billion yuan ($4.67 billion). This is a strong signal, welcomed by analysts, who see it as a sustainable growth driver for the group.

What has changed?

The Chinese group is now clearly focusing on AI as a strategic lever. "Our investments in AI are starting to bear fruit," said CEO Eddie Wu, adding that more than 100 billion yuan has been invested in AI and infrastructure over the past 12 months. According to DZ Bank, AI-related revenues have grown by triple digits for the eighth consecutive quarter.

Alibaba is stepping up its technological announcements and even developing its own chips, according to the Wall Street Journal, against a backdrop of Sino-American tensions over advanced components. The goal is to reduce its dependence on Nvidia and secure the deployment of its data centers in China.

But the cloud's performance does not completely mask the weaknesses of the rest of the group. Overall revenue reached 247.7 billion yuan, below expectations (253.2 billion). Adjusted EBITA fell 14% and free cash flow turned negative, at -18.8 billion yuan, weighed down by heavy investments in infrastructure and express delivery.

Is this the return to favor expected by the market?

Not yet, but the market seems willing to believe so. The rise in the stock price reflects renewed confidence, supported by the rise of the cloud and Alibaba's AI strategy.

However, the group is at a turning point. Its core business, e-commerce in China, remains under pressure: revenues are up 10%, but EBITA is down 21%. Quick commerce, which enables deliveries within an hour, is weighing on profitability. Nevertheless, Alibaba sees it as a vehicle for expansion, with an ambitious target of an additional 1 trillion yuan in GMV per year within three years.

Internationally, the recovery of AliExpress and growth in Europe and the Middle East confirm a certain dynamism, but margins remain low. The group still needs to convince investors that it can transform its massive investments into sustainable growth drivers without sacrificing profitability.

But it is clear that it is the AI narrative that has been boosting the stock since this weekend.

Source: MarketScreener

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Adam

Economic

U.S. markets are set to be closed on Monday, although investors are preparing for a potentially consequential week that will see the unveiling of fresh labor market data. Analysts have suggested that the figures could all but cement expectations that the Federal Reserve will cut interest rates at its upcoming policy meeting later this month. Elsewhere, a legal battle over sweeping U.S. tariffs rages on, with an appeals court rejecting the Trump administration’s levies.

U.S. markets closed for Labor Day

U.S. markets are due to be shuttered on Monday in observance of Labor Day.

With the holiday making for relatively thin trading, Asian shares were mixed, with Japan’s Nikkei and stocks in South Korea slipping. Still, equities in China extended their recent bull run, fueled in part by a stronger-than-anticipated survey on manufacturing activity in the world’s second largest economy.

Hong Kong shares of e-commerce titan Alibaba (HK:9988) also notched a double-digit spike, its largest one-day surge since 2022, thanks to enthusiasm around the prospects for its cloud unit.

Investors are gearing up for a return this week from a muted summer period. Awaiting them are a host of key upcoming events, including a slew of economic data points and a crucial Federal Reserve interest rate decision -- both of which could sway sentiment in September.

Following a tariff-driven swoon in April, Wall Street has marched steadily higher, spurred on by hopes that U.S. President Donald Trump’s sweeping levies will not -- as many have feared -- plunge the U.S. economy into a recession. Optimism around the potential returns from massive investments in artificial intelligence has underpinned stocks as well.

Legal battle over Trump’s tariffs

The Trump administration’s tariffs have faced a range of legal challenges, particularly from those who have argued against the president’s use of emergency executive branch powers to put the import taxes in place.

A crucial ruling was delivered late on Friday, when the U.S. Court of Appeals for the Federal Circuit rejected the tariffs, upholding a lower court decision. The White House now has until mid-October to appeal to the Supreme Court, or else the ruling comes into effect.

Media reports have suggested that Trump officials have long anticipated that the high court would eventually need to settle the matter, adding that the administration is confident that the tariffs -- and Trump’s push to assert his authority to enact them -- will eventually be supported by the court’s conservative majority.

In a note to clients, analysts at Vital Knowledge said the the appeals court decision is "at best neutral" for markets, flagging it "won’t come close come close to eliminating Trump’s import taxes, and it just creates more uncertainty for Corporate America as the White House searches for a studier legal scaffolding for its draconian trade policy[.]"

Economic data ahead this week

Headlining the economic calendar this week will be release of the latest labor market report on Friday, which could provide some insight into the health of the wider economy and serve as one of the final tests of investor confidence that the Fed will slash rates at its September meeting.

An unexpectedly soft U.S. payrolls report last month bolstered bets that the Fed would cut borrowing costs, even as policymakers remain wary of lingering inflationary pressures.

Fed Chair Jerome Powell later suggested in a closely-monitored speech at an economic symposium in Wyoming that risks to the job market were increasing. As of Monday morning, there was a more than 87% probability that the Fed will reduce rates by 25 basis points from its current range of 4.25% to 4.5% at the end of its two-day gathering on Sept. 16-17, according to CME’s FedWatch Tool.

Economists are estimating that nonfarm payrolls will come in at 74,000 in August, not far from the mark of 73,000 in July. The previous data set was itself a cause of controversy, with deep downward revisions sparking Trump’s ire and leading to the ouster of the commissioner of the Bureau of Labor Statistics, which compiles the monthly jobs figures.

China factory activity data

China’s factory activity expanded at the fastest pace in five months in August, a private-sector survey showed on Monday, offering a glimmer of improvement amid weaker official signals.

The RatingDog China General Manufacturing PMI rose to 50.5 in August from 49.5 in July, exceeding a forecast of 49.7 and breaking into expansion territory above the 50-point growth threshold.

The jump was largely driven by a surge in new orders, the survey noted, even as export demand continued to decline for a fifth consecutive month. Meanwhile, firms reported their fastest accumulation of unfinished work in six months.

"New export orders are still in contraction, but the pace of decline has eased. That’s encouraging, yet we shouldn’t get carried away, because external demand looks partly pulled forward while domestic demand stays soft, so the upside to output may be limited unless domestic demand firms up," said Yao Yu, Founder at RatingDog.

Despite the uptick, manufacturers remained cautious on hiring, with employment contracting for the fifth month running. Rising input costs, fueled by sharper raw material price increases, and persistent supplier delays also tempered optimism.

Oil higher

Oil prices were higher in choppy trading on Monday, as traders weighed supply disruptions linked to airstrikes in the Russia-Ukraine conflict against the prospect of rising output and the impact of elevated U.S. tariffs on demand.

By 03:41 ET, Brent Oil Futures expiring in October had risen 0.5% to $67.81 per barrel, while West Texas Intermediate (WTI) crude futures also ticked up 0.6% to $64.36 per barrel.

Both contracts dropped more than 7% in August, dragged down by supply glut fears from steady OPEC+ production hikes.

“Oil prices settled lower last week despite growing European calls for secondary sanctions on buyers of Russian oil and gas. The mild reaction may suggest the market is becoming increasingly numb towards sanction risks,” analysts at ING said in a note.

Meanwhile, Ukraine’s president said on Sunday that the country would retaliate against Russian drone strikes on its power facilities. Both sides have exchanged air attacks in recent weeks that have targeted energy infrastructure and threatened to put a crimp on Russian oil exports.

Source: investing

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Adam

Economic

Asia Market Wrap - Alibaba on a Roll as Nikkei Slips

Stock markets in Asia generally went down after technology stocks fell in the US on Friday. Companies that make computer chips were hit the hardest, causing Japan's stock market to drop.

Hong Kong's market, however, did the opposite and went up. This was because the stock price for the company Alibaba jumped dramatically, which also helped boost the value of other artificial intelligence companies like Baidu and Tencent.

The drop for other major chipmakers, such as Samsung and SK Hynix, happened after the United States stopped allowing the sale of certain chip-making equipment to China.

Japan's main stock market index, the Nikkei, fell to its lowest level in three weeks.

Most of the decline was caused by sharp drops in two very large companies. The stock price for Advantest, a company that makes equipment for testing computer chips, fell significantly. At the same time, SoftBank Group, a major investor in technology and AI companies, also saw its stock price go down.

Several other companies related to computer chips also saw their stock prices fall. This included Disco, which dropped 7.7%, Socionext, which was down 6.3%, and Furukawa Electric, which fell 5.5%.

Together with Advantest and SoftBank Group, these five companies were the worst-performing stocks on the Nikkei for the day.

A different, broader measure of Japanese stocks, the Topix, fell by a much smaller amount.

China Factory Activity Steady as Asian Countries Feel the Bite

New reports released on Monday show that U.S. tariffs are hurting factory production throughout Asia. This bad news overshadowed some surprisingly good results from China, putting pressure on governments in the region to find ways to help their weak economies.

Experts are concerned because many Asian companies had previously rushed to ship their goods early to avoid the U.S. taxes. Now that those shipments are done, analysts believe these companies will struggle to make a profit in the future because their sales to other countries are expected to drop.

For example, countries that export a lot of goods, like Japan, South Korea, and Taiwan, all saw their factory activity decrease in August. This highlights the major challenge Asian countries face in dealing with the impact of the U.S. tariffs.

In Japan, factory activity shrank for the second straight month. While the situation improved slightly from July, the score was still below the 50-mark, meaning production is still contracting. A key problem for Japan is that orders for its goods from other countries fell at the fastest rate in over a year, mainly because of weak demand from China, Europe, and the U.S.

South Korea's factories also continued to shrink, marking the seventh month in a row of contraction. Similar to Japan, there was a very slight improvement from the previous month, but overall activity is still declining.

European Open - European Stocks Benefit from US Holiday

Stock markets in the UK and Europe started the day on a positive note. This comes after news that house prices in the UK are not rising very quickly.

The FTSE and the DAX are both higher this morning. The FTSE 100 went up by 0.3% with the DAX 0.5% higher.

The STOXX 600 is up 0.4% thanks in large part to aerospace and defence stocks with names like the UK’s BAE Systems leading the way with gains of around 2.4%.

The biggest winner in the UK is a software developer called Kainos Group, whose stock jumped over 17% after it predicted strong future sales. Domino's Pizza is also having a good day, with its stock up almost 7% after the company confirmed its financial goals and announced a plan to buy back its own shares.

Elsewhere, the Danish drug maker Novo Nordisk is up about 3% after sharing positive news that its weight-loss drug, Wegovy, is significantly more effective at reducing heart risks compared to a rival's treatment.

On the FX front, the US dollar is a bit weaker today, dropping to its lowest value in over a month. This continues its recent downward trend, as the dollar lost more than 2% of its value during August.

As the dollar has fallen, other major currencies like the Euro and the British Pound have become stronger. Against the Japanese Yen, the dollar is mostly unchanged this morning, but it also weakened against the Yen last month by 2.5%.

Meanwhile, China's currency, the yuan, is holding steady at a very strong level, near its highest point against the dollar in about ten months.

Currency Power Balance

Gold prices soared overnight as geopolitical risks piled up as the Financial Times reported overnight about the possibility of European troops in Ukraine with US backing.

This coupled with renewed tensions around Iran's nuclear programme and the weakening US Dollar amid rate cut expectations has pushed the precious metal to within touching distance of the all-time highs at $3500/oz.

Oil prices are a bit mixed this morning as different factors pull them in opposite directions. On one hand, things that could reduce supply, like the conflict between Russia and Ukraine, are pushing prices up. A weaker US dollar also helps lift prices.

On the other hand, worries that too much oil is being produced globally, along with concerns that U.S. tariffs could hurt the economy and lower the demand for oil, are trying to pull prices down.

As a result, Brent crude (the international price) is up slightly to around $67.79 a barrel, while WTI (the U.S. price) is down a little to $64.33. This comes after a weak August, when oil prices fell for the first time in four months because major oil-producing countries increased their supply.

Economic Data Releases and Final Thoughts

Looking at the economic calendar, the European session will be quiet moving forward after PMI data was released this morning.

Spanish, French, Italian and Euro Area PMI all beat estimates but Germany did come in below expectations.

Moving forward, sentiment will be key and likely hinge on any news on the geopolitical front ahead of US jobs data this week. Remember it is aUS labor day holiday today and tis could lead to thin trading and low liquidity as the day progresses.

Chart of the Day - DAX

From a technical standpoint, the DAX is back at the 24000 handle as it eyes a bounce.

However, there are growing challenges as sentiment remains rather fragile.

Immediate resistance at rests at 24119 before the 24190 and 24350 will be key.

Immediate support rests at 23670 and 23440.

DAX Daily Chart, September 1. 2025

Source: marketpulse

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Winkelmann

Forex

Political

Economic

Good morning. Indian Prime Minister Narendra Modi meets Vladimir Putin today after he reset relations with China. German Chancellor Friedrich Merz sees the war in Ukraine dragging on with no clear end in sight. And the UK wins a £10 billion deal from Norway’s navy. Listen to the day’s top stories.Indian Prime Minister Narendra Modi was due to meet Vladimir Putin in Tianjin, China, today after resetting relations with Chinese President Xi Jinping, as the three countries seek to strengthen ties amid trade tensions with the US. The trio last met in 2024.

German Chancellor Friedrich Merz warned the Ukraine war may “go on for a long time.” Now in its fourth year, Russia’s full-scale invasion of Ukraine is the longest war in Europe since World War II. In an interview with ZDF, he also rejected a coalition partner’s call to raise taxes in Germany.Norway picked the UK as the supplier of frigates for its navy, in what would be its biggest ever defense investment. Norway had considered France, Germany and the US as a potential strategic partner for the deal, which the UK defense ministry said on Sunday was worth £10 billion.Former Barclays executive Naguib Kheraj is among candidates being considered as a potential successor to HSBC Chairman Mark Tucker, according to Sky News. Kheraj spent more than a decade at Barclays, including as group finance director and vice chairman. He has also been CEO of JPMorgan Cazenove and deputy chairman of Standard Chartered.

France accused Italy of fiscal dumping, sparking a heated exchange between the two nations. Italian Prime Minister Giorgia Meloni's office vehemently denied the allegations, asserting Italy's economic attractiveness stems from stability and credibility. The dispute risks reigniting tensions between Rome and Paris, potentially impacting their previously improved relations.

Check out our Markets Today live blog for all the latest news and analysis relevant to UK assets.A €2 trillion upheaval looms for European bond markets as the Dutch pension system undergoes reform.Russian President Vladimir Putin's assaults on Ukraine have worn down the will, the magnificent defiance, of the Ukrainian people, writes Max Hastings. Almost all now recognize, as they did not a year ago, that they will be obliged to cede the east of their country to win any hope of peace. This is monstrously unjust.

Source: Bloomberg Europe

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Warren Takunda

Stocks

London stocks had pared earlier gains to trade just a touch higher by midday on Monday, with defence firms and precious metals miners lending a hand.

The FTSE 100 was up 0.1% at 9,196.87, with the session expected to be fairly quiet as US markets will be closed for Labor Day.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, said: "Energy names are under mild pressure as oil prices extend their slide, while housebuilders could stay in focus after soft Nationwide data hinted at affordability strains. With few domestic catalysts, attention turns to central bank signals later this week to set the tone for the month ahead.

"US markets are closed for Labor Day, but headlines are anything but quiet. A federal appeals court ruled Trump’s global tariffs illegal, setting up a Supreme Court showdown before they expire in mid-October - injecting fresh uncertainty into trade policy. That backdrop, coupled with rising bets on a Fed rate cut later this month, has gold glistening near record highs as investors seek safety. All eyes now turn to this week’s labour data, which could shape the size of the Fed’s next move."

On home shores, a survey showed the downturn in the manufacturing sector continued in August.

The S&P Global manufacturing purchasing managers’ index fell to 47.0 from July's six-month high of 48.0. It was below the 50 mark that separates contraction from expansion for the eleventh month in a row.

The main factor underlying manufacturing sector weakness was a slump in new work intakes. New orders contracted at the fastest pace in four months and to one of the greatest extents seen over the past two years.

Lower new work inflows were put down to subdued client confidence, cost caution following the increases to minimum wages and employer NICs and tariff uncertainties.

Rob Dobson, director at S&P Global Market Intelligence, said: "Production volumes are still showing resilience in the face of global geopolitical uncertainty and US tariff policies, with both July and August having seen only slight contractions that were milder than those suffered earlier in the year. Business confidence has also lifted to a six-month high, reflecting hopes that the trading environment is starting to settle down.

"However, August also saw a steep drop in UK manufacturers' new orders, with total order books and overseas demand both falling at some of the fastest rates seen over the past two years. Weak market conditions, US tariffs and downbeat client confidence all contributed to the dearth of new contract wins. Job cuts were also reported for a tenth successive month, with factory headcounts dropping to one of the greatest extents post pandemic.

"The outlook for the sector therefore clearly remains very uncertain. With manufacturers fearing that possible government policy decisions, including potential tax increases, could further hurt their competitiveness in domestic and export markets, the upcoming Budget will likely prove very important in guiding business confidence about the year ahead."

Investors were also mulling the latest monthly Money and Credit report from the Bank of England, which showed that mortgage approvals for house purchases ticked up by 800 to 65,400 in July.

Net borrowing of mortgage debt fell by £0.9bn to £4.5bn in July, compared to a £3.2 billion increase of net borrowing to £5.4bn in June.

The ‘effective’ interest rate - the actual interest paid - on newly drawn mortgages fell for the fifth month in a row, to 4.28% in July from 4.34% the month before. However, the rate on the outstanding stock of mortgages remained at 3.88%.

The report also showed that net borrowing of consumer credit by individuals edged up to £1.6bn from £1.5bn. Within that, net borrowing through credit cards increased to £0.8bn in July from £0.7bn in June.

Net borrowing through other forms of consumer credit such as car dealership finance and personal loans rose to £0.9bn from £0.7bn.

The latest survey from Nationwide was also in focus, as it revealed a slowdown in annual house price growth.

Elsewhere, a survey from the Confederation of British Industry showed that private sector firms across all major sectors in the UK expect economic activity to weaken in the coming quarter.

In equity markets, defence names Babcock, Rolls-Royce and BAE Systems all gained after the UK secured a £10bn deal to supply Norway with at least five new warships. The deal supports 2,000 jobs at BAE Systems’ shipyards in Glasgow and a further 2,000 roles across the UK maritime supply chain until the late 2030s, the government said.

Precious metals miners Fresnilo, Endeavour and Hochschild shone as gold prices neared a record high, while silver hit a 14-year high.

Kainos surged as it said revenues for the year ending 31 March 2026 were set to be at the upper end of consensus forecasts, driven by stronger sales in the period.

Domino’s Pizza rallied after it announced a £20m share buyback as it takes advantage of a big plunge in its share price over recent weeks. It also said that full-year expectations remain unchanged, though net debt is now expected to be higher than previously expected.

Genuit reversed earlier losses to trade up after announcing the acquisition of Monodraught - a provider of commercial ventilation solutions in the UK - for £55.6m.