From the Desk

This week saw a setback in the ceasefire between the U.S. and Iran. Oil prices spiked on the news while equities and bonds showed little reaction. In other words, financial markets don’t see this as a turning point. Rather they see it as negotiating tactics. Each side is reminding the other that they are willing to use firepower to press their case.

Markets are also more focused on growth prospects. Here, the President of the United States has been clear that he doesn’t want to drag the world into a recession. But the longer ships are trapped in the Persian Gulf the more likely higher energy inflation will drag down economic activity.   

The International Monetary Fund (IMF) also updated its World Economic Outlook this week. While growth has held up so far, the IMF is downgrading the global outlook amid warnings that “Re-escalation … would hurt growth.”

Recent data from China are also sending a warning. China’s producer price index (PPI), which measures manufacturing inflation, hit a six-year high. This pressure has been building since the war began. Most of this is coming from energy inputs, leaving the possibility that inflation effects could be transitory if diplomacy prevails. And this is the scenario that financial markets are banking on: that the current breakdown in negotiations is a speed bump rather than a roadblock.

Sources: Bloomberg, The International Monetary Fund (IMF), the Financial Times, 2026.

Following a record heatwave in late June, another heatwave hit Europe this week, pushing temperatures to 40 degrees Celsius in France and Spain, demonstrating how temperatures are rising faster than the ability of cities to adapt.

Forty degrees Celsius may not be abnormal in Arizona or Texas, but in cities like Paris, London and Berlin, aging infrastructure is not built for prolonged levels of extreme heat. Just 7% of homes in Germany have air conditioning. Europe is not facing a tipping point so much as passing a series of economic and infrastructure thresholds: the temperatures at which schools close, rail tracks buckle, roads melt and power grids falter.

Extreme heat comes with a significant cost. When London experienced its first 40 degree Celsius temperature during the 2022 heatwave, it cost the city £1.5 billion ($2 billion). It’s estimated that upgrading the roughly 1 million homes at high risk of overheating will cost somewhere between £9 billion and £45 billion.

It was reported this week that the European Banking Authority (EBA) will look at how exposed lenders are to the risks of extreme heat. The EBA is developing new approaches to measure the financial consequences of extreme heat, which could ultimately support the inclusion of heat-related risks in future bank stress tests. In addition, both the European Central Bank and Bank of England are incorporating climate risks into their collateral frameworks.

For now, heat will not be in the next set of European bank stress tests, but rising temperatures mean that the potential for longer, hotter and more damaging heatwaves is not going away.

Sources: Bloomberg, Financial Times, 2026.