A strengthening El Niño weather pattern is raising concerns across global agricultural markets as investors brace for disruptions to food production and renewed inflationary pressures. Forecasts suggest there is a high probability that the current El Niño will intensify into one of the strongest on record, bringing droughts, excessive rainfall and extreme temperatures to key farming regions. Commodity markets have already responded, with coffee (Arabica has risen by about 30% since early June to $3.12 a pound) and cocoa prices surging as traders anticipate lower harvests across Brazil, West Africa and South-East Asia. The weather threat also arrives as farmers continue to grapple with fertiliser shortages linked to the recent US-Iran conflict, creating additional pressure on global food supplies.

However, the impact extends far beyond individual commodities. El Niño has historically reduced yields for crops including cocoa, coffee, rice, wheat, sugar and palm oil, all of which play a vital role in global food supply chains. Lower production pushes commodity prices higher, increasing costs for food manufacturers and ultimately consumers. ECB economists estimate that strong El Niño events typically raise global food commodity prices by around 9%, while current geopolitical tensions could amplify the effect further. The prospect of governments introducing export restrictions to protect domestic supplies, as seen during previous food crises, also risks intensifying shortages and fuelling further price volatility across international markets.

More broadly, the developing weather shock highlights the growing interaction between climate change and the global economy. Although El Niño is a naturally occurring phenomenon, rising global temperatures are increasing its economic impact by intensifying heat stress and rainfall variability. For central banks, higher food prices complicate efforts to bring inflation under control, while for governments they raise the risk of greater food insecurity and social instability. The episode demonstrates how climate-related disruptions are becoming an increasingly important driver of financial markets, commodity prices and global economic resilience.

- Muthu Ramanathan

Brussels has just published a paper on future banking laws that marks a genuine shift in EU financial policy. For the first time, competitiveness - not just safety and regulation- is being treated as a central goal, with EU banks explicitly being told they need to compete with dominant US players, especially in investment banking. The paper also expands on something everyone already knew: European banking is hopelessly fragmented. National champions exist, but none of them is big enough to matter globally, largely because domestic regulators and politicians prefer to keep autonomy over their national banks.

However, the real challenge is implementation. With 27 member states at the table, even the strongest proposals struggle to survive. This paper's central idea, a "country-blind" regulatory regime for cross-border banks overseen purely at EU level, is no exception. With the ECB's supervisory board as the overall decision-maker, where national representatives can form majority coalitions, the proposal risks undoing the very premise the reform was built on.

Ultimately, the success of the reforms will depend less on the ambition of the proposals than on the political willingness to surrender national control. A genuinely integrated banking market would allow institutions to achieve the scale needed to compete with US investment banks, improve capital allocation across the bloc, and strengthen the international role of European financial markets. However, if member states dilute the reforms to preserve domestic influence, the EU risks repeating a familiar pattern: recognising the structural problem without implementing the institutional changes needed to solve it.

- George Tyson

Despite persistent concerns over the competitiveness of London's capital markets, the UK's investment management industry continues to strengthen its position as one of the world's leading financial centres. Assets managed from the UK rose 11% to a record £11.1 trillion in 2025, with more than half now managed on behalf of overseas clients for the first time. The growth comes despite continued outflows from UK equity funds and a prolonged decline in domestic stock market activity, suggesting that while London's public markets have faced significant challenges, its investment management expertise remains highly sought after internationally.

The figures highlight an important distinction between a country's capital markets and its wider financial services industry. While London has lost some high-profile company listings to the United States and domestic investors have reduced their exposure to UK equities, international institutions continue to entrust British asset managers with increasing amounts of capital. Assets managed for European investors rose sharply, while those from North America and Asia-Pacific also reached record levels. Greater post-Brexit regulatory clarity, alongside reforms to UK capital markets, has helped reinforce confidence in London's established legal framework, investment expertise and deep financial ecosystem.

More broadly, the data demonstrates that financial centres derive their competitive advantage from far more than stock market performance alone. Asset management remains one of the UK's most internationally competitive industries, generating high-skilled employment and attracting capital from around the world. As global investors continue to prioritise expertise, governance and regulatory stability, London's ability to manage international assets suggests its role within global finance remains resilient. The challenge for policymakers is now to translate the strength of the wider financial services sector into a revival of the UK's domestic capital markets, ensuring both industries can reinforce one another over the long term.

- Shrish Yalamarti

Until next time,

The Long and Short

Markets, Made Sense