Please see below, an article from Tatton Investment Management analysing the key factors currently impacting global investment markets. Received this morning – 23/06/2025:
The risks are real – but priced in – up to this point of escalation
Last week’s Israel-Iran escalation ended with higher oil prices, a slight knock to equities and a slightly stronger dollar. Even if that seemed a relatively muted reaction to an historic event, it did nevertheless suggest that markets thought the US would join Israel’s attack. This explains why oil is up by only $1 following the US’ attack over the weekend and that should mean oil continues to stay within ‘normal’ ranges – but that depends on the nature of Iran’s reaction, namely whether it will indeed try to block the Strait of Hormuz as voted for by its parliament on Sunday.
Last week, potential US involvement created internal tensions between Trump’s MAGA isolationists and old-school Republican war hawks. But his move to action appeared to have rallied and consolidated the factions which could further embolden the president in his aggressive policies, which has the potential to cause market volatility to increase after all.
Trump also called Federal Reserve chair Powell “stupid” for not cutting interest rates. He’s right that the slowing US economic could do with lower rates, but it’s his tariffs, deportations and general chaos that’s preventing the Fed from doing so. The Fed recognises that the medium-term trend is towards lower rates, but Trump has them in purgatory. It’s heartening, at least, that Powell and co are staying level-headed.
The Bank of England also held steady but is in a different situation (with a stabler government). It signalled an August cut and will be helped by sterling’s strength.
Conversely, dollar weakness is a problem for the Fed. The dollar has stayed low despite the US stock market recovery, and the currency effects make middling US company earnings look worse for international investors. This is especially when considering that virtually all the earnings positivity comes from the globally focussed Magnificent Seven.
Dollar weakness this year reflects stronger growth elsewhere (the FTSE 100 hit a new all-time high) so it’s fitting that ECB president Christine Lagarde wrote about the need for a “global euro”. Currently, US capital markets are joining the Fed in purgatory. Investors now await not just the Israel/US-Iran war but the 9 July tariff deadline.
The UK equity liquidity problem
The FCA has just launched its Private Intermittent Securities and Capital Exchange System (PISCES) to boost investment in UK companies. It opens up more companies to private investment, but we think the main problem with UK capital markets is the lack of trading liquidity. This illiquidity comes from high transaction costs and a post-Brexit exodus of market makers, and it has resulted in Britain having one of the lowest domestic ownership rates of its stock market (just 31%). Illiquid markets are more prone to sudden price drops – increasing risks for investors and hence decreasing equity valuations. PISCES opens up more saleable assets, but doesn’t encourage more buyers and market makers.
The EU has similar liquidity problems – owing largely to the lack of retail investors (relative to the US boom in retail investing). European markets are dominated by large institutional investors, whereas from a ‘gap risk’ perspective you would rather have many small buyers and sellers. Big institutions also prefer to keep their trades away from public order books, so that others can’t copy their trades and move the price before the large orders are fulfilled. That lack of transparency decreases the perception of liquidity.
Europe’s problems are compounded by a lack of common regulation (as ECB president Lagarde argued in a Financial Times op-ed), which discourages investment banks from acting as market makers. But the bigger problem – as in the UK – is high transaction costs. The US has much lower transaction costs and an integrated market, increasing liquidity and benefitting American companies.
Reducing UK stamp duty on share trading would therefore help bring back liquidity, but so would greater regulatory alignment with Europe. With London’s financial expertise, Britain has a real opportunity to capitalise on Europe’s investment drive. But reforms need to make it easier for buyers too – not just open more assets for sale.
Yield breakup?
UK and US government bond yields are tightly correlated. To understand why, it helps to look at historical bond trends: global yields used to be high and fairly independent, but came down together after 1997, thanks to the freer movement of global capital and the advent of independent but often coordinated central banks. Yields dispersed somewhat after the 2008 financial crisis – and again post-pandemic – partly due to regional factors (e.g. the euro crisis) but largely due to slower economic growth in Europe and the UK, compared to the US.
There are a couple interesting trends to note here. First, Japan and China don’t follow the same pattern as the rest of the world, due to their different growth profiles. Second, UK yields used to be more tightly linked to Europe than the US – but this changed after the Liz Truss bond market crash.
Does the current UK-US correlation mean UK growth and inflation is more similar to the US than Europe? Perhaps on the inflation front, as we do have a tighter labour market than the EU, post-Brexit. But the growth comparison makes less sense: the US economy has raced ahead, but Britain has been sluggish. The relationship makes even less sense when you consider that Trump’s current fiscal expansion (from tax cuts) is starkly different from Downing Street’s fairly stringent fiscal rules.
It’s possible that US and UK yields are connected because the traders of those bonds are themselves linked. If so, the relationship seems fragile, especially if Trump keeps breaking trade links. Currency movements – like sterling’s gains against the dollar this year – could be the thing to break it, as that would mean capital flows into UK bonds and out of US bonds. Indeed, further declines in the world’s reserve currency – coupled with growing government debts – could see yields break apart globally. It will pay for investors to stay alert to the risks and opportunities this changing landscape presents of the coming months.
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Marcus Blenkinsop
23rd June 2025