Please see below, an article from Tatton Investment Management, analysing the key factors currently affecting global investment markets. Received this morning – 13/10/2025
Volatility on the horizon
Stocks were pushing all-time highs early last week, but sold off sharply after Trump’s tariff threats against China. At the open in Asian markets there was further selling but this lasted only minutes. From thereon there was healthy “dip buying”. Trump intimated that he saw the spat over wider rare earth product controls as temporary, having previously also said he would probably now meet Xi (a reversal of his previous threat).
Meanwhile, cryptocurrency markets were alive with a rumour that a Trump insider had placed shorts on Bitcoin ahead of the first TruthSocial post on Friday, potentially earning millions of dollars.
Our conversations with investors over the past week suggest they remain bullish for the medium-term. However, in general, short-term sentiment is waning. Risks are rising for the short-term and many expect a dip before the bullish trend reasserts itself.
Everyone expects tax rises in the UK’s autumn budget. The government is likely to raid banks or savings to maintain its electoral pledge, but an income tax rise would probably do the least economic harm. The UK has a debt problem – but it’s a problem of bond market structure, not overspending. There’s too many long-term bonds and not enough short-term bonds (a legacy of historic pension regulation) and the oversupply puts off foreign investors. This could be solved, if the government borrowed at the short end and bought back its long-term bonds cheaply. It would be criticised for ‘fiscal dominance’, but if the treasury can match bond supply and demand while lowering its own debt costs, what’s not to like?
There’s a cacophony of debate about an AI bubble (prompted by Nvidia’s ‘vendor financing’ with OpenAI) but even, in pure valuation terms, that’s exaggerated. We note, though, that rental prices for Nvidia’s H100 GPU (at the heart of the AI revolution) have declined more than expected – suggesting an oversupply. Nvidia and its peers – the world’s biggest stocks – could be vulnerable in the short-term, even if AI’s long-term growth is assured.
With the leading lights shining less brightly and liquidity tapering off, investors will struggle to get more optimistic. Volatility could increase – like on Friday. While index-level volatility has been low recently, volatility in underlying stocks (particularly the biggest names) has increased, making equities riskier.
The US government shutdown means that economic data isn’t being published either – starving markets of the information they feed off. Kept in the dark, markets fixate on the information they do have, like some poor credit and sentiment data. Investors aren’t worried about the data yet and the profit outlook remains solid, but a patch of volatility is becoming more likely.
How stable are stablecoins?
With the Bank of England relaxing its limits on stablecoin holdings and governor Bailey opining on their potential, the digital assets look set to play a big role in global finance.
Stablecoins are cryptocurrencies pegged to other assets, like fiat currencies or gold, where the peg is maintained by ‘safe’ assets like cash or short-term debt. They’re more like money market funds than traditional credit-backed bank deposits. The US government threw its weight behind stablecoins with the “GENIUS” act, and most existing stablecoins (like Tether’s USDT) are backed by short-term US treasury bonds. The benefit of using them is the underlying blockchain technology, which allows for instant, 24/7 transactions.
The ECB worries that stablecoins could undermine financial stability (by encouraging risk-taking on the asset-backed side) and its ability to control monetary policy. That’s why the ECB wants to pursue its Central Bank Digital Currency (CBDC) instead. But it’s no surprise why the US is in favour of stablecoins: in their current form, they reinforce the dollar’s global dominance and are likely to provide massive demand for US bonds.
The sector is set to expand, after getting official US backing. But as Citi researchers point out, other digital assets (like free-floating cryptos and CBDCs) can co-exist and flourish alongside stablecoins. European policymakers would do well to promote their own preferred medium rather than trying to put the stablecoin genie back in the bottle.
But the ECB isn’t wrong about the risks from stablecoin adoption. Much has been said about the potential for issuers to obfuscate risks in their collateral base, but less explored is how the increased demand for ‘risk free’ US bonds could distort the financial system. Their entire value is linked to debt provision for a highly leveraged institution with declining governance standards. That this institution is the US government makes it ‘risk free’ in name only.
Serial French government collapse isn’t a Euro crisis
The resignation and reappointment of French Prime Minister Lecornu is, at its heart, about the split parliamentary blocs’ inability to agree a budget. President Macron has reportedly offered to suspend his pension reform to salvage a workable government and avert an election. Lecornu has now built another cabinet. Today they must agree a new budget and then it will be taken immediately to parliament for a vote. It is likely that the net impact will be tempered from the previous proposal of -0.7% of GDP to -0.4%, leaving an ongoing 2026 deficit of 5% of GDP.
Budget deadlock has been constant since the 2024 election, but the inability to cut spending or raise taxes goes much further back. In the meantime, France’s debt and deficit are too high for bond markets’ comfort. Mohamed El-Erian warned the French bond and equity sell-off is a problem for the whole of Europe and the UK. Needless to say, a French debt crisis would be worse than previous episodes with Greece or Italy.
French markets didn’t have a good week, but in truth the reaction was mild. French government bond (OATs) yields increased their spread over Germany, but not dramatically – and French stocks recovered their losses midweek. There was little impact on broader European assets. This might just be because markets have started ignoring political noise – a lesson learnt from the US. But also, Europe’s fundamentals are decent. ‘Periphery’ growth is good, and Germany’s fiscal impulse has increased growth expectations and investment into Europe. Perhaps markets hope growth will ease France’s debt problems.
We agree that the governmental collapse is unlikely to create another euro crisis, but it’s still a problem. Our measure of government debt risk increased for OATs this week, suggesting markets see France as a less reliable move. The worrying part is that this isn’t a short-term panic; it’s the culmination of France’s inability to agree a sustainable tax and spend policy. If OATs spiral, the ECB has the firepower to intervene and stabilise European bonds. The risk isn’t that France collapses; it’s that the drift continues.
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Marcus Blenkinsop
13th October 2025