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Please see below, the Daily Investment Bulletin from Brooks Macdonald which covers the latest news affecting global markets. Received this morning – 02/07/2024

What has happened?

Yesterday has seen some interesting moves in the US government bond market. Despite an in-line US inflation print last Friday, US 10-year bond yields still moved higher yesterday, up +6.5 basis points (bps) on Monday to 4.461% and building on its +11.0bps move up on Friday. A narrative has built up that in the aftermath of the Trump-Biden US presidential TV debate last Thursday which Trump was widely considered to have won, markets appear to be pricing in a higher probability of a Trump victory in November and with it an expectation of larger US fiscal deficits. That has also reverberated over in Europe, with government 10-year bond yields yesterday higher across the region, including UK, France, and Germany. The higher US bond yields are also rippling across FX markets, leading to a higher US dollar, which in turn is pushing the Japanese Yen to a fresh 38-year low this morning.

An early start to the Atlantic hurricane season

In the last 24 hours, currently in the Caribbean Sea, hurricane Beryl has strengthened to a Category 5 hurricane (the highest category). It is the strongest storm to ever form in the Atlantic at this time of the year. The hurricane has made landfall in several countries in the Caribbean and is moving West-Northwest. It is expected to hit south-east Mexico by the end of the week and potentially onwards into the Gulf of Mexico, home to a number of US offshore oil field operations. The US National Oceanic and Atmospheric Administration (NOAA) has so far recorded maximum sustained wind speeds of 165mph, and the storm is thought to be getting stronger. Separately the NOAA has warned that the North Atlantic could get as many as seven major hurricanes this year, up from an average of three in a season. The NOAA said that record high sea surface temperatures are partly to blame, and meteorologists have this week expressed surprise as to how quickly hurricane Beryl has developed. Brent Crude oil futures are currently trading up at US$86.85 per barrel, close to 2-month highs.

 A Trump presidency looks a little more likely

On top of US President Biden’s weak showing at last week’s TV presidential debate, a Trump victory in November has been further buoyed by a decision in Trump’s favour yesterday from the US Supreme Court. The court has ruled that presidents have some immunity for their “official” acts whilst in office. With likely much legal to-and-fro now expected over what are deemed “official” acts, expectations are that the criminal trial over Trump’s attempt to overturn the 2020 election could well be delayed for a year or more, and very likely till after the US election in November.

What does Brooks Macdonald think?

The current political temperature in the US matters for markets. Should Trump win in November, he is expected to impose more tariffs on Chinese exports, an emphasis on more tax cuts, as well as pursue a US-first, likely more isolationist policies more broadly. As such, whilst current Biden has presided over a sizeable budget deficit in office already, a Trump presidency is expected by some to put incremental upward pressure on inflation expectations, and coming at a time when the US Federal Reserve is likely to be hoping to be underway in its interest rate cutting glide path.

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Alex Kitteringham

2nd July 2024