Please see below, todays Daily Investment Bulletin from Brooks Macdonald covering their thoughts on markets and the ongoing Geopolitical Issues. Received today – 17/07/2025:
What has happened
For the most part, yesterday saw markets continue to digest the latest economic data, including inflation numbers and company calendar-quarter Q2 results that are landing this week. Then, if only for about an hour, investors got a glimpse of how markets might react to a big tail-risk event – namely the risk that the head of the world’s most important central bank, the US Federal Reserve (Fed), might be fired from post. While the rumours were quickly quashed, with conspiracy theories suggesting US President Trump might have been testing markets’ reaction by once-again floating the prospect, there are some important lessons for investors to take away.
A question of central bank independence
Markets reacted quickly yesterday after several news outlets reported Trump was about to fire Fed Chair Jerome Powell. Fears peaked when the New York Times reported that Trump had drafted a letter to fire Powell, with US equity markets and the US dollar down, while US government bonds saw the yield maturity curve steepen sharply. Those moves largely unwound when Trump subsequently said he wasn’t planning to fire Powell, although Trump did caveat saying, “I don’t rule out anything”.
Markets react
With the firing of Powell briefly a serious risk, the US government bond Treasury market saw a huge steepening in the yield curve – at the lows, the US 2-year government bond yield was down -8.2 basis points (bps) on the day at 3.86%, whilst the 30-year bond yield surged by over +10bps in under an hour to an intraday peak of 5.07%. In currency markets, the US dollar index (DXY – an index of the dollar versus a basket of major developed-market currencies globally) slumped down -0.91% at the lows. While the bulk of these moves subsequently unwound as Trump appeared to back-track, the US 30-year over 5-year yield differential was earlier this morning at around 103bps, its steepest level since October 2021.
What does Brooks Macdonald think
In the event of a more Trump-friendly Fed Chair taking charge (Powell’s term as Fed Chair ends anyway in May 2026, though technically he could stay on the Fed board until January 2028), while that could lead to lower policy rates, it isn’t necessarily good news for markets. Sure, lower rates might lower very short-term borrowing costs, but if the markets lost confidence in Fed policy setting, inflation control, and risk premiums more broadly, that could jack up longer-term borrowing costs which the Fed has much less control over. For one, that higher-cost of longer-term borrowing could impact long-term discounted cashflow valuations for megacap tech stocks in particular – and given market concentration risks of tech within US and global equity indices, it is a risk we are alive to.
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Andrew Lloyd
17th July 2025