News

Please see below today’s Daily Investment Bulletin from Brooks Macdonald, which was received this morning, 16/07/2024:

What has happened

Politics dominated most of the session yesterday with markets trying to price potential Trump presidential trades. The focus in the bond market was on the changing Treasury yield curve, which saw the gap between the 2-year and 10-year Treasury yields compress to approximately 22 basis points, the smallest inversion since January. This movement was attributed to the anticipation that Trump’s proposed policies on taxes, trade tariffs, and immigration could lead to inflationary pressures and a bearish steepening trend. In the stock market, there was a noticeable shift towards companies likely to gain from Trump’s policy agenda, with the broader market finishing just shy of the previous week’s peak by less than 0.1%. Meanwhile, the Russell 2000 index, which tracks small-cap stocks, climbed 1.8%, reaching its highest point in over two and a half years.

Pricing in a Trump win?

Sectors such as banking and the oil and gas industry are perceived as likely beneficiaries in the event of a Trump victory, owing to his inclination towards deregulation and their limited vulnerability to potential tariffs. While the anticipation of Trump’s presidency buoyed many assets, it also highlighted vulnerabilities in certain areas. Notably, solar energy companies experienced declines, as the sentiment suggested they would have been more advantaged under a Democratic leadership. This was reflected in significant drops for companies like Sunrun, which fell by 8.95%, and SolarEdge Technologies, which saw a 15.36% decrease.

Powell confirms a more dovish stance

Speaking at the Economic Club of Washington, Federal Reserve Chairman Powell expressed increased confidence that inflation is on track to meet the target, based on Q2 data. However, Powell refrained from hinting at any upcoming policy decisions. He also noted a slowdown in the labour market. With the latest Fedspeak mostly in line with other recent commentary, market pricing for a July cut remains below 10%, though the odds of a September cut close to 100% and the year-end median fed funds rate of 4.80% represents 57 bp of cuts from the current midpoint.

What does Brooks Macdonald think

Yesterday also marked President Trump’s announcement of J.D. Vance, the Ohio Senator, as his vice-presidential candidate. At the age of 39, Vance stands as one of the youngest senators in the current assembly. Typically, a presidential hopeful selects a vice-presidential partner to attract a broader voter base or to balance out perceived shortcomings in image or policy areas. However, Trump has chosen a young loyal Make America Great Again (MAGA) supporter. Equity markets will try to price in the impact of a Trump victory and a potential return of extreme MAGA agenda. Investor could see rising volatility in specific sectors in coming months, though disinflation momentum and Fed pivot could somewhat mute the impact.

Bloomberg as at 16/07/2024. TR denotes Net Total Return.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Charlotte Clarke

16/07/2024

Please see this week’s Monday Digest from Tatton Investment Management detailing their thoughts on global markets over the last week:

Lower inflation, less profits?

Global stocks fell into the latter part of the week – thanks to a sell-off for US mega-caps. Smaller caps and other regions outperformed, in a reversal of the year’s trend so far. UK stocks did well, with markets seemingly believing Kier Starmer’s promise of quietly competent government. The clearest signs of markets’ endorsement (or at the very least its lack of opposition) of the Labour government’s plans are sterling’s appreciation versus the euro and gains for the FTSE 250. It seems that, after upheaval in Europe, investors now see the UK as relatively stable – a far cry from the ’Liz Truss moment’ less than two years ago.

US events were more impactful for global stocks. Remarkably, a surprisingly low US inflation print led to a sell-off for the ‘Magnificent Seven’ stocks on Thursday, dragging down national and world indices. This makes a Federal Reserve rate cut much more likely, which was previously considered only good news. Instead, the reaction suggests disinflation will mean lower medium-term profits.

Aggregate figures hide so much dispersion, though. US small cap stocks rallied hard, which is a little counterintuitive. Small-caps are generally seen as more sensitive to growth, while long-duration assets (like tech stocks) are supposed to benefit more from low rates.

Instead, investors clearly think an easing of the rate burden for small-caps is more important than immediate growth. Tech giants might have been punished because investors doubt how cycle-proof their earnings really are (Nvidia has to have companies to sell to, of course) or just simply diversified some of their allocations towards small and midcap.

In any case, the rebalance could be positive. It dissipates the market concentration we were worried about, and the dollar has weakened, which should benefit global growth. US specific growth implications depend on whether you think lower borrowing costs for most – or the investment spending of the mighty few – are more impactful.

Inflation targets: can central banks adjust?

The idea of central banks changing their 2% inflation targets is a hot topic this year. The question they face is: what long-term target is the optimal balance between growth and stability? 2% is orthodox but ultimately arbitrary, and there have been suggestions that the Federal Reserve or ECB have implicitly moved to a 3% target, to accommodate structural changes in the post-pandemic world economy. Resilient US growth with inflation persistently around 3% (as measured by CPI) shows that this is not necessarily a threat to price stability.

To clarify, higher background inflation doesn’t necessarily mean lower real growth or profits – as some have worried. Higher prices mean higher revenues for someone, which is why equity earnings are considered a natural inflation hedge. In the US case, 3% long-term inflation might actually mean higher real growth, as consumers have kept spending (until very recently) and corporate profits are keeping up with higher inflation. We might think this applies less to the weaker economies of Europe and the UK, but on the other hand, you could argue that less dynamic economies need higher targets to avoid stagnation (Japan maintained a 2% target despite no realistic chance of hitting it for well over a decade).

It might surprise to learn that most central banks have discretion over their inflation targets. Indeed, the Fed and ECB already showed a willingness to reinterpret their “price stability” mandate by changing to “symmetric” targets in 2020 and 2021 respectively. The Bank of England is different; its 2% target is set by law and it has to report to the treasury when it is not met. This might be why the BoE has looked more hawkish than peers in recent years. Unless the treasury tells it to change, we should expect UK policy to be more restrictive than elsewhere.

Trump trumps Truss?

Opinion polls and betting markets suggest a second Donald Trump presidency is now likely. How that will affect markets depends on whether the Republicans can also win a ‘clean sweep’ – the White House and both houses of congress. Current odds suggest the party will win control of the Senate, but lose their majority in the House of Representatives. That would limit what Trump can do, but the House race is very tight.

If Republicans did get a clean sweep, Trump’s agenda of tax cuts and tariffs will become reality once more. Markets reacted very well to his 2017 tax cuts, but they may not be so happy about an expansion of the fiscal deficit this time around. Trump has no qualms borrowing to fund tax cuts, but current debt metrics are worse than in 2017 (debt-to-GDP at 122% and a 6.3% deficit last year), in part because of his policies.

Potential trade wars – particularly with the EU – will make any debt problems worse. The US historically has escaped bond market punishment due to its status as world’s largest economy and owner of the global reserve currency. But fragmented global trade and deteriorating fiscal policy make it less likely capital will flow to the US. The dollar is already expensive on historical and purchasing power parity bases.

Without international flows, the treasury will need to borrow from domestic investors – which takes capital out of the stock market. If yields (particularly longer-term) go up, the extreme result would be a ‘Liz Truss moment’ and a reckoning for US policymakers that thought their bonds immune to global pressures. That isn’t our base case, but the risk is growing. That growing risk itself might lead to short-term sell-offs, but the bigger problem for the US is a long-term deterioration of its global market status.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Andrew Lloyd DipPFS

15/07/2024

Please see below, The Daily Update from EPIC Investment Partners. Received late this morning – 12/07/2024

Over the last few weeks, we’ve been having a bit of fun applying our NFA model (which measures a country’s net assets held abroad less liabilities owed to foreigners) to predict the EURO 2024 matches. With England facing Spain in the final on Sunday, it’s time for a look back at our model’s performance – and our prediction for the winner. 

Early results were promising, with 10 out of 12 countries automatically qualifying for the round of 16 boasting NFA scores of 3 stars or better. Only Portugal and Spain seemed to defy the odds. We even managed a 63% success rate in the round of 16! But alas, the semi-finals proved our undoing, with a 100% failure rate. 

You might think we are disappointed, but we’re actually thrilled. Why? Because 4-star England defied our model’s prediction and triumphed over 6-star Netherlands!  

Although predicting the EUROs is just a light-hearted distraction, there is a serious side to NFA analysis. Last week we highlighted the similar debt levels of the UK and France (with debt-to-GDP ratios of 104% and 111% respectively) but noted that France’s NFA position has markedly deteriorated in recent years. France only just scrapes in as a 3-star rated country, with net foreign liabilities of 48.8% of GDP. Deteriorating NFA positions are often associated with credit downgrades (and vice versa), so it is worth noting that both Moody’s and S&P have flagged that France could be downgraded following the recent elections. S&P already downgraded France’s rating at the end of May due to the country’s deficit figures, and further downgrades may occur if growth is slower than previously predicted.  

Back to the Football. Regardless of Sunday’s outcome, we cannot quite compete with the legendary Paul the Octopus. His keepers at Germany’s Sea Life Centre presented him with two boxes representing each team, and his food choice determined his prediction. With an astonishing 85.7% accuracy, Paul’s legacy is unmatched. Sadly, Paul passed away at the tender age of two, so we can’t ask for his expert opinion for the final. 

We will have to rely on our NFA model instead. Now, here’s the worry: our model predicts an England victory in the final against Spain. So, fingers crossed our NFA gets it right this time!

Please continue to check our blog content for the latest advice and planning issues from leading investment firms.

Alex Kitteringham

12^th July 2024

Please see today’s daily update from EPIC Investment Partners received this morning:

The Middle East is experiencing a remarkable transformation in sustainability, with 2024 marking a watershed year for ESG across the region. Businesses are spearheading this change, rapidly transitioning from ambitious goals to tangible actions and reshaping industries and economies. 

A recent survey by PWC reveals impressive progress: 80% of companies now have formal sustainability strategies, up from 64% in 2023. Over half have fully integrated these strategies into their core operations. Leadership is driving this change, with 50% of companies either having appointed a Chief Sustainability Officer or planning to do so within a year. 

Climate action is at the forefront, with half of all surveyed companies pledging to achieve carbon neutrality within realistic timeframes. This significant increase in net-zero commitments showcases the region’s determination to address climate change. Transparency is also improving, with over 40% of companies producing comprehensive sustainability reports and an additional 24% disclosing selected ESG metrics. 

Innovation plays a crucial role, as companies explore cutting-edge technologies like GenerativeAI to enhance their sustainability efforts. The financial sector is supporting this green transition, with a growing number of companies accessing green loans and bonds. This trend is bolstered by significant initiatives like the UAE’s USD 30bn ALTÉRRA climate investment fund. 

Collaboration is key, with the private sector actively seeking partnerships to drive the sustainability agenda forward. Consumers are aligning with this shift, showing willingness to pay premiums for sustainably produced goods. Companies are recognising the economic benefits of sustainable practices, with some state-owned organisations demonstrating significant cost savings and competitive advantages. 

Looking ahead, there’s a growing focus on sustainability education and upskilling to ensure the region has the expertise needed to maintain momentum. While challenges remain, the Middle East is positioning itself as a leader in sustainable development. 

With many of the countries in the region, e.g. Abu Dhabi and Qatar, ranking amongst the wealthiest in the world, and with the growing focus on sustainability, the Middle East is an attractive hot spot for fixed income investment. Discerning investors seeking both returns and alignment with sustainable practices are finding the region increasingly attractive.  

Please continue to check our blog content for the latest advice and planning issues from leading investment firms.

Charlotte Clarke

09/07/2024

Please see the below article from Tatton Investment Management detailing their thoughts on global markets over the last week. Received this morning 08/07/2024.

New government, same economy

The election results were emphatic but full of contradictions. Labour achieved one of the largest majorities ever with the lowest winning vote share, and it did so by promising change while emphasising continuity. The contradiction most relevant to investors is that capital markets were unmoved by this political earthquake.

Even though UK stocks rallied on Friday morning, this probably had more to do with global factors than domestic politics – just like last month’s sell-off. Markets are nonchalant because Kier Starmer continues to emphasise fiscal discipline. This is more about Liz Truss’ legacy than his own preferences: the former prime minister’s disastrous ‘mini budget’ reaffirmed the position of capital markets as the most unforgiving opposition of all. That means fiscal growth upside from the new government is limited, but growth indicators are already trending up and could well benefit from Labour’s stability.

That is a far cry from the US. Debt-to-GDP has risen dramatically in the last decade under successive administrations, and this is likely to continue regardless of who wins the November election. But Morgan Stanley research suggests that fiscal policy will be looser under Trump – so Biden’s recent debate failure has increased fears about debt instability. The US usually avoids bond market punishment thanks to its global economic dominance, but that could be tested if its fiscal stance worsens further. Even Jay Powell seems to be worried about the US eventually at risk of facing a ‘Liz Truss moment’.

US stocks continue to outperform all the same. Lately this has been a ‘bad news is good news’ story, with weaker economic data firming up expectations of a Federal Reserve rate cut. There are problems with this mindset. Stock market returns are so concentrated on a handful of mega-tech companies, but background macro conditions seem to have worsened for the group. And while slower growth might mean quicker rate cuts, it could also mean weaker profits. Markets seem to expect a ‘goldilocks environment’, but that could just be hubris. We will have to watch valuations, relative to the unfolding economic progress, closely.

June 2024 asset returns review

Global stocks returned a healthy 3% in sterling terms through June, but returns were highly concentrated on the dominant US mega-tech sector. Interestingly, emerging markets (EMs) also outperformed, jumping 4.7%, despite a 1.6% fall in Chinese stocks – the biggest component of EM indices. This continues the theme of dispersion between China and wider EMs. The latter rallied 6.8% because of rebounds in India and South Africa. Both had previously slumped due to surprising election results, but we said at the time that such political upsets are often overdone and can be good buying opportunities. So it proved.

European stocks saw a political sell-off too, dropping 1.7%, after President Macron’s surprise election call. We wait to see if the French far-right can win an outright majority in second-round voting. The 1.1% drop in UK stocks, on the other hand, isn’t political. The large multinationals that dominate the FTSE 100 are just particularly sensitive to global commodity demand – which has been weak for commodities other than oil. Markets were neither surprised by Labour’s landslide nor fearful of its moderate policies.

The US outperformed again, gaining a further 4.3%. This came despite weakening economic data through June. Investors clearly see slowing growth merely as proof that the Federal Reserve will cut interest rates in September. Bond yields moved gradually lower, but spiked into the end of the month. Reasons for the spike aren’t certain – but we suspect it could be down to struggling Japanese banks offloading their foreign bond holdings.

US strength was yet again really strength of a handful of mega-tech stocks. It shows how skewed returns are that Nvidia alone accounts for 35% of the S&P 500’s year-to-date returns. Monitoring this concentration and the risks it brings is the key challenge for investors in the second half of 2024.

Are Americans wrong about their economy?

US consumers are much less confident about the economy than aggregate economic data should suggest. The US continues to outperform in growth and capital market terms, but 55% of Americans think their economy is in recession, and 49% think the S&P 500 is down year-to-date, according to a Harris poll for the Guardian.

Consumer confidence has never recovered to pre-pandemic levels, despite strong growth and low unemployment during that time. This is a big problem for Joe Biden, and it has been suggested that highly partisan US news sources could be to blame. Backing this up is the fact that economic confidence differs dramatically by party affiliation – but political bias isn’t the whole story.

Some economists have suggested that traditional economic measures miss key factors, like the psychological impact of inflation and high interest rates. The clearest example is that average real (inflation-adjusted) hourly earnings are still below where they were in mid-2020. These were boosted during the pandemic thanks to emergency stimulus, but that did little for confidence because consumers couldn’t spend it on what they wanted at the time.

Wealth inequality, which grew during the post-pandemic recovery, is a crucial component too. Low aggregate unemployment hides the fact that the worst off are struggling much harder. Booming stock market returns are concentrated on just a handful of mega-tech companies, an uncanny reflection of America’s unevenly spread opportunities.

The US economy is set to gradually slow and restart at the aggregate level, but aggregate figures hide so much of what makes the economy important to people. The sentiment gap might have more of a concrete impact – both economically and politically – as growth comes down.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Clare

08/07/2024

Please see the below article from EPIC Investment Partners detailing their discussions on water companies amidst growing environmental concerns. Received this afternoon 04/07/2024.

A judicial decision over 14 years in the making ended on the 2nd of July, with the Supreme Court ruling in favour of private businesses and people over United Utilities, the water company responsible for Northwest England and some six million people. This landmark ruling, with its significant implications, has opened the door for private legal actions in nuisance and trespass against water companies due to unauthorised sewage discharges and the related effects of pollution.

As early as 2010, the Manchester Ship Canal Company, owners of the 129-year-old Manchester Ship Canal, tried to bring a claim that the discharges from United Utilities 121 sewage outfalls within the canal constituted a trespass. However, United Utilities argued that the 1991 Water Industry Act, which privatised the sector, meant only regulators could act. In 2012, the high court sided with United Utilities and dismissed the claim. Despite an appeal process, the Supreme Court upheld this ruling in 2014. 

In March 2021, the High Court confirmed this, stating it was the role of regulators, not the courts, to address problems caused by sewage dumping. However, The Environmental Law Foundation, supported by the Good Law Project, challenged this decision, arguing that there should be legal options for people directly affected by sewage pollution. The case went up to the Supreme Court, which overturned previous rulings and found that United Utilities can be held accountable for damage caused by discharges. Lord Reed and Lord Hodge said: “The supreme court unanimously allows the canal company’s appeal. It holds that the 1991 act does not prevent the canal company from bringing a claim in nuisance or trespass when the canal is polluted by discharges of foul water from United Utilities’ outfalls, even if there has been no negligence or deliberate misconduct.”

In a related development, United Utilities and five other water firms have been mandated to publish live sewage discharge maps. These maps, released before a 2025 government deadline, provide real-time updates on sewage overflows, helping the public know the safety of local waters. This initiative came after significant public pressure and environmental campaigns, particularly focusing on areas like Lake Windermere, where United Utilities had a major incident of raw sewage discharge.

Following this ruling, water companies in the UK, more broadly, could face a spate of legal challenges by people and businesses affected by sewage pollution, where fines and regulatory action have previously not been enough to curtail pollution. The Good Law Project’s interim head of legal, Jennine Walker, said: “This is a sensational victory. It gives us stronger legal tools… to hold water companies to account after repeated failures from our toothless and underfunded regulators… and empowers people and businesses to use the courts to challenge industrial-scale polluters like United Utilities, who have put profits and the shareholder interest over protecting our environment.”

These events underscore the increasing regulatory and legal challenges water companies face in the UK, particularly concerning environmental protection and public transparency. United Utilities Group shares fell -2.5% yesterday, however, the wider utility complex remained broadly flat.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Clare

04/07/2024

Please see this week’s Markets in a Minute update below from Brewin Dolphin, received yesterday afternoon – 02/07/2024.

Guy Foster, Chief Strategist, discusses the result of the first round of the French election and the impact it’s had on equity and bond markets. Plus, Janet Mui, Head of Market Analysis, examines fresh U.S. inflation data.

Markets traded broadly sideways last week, with relatively little economic news or corporate earnings results. While markets may have been quiet, there was plenty of politics for investors to ponder.

The election-heavy year continued with France hitting the polls on Sunday for the first round of legislative elections. Candidates are competing for one of 577 National Assembly deputy positions, which they’ll win if they receive 50% of votes in their constituency, representing at least 25% of registered voters.

However, if they don’t win a position, a second round will take place where voters will select one of the top three candidates who have achieved 12.5% or more of the votes. In this round, the candidate who receives the most votes is elected.

Marie Le Pen’s far-right National Rally party won 33% of the popular vote, while President Emmanuel Macron’s centrist Together coalition (which includes his Renaissance party) achieved 21%. The second round of voting takes place on Sunday.

The UK election looms…

Taking place between the two French rounds of voting is the UK general election.

The two leaders, Labour’s Sir Keir Starmer and the Conservative Party’s Prime Minister Rishi Sunak, debated last week and the consensus seems to be that the prime minister won the argument but still won’t prevail in the election.

When the election comes, the market’s reaction is likely to be muted, as a Labour victory has seemed so likely for a long time – but the margin of victory could be important.

UK elections are notoriously difficult to poll, and prediction models are producing some wildly different forecasts of the possible Labour margin of victory (from 50-150 seats). This could be due to a lack of enthusiasm for the opposition or the performance of other parties, such as Reform or the Scottish National Party.

The size of the margin gives a new prime minister a mandate and equates to their right to make decisions. If this was accompanied by a bold policy agenda, investors would react to those policies being implemented. However, as Labour’s offering has been relatively vanilla, the mandate should therefore protect the leadership from rebellions and contribute to a feeling of general political stability.

Belief in the U.S. president weakens…

More newsworthy was the first U.S. election debate on Thursday.

President Joe Biden, who has been lagging former President Donald Trump in the polls, pushed for this debate because it was seen as an opportunity to expose Trump’s weaknesses.

However, it was also recognised as a risk if Biden was to appear frail, which is exactly what happened. His voice and the dithering nature of his answers will have reinforced the suggestion he’s too old to serve another four-year term. Prediction markets immediately marked his potential chances lower, but Biden’s losses were bigger than Trump’s gains (and the gains of potential candidates Gavin Newsom and Kamala 2 July 2024 Harris). Speculation’s now mounting that Trump might end up facing a different candidate in November.

The obvious candidate would be current Vice President Kamala Harris, but there is little evidence that she would perform well against Trump. For that reason, Governor of California Gavin Newsom is the most likely pick, with a handful of other state governors also amongst the speculation. So far, they have all been firm in their commitment to Biden’s cause, so any change of candidate would need to be initiated by him deciding not to stand. The candidacy will be confirmed at the Democratic National Congress in late August.

The third-party candidates line up…

This year’s election will also feature some third-party candidates. That’s not unusual, however, their influence tends to be limited. In fact, no third-party candidate has won any Electoral College votes (effectively winning a single state) since 1968.

However, it is possible for third-party candidates to influence the election. In 1992, Ross Perot is credited with taking votes from George H. W. Bush, which ultimately helped Bill Clinton. The highest polling third-party candidate in this election, Robert F Kennedy Jr., has appeal across both voter bases, but is especially popular with the young.

Third-party candidates usually underperform on election day, although the low level of satisfaction with the big party candidates could change that.

The Green Party’s Jill Stein is also expected to run. It’s sometimes observed that her vote share in Michigan, Wisconsin and Pennsylvania in the 2016 U.S. presidential election was greater than Trump’s margin of victory over Hillary Clinton in each of those states. Therefore, Clinton might have won that election had Stein not run and her supporters had instead supported Clinton (which they might not have).

Although unlikely, it’s possible that a third-party candidate wins enough Electoral College votes to prevent either Trump or Biden (or his replacement) from winning the 270 votes required to become president. Under those circumstances, the newly elected House of Representatives would select the new president on the basis that each state has a single vote (despite a state like California having 60 times the population of Wyoming).

Therefore, regardless of which party controlled the largest number of seats in Congress, the fact that there are more Republican states than Democrat states means this approach would likely favour Trump.

The debate seeming to improve Trump’s chances led to a rise in the dollar. Traders may have perceived that Trump will cause growth, inflation, or both by virtue of promised tax cuts and threatened import tariffs. However, the gains didn’t last and historically, markets have seemed to find it hard to really think through the implications of different presidents. Hardly surprising given there are so many different potential combinations of presidential and Congress control.

The Falcon Heavy lands…

The threat of higher inflation is one scenario but continued progress in the contemporary space race offers some hope for deflationists.

Elon Musk’s Falcon Heavy rocket successfully deployed the final satellite in the geostationary operational environmental satellite series (GOES-R), with the now familiar sight of its boosters landing in an upright position.

The conquest of space seems like science fiction but is believed to carry tangible economic benefits. One of these is the implementation of space-based solar power, in which energy is captured by space-based solar panels and beamed to earth in the form of microwaves for conversion to electricity. It’s also anticipated that an unmanned nuclear power plant could be built on the moon, allowing for further expansion of human influence in space, including asteroid mining.

Realistic returns from space are years away but could see enormous changes in availability of some natural resources, with knock-on effects for the countries that might currently supply them on earth.

Please continue to check our blog content for advice, planning issues and the latest investment market and economic updates from leading investment houses.

Charlotte Clarke

03/07/2024

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.

Please continue to check our blog content for the latest advice and planning issues from leading investment firms.

Alex Kitteringham

2^nd July 2024