Please see below, an article from Tatton Investment Management, analysing the key factors currently affecting global investment markets. Received this morning – 18/08/2025
The slowdown never comes
Friday night’s meeting between Trump and Putin has produced some clarification from Russia of the current land-grab ambition. While Putin’s proposal is not acceptable (nor designed to be so), there are elements which may lead to more discussions in the Europe/Ukraine/US meetings scheduled for today. Markets retains some positivity about potential progress in the last fortnight, although some of it some of which drained away late on Friday.
Despite this slight pull-back, the good times keep coming – backed up by improved corporate earnings in most major markets. Previously, the rally seemed like a consequence of abundant liquidity; economic data were weak (particularly employment) and many thought incoming tariffs would keep it that way, leading to doubts over the equity rally’s sustainability. But rising corporate earnings expectations almost everywhere have changed the narrative. We know there was a rough patch after April, and that’s what the ‘lagged’ data (employment and GDP) show. But company surveys are more positive, and retail sales remain strong.
Markets also suggest a Federal Reserve rate cut is all but certain next month – helping smaller US companies in particular. So far, tariff pass-through into consumer price inflation has been relatively mild, and consumers and businesses are resilient.
But producer prices are rising faster and there is still a risk that prices spiral. July’s core finished producer goods prices spiked, undermining the case for a Fed cut. Bond markets lowered their bets on a September cut but still think it likely. That might be due to Trump’s pressure on the Fed: he’s openly mulling chairman Powell’s replacement and even Scott Bessent (usually the saner voice of MAGA-nomics) says rates should be 1.5 percentage points lower.
You’d expect this to mean higher long-term inflation, and hence higher long-term bond yields – but that hasn’t happened. The lack of market reaction to Trump’s policies (except perhaps in the dollar) means bonds might be overpriced. But that’s tomorrow’s problem – and won’t disturb market momentum today. Right now, markets are focussed on global growth which is better everywhere except China – and even China might be improving, judging by its recent rally and likely US trade deal.
This isn’t to say markets couldn’t wobble again, and US liquidity has started to drain a little. But right now, things are going fairly smoothly.
Japan: liquidity flowing from home and away
Japanese stocks have been strong in August. Part of this is the US trade deal (which sees ‘just’ a 15% tariff on Japanese exports) but another part is the longer-term improvement in corporate profitability. There’s also a new wave of Japanese investment capital: a generation of retail investors unencumbered by the painful memories of the 1990s asset bubble are swapping low-yielding bank deposits for risk assets. Government and central bank policy is encouraging this switch. Tax-free investment accounts have been introduced, while the Bank of Japan is keeping interest rates well below inflation – meaning people have to invest in higher yielding assets just to not lose money.
The stock market rally isn’t matched by a strong economy, though. Q1 saw zero growth, high inflation and pessimistic consumers. Much of this has to do with the weakness of global manufacturing, particularly the autos sector – which employs millions in Japan. Donald Trump’s 25% tariff threat made the situation worse. So, after a trade deal was agreed, company analysts steadily upgraded earnings forecasts. Profit margins had already improved from corporate reforms, so exporters can take advantage.
The retail investment boom is encouraging, but it has been difficult to direct that investment towards Japanese companies themselves. Japanese investors often buy US or global stock indices – so the domestic investment pool has a relatively low domestic allocation. But Japan’s recent equity rally suggests this might be changing. MUFG found last year that a significant chunk of capital in the government’s new tax free investment accounts is going towards Japanese stocks.
The momentum has dragged in international investors – aided by abundant global liquidity. Liquidity usually flows to undervalued pockets of the market, and Japan fits the bill. But the positivity is backed up by solid fundamentals. Investors are now taking notice of Japan’s improvements.
US debt falling?
We’ve written before about mounting US government debt and the threats that poses, but we should be clear that total US debt-to-GDP (public and private) has been falling since the pandemic. In the decade before it, private debt had been falling in exact proportion to the rise in government debt (unpayable debts were written off after the 2008 crash and the government picked up the slack) and we have since gone back to that trend. But the private sector’s post-pandemic deleveraging isn’t to do with write-offs; companies are just struggling to refinance at historically high interest rates.
One way to interpret the swap of private for public debt is as a ‘crowding out’ story. The government is demanding capital, pushing up ‘risk free’ yields and making private debt less attractive. The rise in our internal measure of government bond risk supports this idea. But as this stifles growth, a high government debt pile could well mean lower long-term yields, as in Japan. Growth isn’t strong enough to incentivise companies to borrow – at least while interest rates are higher than your expected profit growth. Outside of the tech giants (who have strong cashflows and little need to borrow) US corporate earnings are sluggish.
That’s why US companies are under pressure to deleverage, and that will continue as long as interest rates stay high. But rates are coming down – just not as fast as Donald Trump would like. It’s his policies which are stopping the Federal Reserve from cutting rates sooner but, judging from the Fed’s latest meeting, many committee members seem to feel the US economy needs a rate cut regardless of what happens on tariffs. If that happens, it won’t take much to make borrowing viable for US companies. That will benefit smaller US companies in particular.
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Marcus Blenkinsop
18th August 2025