Please see below, an article from Tatton Investment Management, analysing the key factors currently affecting global investment markets. Received this morning – 26/08/2025
Market leaders taking late summer break
Last week, the Bloomberg World stock market index gained 0.5%, with mixed bond prices and UK yields rising. US large-cap stocks underperformed, while China and the UK saw gains, with the FTSE 100 reaching new all-time highs. The market’s tepid action was attributed to a typical summer lull following an unusual market rally, prompting some investors to take profits.
Fed Chairman Jerome Powell’s speech at the Jackson Hole Central Bank symposium raised hopes for a rate cut on September 17th, though he was cautious about further cuts. US 10-year bond yields reacted with a 0.05% decline, while broad stocks gained 1%. Overall though, despite additional significant political events like the Trump-Putin summit and European leaders’ visit to Washington, there was remarkably little market reaction.
The FTSE 100 nevertheless had a strong week, with gains in nine out of eleven GICS sectors. The hot UK inflation report caused another rise in bond yields, but overall rate expectations remain for two more cuts to 3.5% by next summer. It needs to be remembered that Inflation is not generally bad news for stocks, with Unilever being a top contributor to market gains as they raised prices.
China continued to perform well despite ongoing tariffs and no trade deal with the US. Chinese investors, driven by high cash balances and growing confidence in economic stability, were the main drivers. Meanwhile, Kenya’s decision to swap Dollar-denominated borrowing from China into Renminbi loans highlights China’s growing global influence.
In the US, the Magnificent 7 tech giants had a poor week, pausing their market-leading rally. Nvidia’s upcoming earnings report is highly anticipated, with past trends showing share price drops before the report, followed by gains. However, we note that US investors may have finally exhausted their excess cash balances from the pandemic largess, which probably have been a factor in supporting extended valuations and speculative meme stocks and crypto investments.
Political and geopolitical news often has little direct market impact unless it significantly changes companies’ business operations. Over the past week, the broader financial media came up with a number of explanations for the different market moves, but from our vantage point of view we are not convinced that it was much more than a typical summer lull. The exception from the norm is that this one comes after a long and seasonally unusual market rally, that may have some investors more itchy to take some profits.
UK Inflation
The July price data disappointed those hoping for lower UK interest rates. Headline CPI inflation rose to 3.8% year-on-year, higher than economist projections and up from 3.6% in June. Core CPI inflation also accelerated to 3.8%, with services CPI inflation rising to 5.0%, surpassing most forecasts.
The Bank of England’s Monetary Policy Committee narrowly voted to cut the base rate to 4% from 4.25% on August 7th. Economists now believe further rate cuts are unlikely this year. Money markets have slightly adjusted the probability of future rate cuts, with a 66% chance of a 0.25% cut in December 13.
Two items significantly contributed to the rise in services inflation: a large spike in airfares and an increase in catering services. Airfares added 0.3% to services inflation, while catering services, a key component of the BoE’s supercore measure, rose 0.7% 14 15. The pass-through of rising non-core food prices into core services is contributing to the recent path of inflation and regulated prices such as rail tickets will continue to do so for the medium-term.
But there are some signs that labour costs are leveling off after a surge. Median pay settlements by private-sector employers held at 3% in the three months to July according to Brightmine. Economists broadly agree that consumer price inflation will remain above 3% year-on-year until well into next year. However, from October onwards, the monthly annualized pace should drop below 3%, bringing the CPI rate towards 2.7% by mid-next year. Investors and traders continue to expect a rate cut in December or January, with a final one in late spring.
Insight Article – Does the US Have Enough Money?
The pandemic’s impact on financial markets is dwindling, and one of the most important may be about to disappear; cash created by the Fed may now no longer be in excess.
In a well-functioning economy, most money is created by private sector banks through loans. However, during financial crises like 2008-2009 and the pandemic, central banks created money to ensure interest payments could be met and prevent the system’s money from disappearing.
The Federal Reserve created huge liquidity, and the federal government was dramatically effective in pushing it into the economy. This led to ballooning public balance sheets and increased private (business and household) cash balances. Some of the cash was quickly spent (creating inflation) but much was saved, slowly moving pushing into higher-risk equities and corporate bonds, leading to higher asset valuations.
The Federal Reserve used reverse repos to soak up excess cash in the system. Now, the level of reverse repos has fallen to pre-pandemic normality. With little or no excess cash in the system, asset valuations may stabilize. There will be fewer carry-seekers and lower expectations of capital gains.
The dwindling of reverse repos is likely to raise asset risk perceptions, leading to market volatility in the coming weeks. The Fed has slowed quantitative tightening and, although the Fed balance sheet remains extended they could feasibly return to quantitative easing if there was a damaging fall in bond and risk asset prices.
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Marcus Blenkinsop
26th August 2025