23 Jul 2024
Jonathan Platt, Head of Fixed Income
Spain has come a long way in 50 years – from authoritarian rule under General Franco to a forward looking and prosperous democracy.
On the sporting front Spain was an under achiever for many years but today they are celebrating dual success. A brilliant display by Carlos Alcaraz, swatting aside the challenge of one of the world’s greatest ever tennis players to defend his Wimbledon title, and the success of their men’s football team in beating England in the Euro final. Both were fully deserved. In financial markets too Spain has also come a long way. Double-digit government bonds yields in the early 1990s have been replaced by much lower yields and with the problems in France, the yield differential between the two countries has now shrunk to 10bps.
Sport provided a distraction to the dreadful events in the US. Donald Trump is a controversial figure but is a reflection, not the cause, of the deep divisions in America, which pre-date his appearance on the political stage. He represents a large section of US society and his assassination would have stoked those divisions. Everyone has to be careful with their words – both Donald Trump and his opponents. It is regrettable that political discourse, to reinforce a strong image, resorts to military language so readily. Irresponsible talk in a society with a gun culture is not a good combination.
The market reaction to the attack on Donald Trump saw the US dollar strengthen and bond yields rise. This reflected the view that a Donald Trump victory in the Presidential election and Republican gains in Congress were now more likely. Whilst there is still a long way to go before November, the image of a combative and defiant Donald Trump will play well, especially in contrast to an incumbent whose health has been questioned. In policy terms, Trumpism is likely to be defined as looser fiscal policy through tax cuts, a move towards greater protectionism in the form of tariffs and a more isolationist foreign policy. From a bond market perspective this does not look attractive unless a non-inflationary growth transformation is forthcoming.
On the data front, US inflation came in lower than expected. The headline CPI inflation measure was recorded at 3.0% and core at 3.3%, both 0.1% below consensus. Service inflation, a recurring problem in many economies, only rose 0.1% on the month which will reassure the Federal Reserve, although the reading was helped by a sizeable fall in air fares, a volatile component. Investors have responded and are now pricing in a high probability of an interest rate cut for September, and a further one before year end.
In the UK it looks a close call for an August cut. The Bank of England will not want to be seen as political, denying a cut in June but delivering one in August for a new government. Which may mean there needs to be a shift in the data. The recent stronger-than-expected GDP release, which has led economists to upgrade their UK growth forecasts, argues against a move, and certainly does not create any sense of urgency for action. Conversely, labour market data indicates more slack, although pay growth remains strong. On balance, my view is that the likelihood of an August cut is receding but a lot depends on the next inflation print, due this week. Particular attention will be paid to service inflation, an indicator of domestic price trends.
In markets the trend in yields was downwards. The 10-year US treasury yield fell 10bps to 4.2%, before giving ground on the Trump assassination attempt. In the UK, the benchmark 10-year yield was broadly unchanged at 4.1% whilst the German equivalent closed at 2.5%, a modest decline on the week. Credit markets were stable with spreads remaining towards the lower end of their recent ranges.
The general election in the UK has been a good example of orderly politics. Let us hope that this is the case in the US in November. But in the UK, hard choices remain to be made. Just two examples struck me last week of the difficulties that lie ahead in relation to net zero. First, the Port Talbot steel works are transitioning from coke to electric furnaces, a move that will significantly reduce carbon emissions but one that will see many jobs lost. Second, according to media reports, the co-leader of the Green Party is opposed to plans in his constituency to build pylons to transport electricity generated by offshore wind power. To coin an American phrase ”All politics is local.”
This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.