Quarterly Outlook
Q3 Investor Outlook: Beyond American shores – why diversification is your strongest ally
Jacob Falkencrone
Global Head of Investment Strategy
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London Quick Take - 3 July - Gilts and Sterling Calmer but UK Fiscal Risk High, Trump Tax Set for Key Vote
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
The Spring statement provided a credibility dividend for the chancellor; the spread between UK gilt yields and those of G7 peers narrowed afterwards - the welfare reform and winter fuel climbdowns has seen the spread widen again however as markets grow cautious over the fiscal outlook for the UK. I think we are stuck with an added risk premium for gilts since this event – it's hard to put the genie back in without doing something that fundamentally alters the opinion of the market. The 10yr gilt has eased about 8bps today to 4.539%, a tiny bit above the 4.5% it traded before PMQs, while the 30yr tracks about 9bps lower to 5.336%, having been at 5.3% before the fallout yesterday. Both, it should be noted, are materially higher than at any point during Liz Truss's tenure, and likely to remain so.
Despite the backing from the PM, or perhaps because of it, the question for investors right now is: will she leave? The market reaction should proclaim that she is required at No11 to avert a market response that delivers a death blow to the government; the prime minister is now giving her his full backing. The PM can’t control his backbenchers, but maybe the bond market can. The reaction could keep her in the job. But doubts remain and we might see continued pressure on gilts as we head into the autumn. And often when a PM has to constantly state his backing for a minister the writing is on the wall.
The FTSE 100 ended the day a touch lower as the move in gilts pressured rate sensitive sectors like homebuilders and real estate with Berkeley and Persimmon dropping 8% and 6% respectively. Miners Glencore, Antofagasta and Anglo American outperformed with copper prices hitting their highest in months. The FTSE 100 opened higher on Thursday by around 0.4% with the DAX and CAC also higher as risk appetite looked to be decent.
The pound is a lot calmer this morning. Sterling stabilised after a steep decline on Wednesday led by the move in gilts, with GBPUSD moving two big figures on the session in volatile trade. Today GBPUSD has recaptured 1.3660 after yesterday saw it dip from a high of around 1.3750 to a low of around 1.3560. Cable seemed to find technical support at the 21-day SMA but I would question whether the fundamentals have shifted against the bulls now given the fiscal hole the government is in. Remember we are in a deeply difficult cycle of slow growth and rising spending which requires – absent any fresh borrowing - a doom loop of higher taxes that squeeze the productive elements of the economy further and further until the last pip has squeaked.
The government is in a strait jacket – it can’t do what it wants because of the party, it can’t borrow more because of the markets, and it cannot pull the main tax levers because of the self-imposed fiscal rules. And growth, the key to getting out of the mire, is not there.
US stocks hit a record high after President Trump announced a trade deal with Vietnam that sets a 20% tariff on imports from the country into the US. It marks an improvement for the southeast-Asian nation from the 46% blanket tariff set under the original reciprocal regime. Nike shares rallied as it should avert a supply chain nightmare. Goods from (mainly China) other countries shipped via Vietnam will face a 40% tariff.
The S&P 500 rose 0.5% to a record high and the Nasdaq jumped 0.8%, driven by Apple, Nvidia, and Tesla. The narrative is that optimism came from the US-Vietnam trade deal, whilst softer labour data from ADP stoked hopes for Fed rate cuts even as it raised worries about the US economy. I think the move was really off the back of the trade deal and shows how sensitive the market remains to this story and suggests July 9th is a key moment.
Meanwhile, Trump’s tax bill heads to its final debate after being held up in a tense session overnight in the House of Representatives. The president seemed to be struggling to beat a rebellion of his own. “Largest Tax Cuts in History and a Booming Economy vs. Biggest Tax Increase in History, and a Failed Economy. What are the Republicans waiting for??? What are you trying to prove??? MAGA IS NOT HAPPY, AND IT’S COSTING YOU VOTES!!!”, he posted on Truth Social. This morning though the House voted 219-213 to move the bill forward to a final stage after hours of stalemate.
A key nonfarm payrolls report is due up later, coming a day earlier than usual because of the July 4th holiday. Coming after ADP reported yesterday showed private sector jobs unexpectedly fell in June – the first drop in two years – it's going to be a crucial one for market expectations around the Fed and the US economy heading into the trade deal deadline; are things holding up ok? The consensus is for +110k jobs added last month, with May at +139k. We have started to see some weakness in labour market data – Philly employment lowest since 2020, initial claims rising to 246k from 226k...but it’s still maybe too early to see the NFP really swing lower.
Tesla deliveries slumped but the stock bounced 5% as the decline was well priced and not quite as bad as some feared. Tesla reported around 384,000 sales in the second quarter, down 14% from a year before and the second straight quarterly decline. Recent reports on sales weakness in China and Europe had already primed investors for a bad number and the added recent weakness from the renewal of the Musk-Trump spat offered some extra space for bulls to flex their muscles on the news. Sense that demand growth is just in a moderate decline rather than collapsing?
London Quick Take - 3 July - Gilts and Sterling Calmer but UK Fiscal Risk High, Trump Tax Set for Key Vote
Key Points
- UK prime minister Starmer seeks to shore up support for chancellor Reeves
- Sterling stabilises after sharp selloff along with gilts
- Wall Street climbed to fresh record highs as US signs Vietnam trade deal
- Trump tax bill proceeds as Republicans face down own backbench rebellion
- Tesla rallies despite 14% decline in quarterly deliveries
UK gilts are firming up this morning along with the pound as the PM gives his chancellor much more vigorous backing following a tricky session on Wednesday. Gilt yields had spiked sharply and sterling retreated as bond markets interpreted a visibly upset Rachel Reeves during PMQs as a sign that her days as chancellor were numbered. It was an unusual situation, but it looked like the bond market had her back in a way – it didn’t like the way the PM did not give her his full backing during PMQs. It may have been an overreaction – Starmer may not have been quick enough on his feet to realise the implication; markets took it to mean the worst and sold gilts. Who really knows what is going on? What I can say is the calculation was that she’s probably the most market-friendly chancellor Labour could field, so replacing her indicated a higher chance of changing fiscal rules, implying more debt and instability. But there is a deeper problem for the government here even if she stays – the market is getting nervous about its ability to make the sums add up whether she is ‘market-friendly' or not - and the economic outlook is hardly improving.
The Spring statement provided a credibility dividend for the chancellor; the spread between UK gilt yields and those of G7 peers narrowed afterwards - the welfare reform and winter fuel climbdowns has seen the spread widen again however as markets grow cautious over the fiscal outlook for the UK. I think we are stuck with an added risk premium for gilts since this event – it's hard to put the genie back in without doing something that fundamentally alters the opinion of the market. The 10yr gilt has eased about 8bps today to 4.539%, a tiny bit above the 4.5% it traded before PMQs, while the 30yr tracks about 9bps lower to 5.336%, having been at 5.3% before the fallout yesterday. Both, it should be noted, are materially higher than at any point during Liz Truss's tenure, and likely to remain so.
Despite the backing from the PM, or perhaps because of it, the question for investors right now is: will she leave? The market reaction should proclaim that she is required at No11 to avert a market response that delivers a death blow to the government; the prime minister is now giving her his full backing. The PM can’t control his backbenchers, but maybe the bond market can. The reaction could keep her in the job. But doubts remain and we might see continued pressure on gilts as we head into the autumn. And often when a PM has to constantly state his backing for a minister the writing is on the wall.
The FTSE 100 ended the day a touch lower as the move in gilts pressured rate sensitive sectors like homebuilders and real estate with Berkeley and Persimmon dropping 8% and 6% respectively. Miners Glencore, Antofagasta and Anglo American outperformed with copper prices hitting their highest in months. The FTSE 100 opened higher on Thursday by around 0.4% with the DAX and CAC also higher as risk appetite looked to be decent.
The pound is a lot calmer this morning. Sterling stabilised after a steep decline on Wednesday led by the move in gilts, with GBPUSD moving two big figures on the session in volatile trade. Today GBPUSD has recaptured 1.3660 after yesterday saw it dip from a high of around 1.3750 to a low of around 1.3560. Cable seemed to find technical support at the 21-day SMA but I would question whether the fundamentals have shifted against the bulls now given the fiscal hole the government is in. Remember we are in a deeply difficult cycle of slow growth and rising spending which requires – absent any fresh borrowing - a doom loop of higher taxes that squeeze the productive elements of the economy further and further until the last pip has squeaked.
The government is in a strait jacket – it can’t do what it wants because of the party, it can’t borrow more because of the markets, and it cannot pull the main tax levers because of the self-imposed fiscal rules. And growth, the key to getting out of the mire, is not there.
US stocks hit a record high after President Trump announced a trade deal with Vietnam that sets a 20% tariff on imports from the country into the US. It marks an improvement for the southeast-Asian nation from the 46% blanket tariff set under the original reciprocal regime. Nike shares rallied as it should avert a supply chain nightmare. Goods from (mainly China) other countries shipped via Vietnam will face a 40% tariff.
The S&P 500 rose 0.5% to a record high and the Nasdaq jumped 0.8%, driven by Apple, Nvidia, and Tesla. The narrative is that optimism came from the US-Vietnam trade deal, whilst softer labour data from ADP stoked hopes for Fed rate cuts even as it raised worries about the US economy. I think the move was really off the back of the trade deal and shows how sensitive the market remains to this story and suggests July 9th is a key moment.
Meanwhile, Trump’s tax bill heads to its final debate after being held up in a tense session overnight in the House of Representatives. The president seemed to be struggling to beat a rebellion of his own. “Largest Tax Cuts in History and a Booming Economy vs. Biggest Tax Increase in History, and a Failed Economy. What are the Republicans waiting for??? What are you trying to prove??? MAGA IS NOT HAPPY, AND IT’S COSTING YOU VOTES!!!”, he posted on Truth Social. This morning though the House voted 219-213 to move the bill forward to a final stage after hours of stalemate.
A key nonfarm payrolls report is due up later, coming a day earlier than usual because of the July 4th holiday. Coming after ADP reported yesterday showed private sector jobs unexpectedly fell in June – the first drop in two years – it's going to be a crucial one for market expectations around the Fed and the US economy heading into the trade deal deadline; are things holding up ok? The consensus is for +110k jobs added last month, with May at +139k. We have started to see some weakness in labour market data – Philly employment lowest since 2020, initial claims rising to 246k from 226k...but it’s still maybe too early to see the NFP really swing lower.
Tesla deliveries slumped but the stock bounced 5% as the decline was well priced and not quite as bad as some feared. Tesla reported around 384,000 sales in the second quarter, down 14% from a year before and the second straight quarterly decline. Recent reports on sales weakness in China and Europe had already primed investors for a bad number and the added recent weakness from the renewal of the Musk-Trump spat offered some extra space for bulls to flex their muscles on the news. Sense that demand growth is just in a moderate decline rather than collapsing?
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