The SACKO trade – Starmer always chickens out...I was inspired by a story in Bloomberg noting the PM's own TACO problem...there have been climbdowns aplenty and lots of bad news, but there’s actually been some good news today (!) as the British economy grew more than expected in November – though ironically it could be that people were just spending a lot on accounting and tax advice ahead of the Budget - monthly GDP data should always be taken with a pinch of salt. Even better news is that gilt yields – borrowing costs for the government – keep falling as markets bet on weaker inflation and more cuts by the Bank of England, albeit they have ticked up a tad today on the GDP print. I don't think this print will change the narrative much as it's about much more than just a few bps of growth here and there. Markets seem relieved that fiscal policy is a bit more certain after the chancellor raised her headroom in the Budget. Lower gilt yields mean of course more headroom and scope later on to cut taxes, should the government seek to win an election again.
On the other hand, the construction sector is having its worst slump in more than two years with output down more than 1% in the three months to November. Taylor Wimpey meanwhile said uncertainty around the Budget muted sales in the second half of 2025. Dunelm shares tumbled 16% on a tough December. Has the uncertainty lifted? I think to an extent it has – bond markets seem to think so, while the UK equity market is strong, too, as evidenced with a fresh record high for the FTSE 100 this morning. The question is always the unpriced political risk – can the deeply unpopular Starmer survive past a drubbing in the May elections? So, I guess, we could say that the SACKO trade is a bet on heightened political risk and roiling of bond markets.
It's worth paying some attention to the narrowing in UK/US spreads - the difference between say the yield on the US 10yr Treasury and UK 10yr gilt is noteworthy and reflects both more ease around the UK situation - less inflation outlier premium and less moron premium - while the US is gearing to face its own moron premium due to unpredictable economic policies and erosion of Fed independence.
European stock markets were mixed early Thursday despite a lift from chipmakers after TSMC reported record earnings. The world’s largest contract chipmaker posted a 35% leap in profits from strong AI chip demand. The move sent ASML up 7%, ASM International over 9% higher and BE Semiconductor 5% higher. The AEX was up 1% as a result whilst the DAX and CAC slipped about a quarter of a percent in the first hour of trade. The FTSE 100 ticked up to a fresh record high just below 10,202 but then came back down and was basically flat as basic resources stocks and some financials pulled in opposite directions. Schroders popped +8% after the asset manager said profits would be ahead of market expectations. Private equity groups 3i and ICG rallied along with Pershing Square. Housebuilders fell after the Taylor Wimpey results.
It follows a downbeat session on Wall Street as investors rotated out of tech. The Nasdaq fell 1%, the S&P 500 was down 0.5% to notch back-to-back losses and pull further away from its record high. The Dow Jones was almost flat on the session with consumer staples up, highlighting a more defensive trade in play.
Oil fell as President Trump signalled he may not attack Iran yet. Gold and silver also pulled back as some of the froth came off the top, while traders also cited the US holding off imposing tariffs on imports of critical minerals. Oil fell for the first time in six days, with WTI topping out bang on its 200-day moving average before reversing.
Silver saw a sharp reversal after hitting a fresh record high at $93.75 but has since found a bid near Tuesday’s lows around $86.50, while gold trades around the $4,600 round number.
