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The New World Order
Is that the missing World Cup medal?!
Key points
- Price action was largely rangebound this week, with the summer providing a pause after an active year and Trump’s return to the White House.
- Attention is now shifting to the Jackson Hole economic summit, as well as upcoming labour market and CPI data for clearer economic signals.
- In the UK, a weak CPI print, underperforming gilt market and political uncertainty continue to weigh on the economy and the pound.
- In FX markets, growth data from Norway highlighted its recent economic outperformance, and we look for this to be reflected more explicitly in the trajectory of the krone, which remains close to its weakest ever valuation relative to the euro.
- There has been limited progress on the Russia-Ukraine conflict, following meetings in Alaska and at the White House, with security guarantees remaining critical.
Global markets were relatively quiet over the past week, with price action largely rangebound. Minutes from the last Federal Reserve meeting showed that a majority of participants were more focused on inflation rather than labour market risks.
However, this meeting predates the recent disappointing payrolls revisions and so not much weight has been assigned to these comments. Meanwhile, this weekend’s Jackson Hole conference could be more consequential, and it will be interesting to note whether Powell gives a nod towards lower rates at the September FOMC, in line with market projections.
However, the topic of this year’s symposium – ‘Labor Markets in Transition: Demographics, Productivity and Macroeconomic Policy’ – appears wide-ranging and Powell may choose to keep markets guessing. Ultimately, what could be much more critical is the next set of US labour market data, which are released on 5th September, with the August CPI print coming just a couple of days later.
Yet with all eyes on September, this has meant that summer market conditions have been able to prevail for the time being, with many investors happy to catch their breath for a moment, following a very active 6-7 months since Trump returned to the White House.
In the UK, another disappointing CPI print continued to contribute to underperformance by UK gilts relative to other markets. Meanwhile, the Labour government has been leaking a series of potential tax hikes it is looking to implement.
However, unless it can tackle runaway welfare spending, there is a sense that the market’s trust in the government’s policy stance is starting to evaporate. Long-dated gilt yields are at their highest level since 1998 and yet there seem few buyers eager to step into the market, even at these elevated levels.
Elsewhere in Europe, it is peak holiday season in mid-August, so it should not be a big surprise that regional markets have been relatively quiet. Activity in credit markets has also been relatively muted, with the run-up in equity indices taking a pause for the time being.
We still see some value in subordinated financials and selected other areas, where there may be scope for credit compression. However, aside from this, we think that valuations are now a challenge, and it will be interesting to see if markets demand more of a pricing concession into seasonally heavy supply in September. From this standpoint, we remain relatively cautious in terms of beta risk with respect to corporate bonds.
FX markets have also traded sideways over the week, in the absence of any new catalyst to drive price action. We continue to express a slight bias towards a weaker dollar, favouring the Korean won, which we see as structurally undervalued, and the Norwegian krone. Growth data from Norway this week underlined its recent economic outperformance, and we look for this to be reflected more explicitly in the trajectory of the currency, which remains close to its weakest ever valuation relative to the euro.
During the week, we have also added a short position in sterling, on the view that recent outperformance of the pound is unjustified, as UK political risks grow and economic fundamentals remain challenged. Were there to be a bigger dislocation in gilt yields, this could also see pressure return on the currency, as we witnessed under the Truss tantrum back in 2022.
We continue to maintain long positions in short-dated US Treasuries, with an offsetting short in 30-year maturities. We retain a short stance in long-dated bunds and on a spread basis are underweight in France.
We also continue to hold a long-end flattener in Japan, where the 10/30 curve remains much too steep in our eyes. Aside from these curve views, interest rate duration and credit duration remain relatively flat, on the basis that we see more opportunities in curves and on relative value trades in the current market environment.
Looking ahead
Elsewhere, the Trump/Putin summit in Alaska provided plenty of talking points with respect to the conflict in Ukraine, with Zelensky and European leaders travelling to Washington in the wake of the meeting. Some progress in talks may have been made, though it seems that Kyiv has little to celebrate. Ceding territory to Russia in the wake of its aggression remains highly problematic. Meanwhile, any security guarantees will need to be watertight in order to avoid the risk that Russia won’t seek to build on its gains at a later point, after consolidating its advances.
Aside from this, it is interesting to observe Power Politics at work and reflect how much has shifted in the past few years. Meanwhile, those with an eye for detail will have noticed Chelsea’s World Club Cup trophy positioned just behind Trump, in pride of place in the Oval Office (along with the spare medal that Noni Madueke didn’t get to claim). The New World Order: Up the Chels!
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