Europe leads the way to rate normality

It's incredible to think we're already a week into the sixth month of the year, but such is 2025. It's kept our attention and it's really rushing by. Clearly, markets have been very volatile so far this year, particularly in the US. This week, a bit more becalmed in many ways. We've had still tariff news in terms of the increases and significant increases on steel and aluminium. We've got lots going on in terms of the 'big beautiful tax bill' that no doubt you've read about and Elon Musk suggesting it's pretty poor to put it mildly. But you know aside from those sorts of issues, there's a general consensus in the markets that we are post peak tariff concern which means either one of two things really; the markets right and we're heading in the right direction, or of course we are being lulled into a false sense of security and there could be further volatility from here. And either scenario is not a totally outlandish possibility. 

When it comes to the implications of tariffs, we've said in the last couple of videos that there's a short-term potential noise impact, which is largely a financial markets phenomenon I suppose, but there's a longer-term potential impact in terms of how it translates into business confidence, business activity and consumer confidence and consumer activity. We've had some indications over this week when it comes to data, which might suggest that there is a paring back of sentiment in the US. We've had ADP Payrolls, we've had other ISM data as well, and neither of them paint a particularly positive picture. They're not pointing to a collapse in economic activity by any means, but they are sort of at the margin a little bit less positive. 

And interestingly enough, that's resulted in a sort of increased expectations of there may still be a rate cut in the US taking place in 2025. And that brought down treasury yields slightly and you know that helped the fiscal position a little bit, helped debt serviceability and as a result of that actually the story goes that equity markets have responded well. 

Now sort of classically speaking, weaker economic data, all else being equal, you'd expect it to have a sort of less positive impact on equity markets, which generally, you know the presumption being that better economic activity is going to lead to better revenues and that's revenue you can translate into profitability. But so the story goes this week at least, the improved debt serviceability position and helping out on the fiscal balance side has led to markets going up. Which shows if nothing else that market commentators will always try and fit a story with market movements whether or not it makes a huge amount of sense. Either way markets have drifted up so far this week. We are sort of flirting with a bull market in the US as it happens. It may not feel like it. And obviously, if you translate it out of US dollars, you may well find that it's not the case. The dollar has been weaker and that translation effect has provided a headwind to returns when referring to them in a foreign currency such as sterling. But in dollar terms, we're just shy of that magical plus 20% number from the bottom, which is the broadly accepted definition of a bull market. Now clearly year-to-date, we're nowhere near up those sort of order of magnitude because we fell at the start of the year and we bounced out of the bottom in pretty short order. But nevertheless it just demonstrates how quickly sentiment has turned over the last few weeks from being pretty negative on the back of all these tariff concerns to brushing it off on Wall Street at least, maybe not Main Street yet, we'll have to see with the forms of time, but Wall Street has moved on to worry about other things. 

Another bit of news on the US stock market, NVIDIA has put in a decent run over the last a couple of weeks and that's now back to being the largest company in the US. The largest company in the world, a position that it gave up to Microsoft earlier this year. So once again NVIDIA coming back to the fore. 

Elsewhere in Europe, we've had both inflationary data and the ECB has delivered a widely anticipated rate cut. Interestingly enough, inflation and the interest rate are sitting almost in lockstep with one another. You had the inflation print come out looking at a 1.9% inflationary level, and the base rate at the ECB has just been reduced down to 2%. The accompanying statement really making the case that we're largely through it now in terms of the cutting cycle. They've made some significant cuts on the way from the peak, and even Donald Trump actually in the media this week sort of saying, the ECB are ahead of us, they've made loads of cuts and we haven't done very many, we need to get on with it. Another stick to beat Jerome Powell with. There has been a significant move down, when you look at a base rate of 2% in Europe you know it's reminiscent of the sorts of levels we had not that long ago, clearly not the zeros or negatives, but it is firmly back into kind of modest territory, arguably even low territory when it comes to interest rates. That's perhaps not very expansionary, but it's certainly not a restrictive level of interest rates. It's fairly low and one that shouldn't impede economic activity in the Eurozone. 

And on that subject, there's still plenty of positive stories emanating out of Europe. We've seen the UK government referring to a lot of spending plans, trying to balance the books very clearly, but a review over the weekend talking about some significant defence spending or anticipated defence spending on the way again, underlying the redrawing of these political lines and alliances we've had around the world over the last few years, and many members of NATO feeling they need to run and catch up to the sorts of levels of spending that perhaps the US has been carrying on over the last couple of decades. A lot of government spending could well be expansionary, as long as the way it's managed is carefully undertaken. And we've seen Rachel Reeves tread a fairly careful path between wanting to commit to to spending, but not overcommitting and creating a risk of yields running really high if the bond market believes it to be an irresponsible level of spending and one that needs a higher interest rate as a consequence. So it is a balance. 

A difficult balancing act for governments around the world, all of whom are far more indebted than they were. Even the US is having to really cut its cloth and be a little bit careful as we saw even only a few weeks ago, as bond markets really implying at least to the US government that you can't just sort of be irresponsible, you'll feel it in the weakness of your currency, you'll feel it through increased interest rates and that's really putting a lid perhaps on the excesses of government policy that otherwise might come through. 

All in all of course, as always from a multi-asset perspective, lots of different returns drivers going on out there, asset classes moving in different directions. It's demonstrating diversification over the short run, which also we believe is a very powerful force over the long-term and as a result of that that's why we believe in keeping a lot of broad range of returns drivers in the portfolio to give yourself a sufficiently insensitive allocation of capital to any one of these particular factors. That's it from me. Have a good weekend when you get there and we'll see you next time.