Monday Digest

Posted 11 August 2025

Trump goes for easy targets as tail risks fade
Markets regained their footing – aided by a slew of US trade deals. This is excepting a few others; Brazil and Canada with leaderships that irk Trump; and poor Switzerland because of the movement of gold. After the shock, the Swiss president failed to get a meeting with Trump, let alone any reprieve on the US’ surprise 39% tariff. Trump was too busy firing the Bureau of Labour Statistics’ chief for releasing statistics he doesn’t like and hiring a friend to set interest rates he does like. But markets were unphased by these ‘Banana Republic’ policies.

The Bank of England’s 5-4 vote for an interest rate cut was unexpectedly tight, and its updated forecasts show more inflation into the year-end. Bond markets dialled back bets on further rate cuts in response. Longer-term yields didn’t move much, though, as the BoE hinted it might slow its sale of long-term bonds. Before that, stories emerged about a multibillion “black hole” in the government’s finances. Reading between the lines, it looks like Downing Street is preparing to break one of its fiscal promises.

The US and Russia edged closer to ceasefire negotiations for Ukraine. Washington is offering Moscow both the carrot (a Trump-Putin sit-down in Alaska on Friday) and stick (secondary tariffs on India and others for buying Russian oil). Markets have raised hopes if not expectations of ceasefire progress too – judging by sharply lower oil prices. Oil’s loss was partly due to OPEC+ loosening output constraints, but a Russia-Ukraine ceasefire would boost global oil supplies further. This is a major positive for Europe, boosting its equities.

Investors see tail risks receding. Those betting against the market therefore have to close their positions, supporting the momentum which has pushed up equities for weeks. Momentum has dropped a little, but sentiment (particularly among retail investors) is strong – backing up by strong big tech earnings. That doesn’t mean everything’s alright: US effective tariffs are still close to 20% and we don’t know how badly that will hurt economic demand and corporate profits. But recent data suggests the late spring soft patch is improving. Markets see the US economy as resilient – so the world carries on.

July Asset Returns Review
July was full of drama but ended up being a standout month for global stocks, which finished up 5% in sterling terms. It began with the passage of US tax cuts – seen as a positive for American companies – but another tariff deadline on 1st August loomed large. In the end, the Trump administration mostly signed trade deals or further suspended tariffs. But tariff threats pushed up implied volatility (the cost of insuring assets) in the meantime, while actual volatility was soothed by abundant liquidity. That arbitrage opportunity incentivises buying stocks – which pushed the US up 5.9%.

Some strong Q2 earnings reports – mainly among the ‘Magnificent Seven’ tech stocks – also helped. US returns were amplified, in sterling terms, by the dollar’s 4% gain on the pound.

Despite negative coverage of UK growth and inflation UK stocks gained 4.3%. European equity was more muted at 0.9%, but is still 14.6% up from the start of 2025. July’s best performer was China, gaining 8.6%. This was partly down to signs of US conciliation, but also due to Beijing’s desire to stimulate domestic consumption. The government’s greater focus on demand will benefit not just China but emerging markets more broadly, whose stocks climbed 5.6% in July.

Commodities had a strong month, up 7.3%, mostly powered by the 11.2% jump in oil prices. This is often a global growth indicator, but last month’s data (weak US job numbers) did not back that up. US bond yields fell sharply into the end of the month.

The mismatch between strong markets and weaker data had commentators doubting the equity rally. But markets are still awash with liquidity. There’s money to buy assets, so volatility will be low and risk appetite high – evidence by Bitcoin’s stellar 12.6% gain last month. Markets can rally hard on little news in this environment.

(Where possible, quoted performance data are sterling-based net total returns for the period).

Do fiscal rules stop growth?
Given the dour coverage of the UK economy, it was interesting to see renowned financial journalist Anatole Kaletsky argue recently that Britain could see a revival, if the government removes its restrictive fiscal rules.

He argues that the balanced budget rules hamper growth by constraining spending when it’s needed most. The problem is compounded by the UK’s fragile tax base: a big chunk of tax revenues is paid for by the top 10% of earners, while middle income earners pay less than other countries. Part of that is income inequality, but concentrating the tax base on high earners puts government finances at risk. Last week’s report that company directors are leaving the UK for more favourable tax treatments demonstrates this.

Kaletsky argues the government needs to “tax the middle” over the long-term. Noting that this would be unpopular and economically destructive right now – given Britain’s weak economy -he favours borrowing to invest (thereby giving people enough money to pay future taxes) while resetting fiscal policy for longer-term tightness . That’s why he thinks Labour’s current fiscal rules will be abandoned by 2026. He argues that this will either be pre-emptive or forced by a bond market sell-off – just like after 1992’s infamous ‘Black Wednesday’ which forced Britain out of the ERM.

Kaletsky’s diagnosis is valid, but his suggestion that bond traders would welcome the abandonment of Labour’s fiscal rules is possibly wishful thinking. It’s ironic that he uses ‘Black Wednesday’ as a template, since the last time bond markets forced a change of UK fiscal policy was Liz Truss’ ‘mini’ budget. Most took the opposite message from the Truss episode: containing interest rates is the priority in supporting growth. The weakest part of Kaletsky’s argument, in our view, is that it glosses over potential significant volatility in the UK bond market and how this feeds back into the economy. Labour might change its rules soon – but bond traders’ response is much less certain.