Elections dominated the quarter across the developed world. Rishi Sunak’s surprise snap election announcement was followed by some lacklustre campaigning punctuated by some hapless moments. There then followed the predictable path of voter dissatisfaction unceremoniously wiping-out the Conservative Party in favour of Labour, although their share of the vote was still less than Tony Blair’s. No adverse market reaction was apparent and sterling strengthened.

Rachel Reeves, new Chancellor of the Exchequer, addressed business leaders at the Treasury and in a solid performance managed to inspire more confidence than expected. She again reiterated that she would not be raising headline taxes although CGT appears to be in the firing line still. Her plan to produce much needed growth seems to be based mostly on residential construction, but either way her plans and the political stability we appear to have can potentially rekindle interest in UK assets.

This would be a good thing as around a third of our Gilt stock is owned by overseas investors and the funding profile of Gilt issuance is around £280bn this year amidst a
£100bn of BoE balance sheet reduction. Sir Robert Stheeman, head of the Debt Management Office, has successfully overseen Gilt issuance for over twenty years and is now retiring, but we can be confident that he will have chosen a successor as competent as he has been. A recent Gilt auction illustrated the demand for our debt as an £11bn ten-year auction attracted a book of £110bn, both records. With the Election behind us, the Bank of England is free to act, potentially cutting in August or September, but we wait to see as recent GDP numbers confirmed that the UK economy is growing again regardless.

The fallout from Joe Biden’s disastrous performance in the Presidential debate, and now some rather embarrassing confusion with names, continues and it does look as though he is on very thin ice as more Democrats form up against his candidacy. Finally, the US labour market is showing signs of weakening and US inflation saw two lower CPI prints following three upside surprises in a row. Fed Funds futures now price in S0bps of easing by year end, but the first cut is not expected until November. Persistent inflationary pressure has prompted several Fed officials to caution that rates may need to be higher for longer; ‘an extended period of time’ and Chairman Powell repeated this after the last Fed meeting. He looks to be out of a job anyway if Trump succeeds, so maybe he won’t get the chance to cut rates. On that note, if we do get a Trump victory at least he will have more of a clue how the government machine works this time.

An ongoing US current account deficit (last in surplus at the Millenium) of near to 7% reawakens the analogy that the US continues to spend like a ‘drunken sailor’. The last deal that passed through Congress on the US debt ceiling did not set a limit at a particular level but suspended it completely until 2025.

Sweden became the second major Central Bank to lower rates as the Riksbank followed the SNB in cutting rates for the first time in eight years. Then the Canadian Central Bank just beat the ECB to be the first G7 nation to cut. Lagarde and her team did move as expected, but apparently this was a ‘hawkish cut’, whatever that means. The ECB stood ready to redeploy their bazookas, which are still live, if the French situation deteriorates significantly and contaminates wider eurozone stability.

The European elections saw the rise of the far right and President Macron’s subsequent call for a snap French election sent tremors through the euro system. Some impressive political manoeuvring kept the far right in third place and unexpectedly delivered the left the most seats, but no majority, meaning gridlock in their system. However, the spotlight shone on France’s finances, and they are in a parlous state, even worse than ours. This has led some to speculate that their debt to GDP levels could reach 200%.

The yield spreads between German Bunds and French OAT‘s ballooned out to 2017 levels, causing some to speculate they could reach the heights of Italian bonds, what a brutal come down that would be. French cockiness towards other EU members past and present has evaporated, and they could be heading for the periphery. The FTSE regained its symbolic market capitalisation edge over the CAC. French banks came under pressure, but the majors are well capitalised. Credit Agricole, for instance, has already raised 85% of its 2024 funding requirements. Germany’s coalition have managed to produce the outlines of a fiscal deal, but this does not disguise that it is growth that is needed to get their economy back on track.

Over the quarter, the primary market continued to deliver strong levels of corporate issuance. The second week of April saw a record and the fourth busiest week in years. ‘Reverse Yankees’ {American companies issuing debt in currencies other than dollars) continue to be a big contributor as cross currency rates between Europe and the US continues to favour American companies issuing in euros (and to an extent, sterling).

European credit spreads suffered some electoral volatility but then rallied back to where they were before. Sterling spreads saw little movement and the primary market has chuntered through it albeit at lower volumes. Sterling issuance had a two-week drought, strongly supporting spreads. Demand for high quality credit remains high, leading one respected commentator to describe the support for A rated paper as ‘insatiable’. The car crash that is Thames Water was not helped by the Ofwat determinations, their bonds have tumbled and are now on watch to be downgraded to junk status. We have no exposure.
 

The full Quarterly Review is available here. 

July 2024

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The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment arrangements.

Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.