EQUITIES
Despite all the trouble, and potential trouble, in the world, global equity markets are at all-time-highs. Why is this?
-Markets are always forward looking and are pricing in where they expect the economy and inflation to be in 18-24 months.
-Inflation, although not at the 2% Central Banks target, at approximately 3.5% in US/UK seems relatively under control and has not spiked up due to US tariffs and of course is significantly lower than the 10% US-UK levels of 24 months ago or so.
-So interest rates are slowly coming down around the world – US Fed Funds Rate is at 4.25-4.50% (down from its 5% peak 12 months ago) with 1 or 2 more 0.25% cuts forecast by the end of the year. UK interest rates are also slowly being cut – currently the main Base Rate is at 4%. Lower rates are good for bonds and equities.
-Markets are less worried now about Donald Trump with his tariff threats generally being negotiated down by individual counties e.g. UK secured a 10% tariff, EU -15%.
-There is also a FOMO – ‘Fear of Missing Out’ as investors don’t want to miss out on the AI boom: This has driven the more technology focussd US NASDAQ index up from the April Tariff lows of 15,000 to 22,500 today – a dramatic rise. The main US S&P 500 index is also at all-time-highs – partly due to the fact the many of the larger US technology companies are also part of this index also.
Germany, Japan and the UK are also at all-time highs with the UK FTSE 100 index at 9,200 additionally helped by the fact that its valuation metrics are a lot cheaper than the US.
BONDS
The prospect of lower US interest rates is helping US bonds with the 10-year yield-to-maturity at 4.20? More dramatically, government bond yields have risen (so bond prices down) in the UK market as investors worry about the amount of new bond issuance that the Treasury will need to make to fund an arguably out of control UK budget deficit. 10-year yields are historically high at 4.80%, and 30-year UK government bonds are at a 25-year high of 5.60% yield-to-maturity (annual rate of return).
The two other most not worthy items are
US DOLLAR – is the weakest it has been for a few years a with investor concerned around Mr Trump’s current and future handing of the economy and anything else he might get involved in.
GOLD – has been very strong and is at an all-time-high at $3,700 per ounce. It seems a very safe haven asset (gold has been around for 5,000 years) in a very uncertain world.
