Global markets and the role of data

We recently experienced how quickly events like President Trump's tariff policies and rising geopolitical tensions in the Middle East can change market conditions. These types of events highlight why facts are so important when markets are volatile. It's an opportune moment to step back and consider the broader picture. We're now a few months past the market correction in April linked to Trump's tariffs, and as anticipated, volatility has decreased, resulting in somewhat calmer markets. While global concerns and signs of slowing economic growth persist, conditions have become more stable.

Energy prices and stagflation concerns 

We've been somewhat bearish on the sustained high oil prices due to abundant supply and changing demand patterns. The positive aspect is that this situation doesn't resemble the stagflationary shocks of the past. While there are lessons to be learned from those times, we don't anticipate a repeat of 2022. 

A significant rise in fuel prices has not compounded the consumer shock triggered by Trump’s tariffs in April. Instead, it has remained within the range of risks already accounted for by central banks in their policy outlooks.

Central Bank responses and interest rates

The US Federal Reserve opted to hold rates steady at its recent meeting, pointing to inflationary pressures stemming from April’s tariff-related uncertainty as a key reason for its decision. However, they still plan to reduce rates by two 25 basis points cuts by year-end, and we see no reason for deviation from this plan.

The Bank of England has also been able to reduce interest rates quarterly. Although they didn't cut rates at the last meeting, they are likely to implement two more cuts this year.

The ECB has been more aggressive with cuts due to economic concerns in Europe. European policy rates are currently at 2% and the ECB is likely to pause for the rest of the year.

UK economic outlook

In the broader UK economy, there have been negative reports on retail sales and first-quarter GDP readings, partly due to one-off factors like the stamp duty threshold changes and tax hikes affecting the business sector. Despite a slowdown in activity, we don't foresee a recession.

Commodities and geopolitical risks

Markets have remained steady despite rising tensions in the Middle East. The oil price spiked during the early phase of the conflict but has since reversed. Notably, this surge hasn't resulted in a widespread impact on broader commodity prices. 

Lessons from the past suggest these surges are unlikely to cause systemic inflation, as central banks may raise interest rates, leading to a demand slowdown, thus preventing inflationary pressures.

The significance of oil lies in its impact on numerous goods and services, influencing transportation costs. However, the current oil market differs from previous years, with OPEC having substantial spare capacity and large stockpiles, mitigating potential oil shocks. As electrification progresses, oil demand is expected to decrease by about five million barrels over the next five to ten years (IEA forecasts).

Market sensitivity 

Central banks initially lagged pandemic-era inflation, then raised interest rates rapidly, causing a consumer credit shock that ultimately slowed the economy. This action, while painful, created room for rate cuts at present.

Markets have increasingly understood the institutional constraints on Trump’s economic actions. Bond markets, in particular, reacted sharply in April when tariffs led to capital flight from the U.S., despite rising government yields. This prompted a reversal of some policies, reflecting the Trump administration's market sensitivity.

While it would be overstated to call it a moment of danger, it did represent an unfamiliar scenario that reinforced the role of market discipline.

Currency and trade 

Recent weeks have returned to familiar patterns, with the dollar strengthening amid Middle East tensions. Year-to-date US dollar weakness will act to dampen the inflationary impact of higher commodity prices. 

Another trade conflict involving Trump is likely, but events in early spring confirmed that the US must adhere to certain rules or face consequences from the bond market.

Future trade anxiety will be met with a market understanding of institutional constraints, reducing fear. Institutions will constrain Trump's actions, as consistently predicted. The bond market's rapid response was underestimated, but it offers reassurance for future challenges.

Lessons learned 

Disciplined data-driven decision-making during high anxiety and volatility is crucial. It's essential to step back and make long-term decisions, drawing lessons from the past and avoiding reactive decisions. Maintaining liquidity and quality in portfolios is vital, allowing for patient market recovery.

Market corrections occur frequently, and most don't lead to recessions. Narratives can be misleading, so focusing on measurable indicators is crucial. Events this year, despite alarming noises, didn't indicate a major recession when analysed. There were concerning signs, but insufficient confirmation for a severe downturn.