1. Trump’s Trifecta Triumph
The polls may have said the US election was heading for a dead heat, but in the final reckoning, Donald Trump ran the table. The Republicans claimed the House, the Senate and the White House. This leaves him with the ability to drive through an economic agenda focused on deregulation, tariffs and support for the ‘old economy’ sectors of the stock market. Markets rallied on the news, probably largely in celebration of avoiding the uncertainty of a contested election. Time will tell whether the Trump presidency continues to provide support. One thing is certain, he cares about the US stock market. He considers it as a measure of his success and will work to drive it up. Of course, he cares only about the US stock market and his election is a reason for caution around markets that could be slapped with new tariffs, such as China. His election has also led to fears of higher inflation over the coming years, and this has pushed bond prices down and yields up. We see it as leading to a slower pace of Federal Reserve rate cuts.
2. Bond markets accept Reeves’ budget
The first Labour budget proposed £100 billion of additional spending to renew Britain’s infrastructure. This could provide a much needed boost to Britain’s productivity, albeit one that does not quite match up to the size of the challenge facing the UK economy. Importantly though, her efforts to increase the size of government debt without spooking the markets was largely successful. So soon after the disastrous Truss mini-budget, there were real nerves about whether bond investors would panic about the extra spending. So far, she has done enough to reassure. However, we believe the environment for UK government bonds is still hugely challenging. The government’s projections suggest that over this parliament they have just £15 billion of fiscal headroom to meet their own test. Or, in other words, if the government overspends by 15% on that £100 billion, they are in trouble. We can only hope this proves to be one of the most efficient infrastructure spending initiatives in the UK’s history.
3. China starts spending
If our £100 billion of government support for our economy seems a little lackluster, the same cannot be said for the Chinese government. This month it announced $1.4 trillion of support. It aims to relieve debt piles in local government to provide additional spending and stimulus to its economy. Yet even this huge number fell short of what some had hoped for. There is no new drop of money to help household spending. This means that the environment for the world’s second-largest economy remains mixed. Yes, there is more fiscal support, but if a trade war looms with the United States, it may not yet be enough to get to the growth rates that Beijing seeks.