Black Headed Bunting
Flags should be flying, the COVID cycle is over (says Lagarde) rates are falling, currency wars are afoot.
Ignore the noise, watch the graphs.
But somehow gloom pervades.
Truly a black topped bunting.
MIXED MARKETS
Markets are designed to confuse and a lot of that is happening, with the worst of recent gloom a way back now. In developed markets it was April, after which the value rally got going, very much with falling rates. And they are falling - seven cuts (or was it Trump’s nine?) in Europe. Less than a year ago rates were at 3.75% and are now almost halved to 2%. There’s a rising currency, giving an urgency to cut fast enough to stop the damage from competitive devaluations.
India also did a surprise double cut (so 0.5%) this week.
LatAm is behaving oddly, it has been a top market, year to date, but largely because it hit a low at the turn of the year; year on year it is not up. Brazil is almost in lockdown with rising rates (14.75%), and no surprise, a year-on-year market fall. Mexico is well into rate cutting, at 8.5% from a post COVID high of 11.25%. That market is up 17% this year.
Another year-on-year top performer is the Hang Seng, up 28%. Why is that?
Aubrey Capital kindly hosted an Emerging Markets conference in the City this week. A speaker noted that as China and Russia now avoid the USD, many traders are ending up with, or need access to, a non-convertible currency.
The PRC therefore apparently facilitates global gold exchanges, as a substitute, in three new offshore hubs (as well as Shanghai). This is perhaps helping to ramp the gold price.
But that has physical limitations. However, China also has a convertible currency, in the Hong Kong Dollar.
If that gets used more, demand for it also rises.
The actual twelve-month top performer is the DAX in Germany, up 29%. But just across the Rhine, the CAC 40 has fallen over a year. If nothing else, easy terms like Emerging Markets, Developed Far East, LatAm and even Europe, are hiding some very mixed performances.
MISTS CLEARING
But the common theme does look like rate cuts, and that’s a cause for optimism. The UK now needs to be very careful that Labour’s fiscal ineptitude is not forcing rates to stay materially higher than in Europe, (still at 4.25%).  As a result, sterling is strong and in danger of getting stronger, helping inflation, but hurting growth. UK exporters are getting kicked enough already.
It hurts housebuilders too.
Compiled from the ECB’s recent publications
The UK market rally feels a lot about beaten up, high yielding stock, sensing some relief is inevitable, regardless of the Bank of England’s posture on inflation.
The strength in UK banks (a big part of that outperformance) is partly their attractive yields (as rates fall) but partly the belief that as rates stay high and weak demand persists, surplus capital allows them to buy back shares and reduce deposit rates, both of which the sector has been quite aggressive about. That’s nice, for banks, but it is a Goldilocks position, either rates now fall, or bad debts rise.
For all those caveats the Europe, Value and Emerging Markets rallies are real. And if rate cuts go on, we expect these to persist. Along with this, at some point, a currency reversal when the Federal Reserve finally moves.
Our work still does not suggest an outflow of funds from the US, just as it does not suggest a recession or pull back. None of which makes much sense, given the weaker dollar this year. Although it may simply show a reduced inflow rate into the US.
So, is something moving, that we can’t see?  Rising long rates are giving the same signal, of assets unexpectedly moving, out of fixed interest.
While I expect political chaos under Trump, amplified by an obsessed UK media, I do wish for some days of calm; could he not play more golf?
Some of us take no notice, of course.
OFFENSIVE FUNDING
Back in the UK, the defence review - a helpful two-page summary is available here; sounds like something for everyone. (If the Tory party had the intellectual depth to suggest this, both the profligacy and militarism would have raised Cain). But it is all (as ever) fabrication, there are no available funds, even though the serious work of building inventory, finally starts.
We are promised six new energetics factories, which sounds like a modish protein bar, but just means lethal explosives. It is the logical move, but only accountants can deliver it. Year to year accounting means we must accept (and hope) that 80% of the energetic output will be made, stored, and then destroyed, at a vast annual cost. This stuff does not keep well.
I have yet to find a minister that can allow that annual profligacy. Creative accounting is needed.
I also can’t see how this hybrid Truss/Reeves can borrow (and tax) another 3% of GDP for defence. She has already rewritten the rules to add billions of spend, loaded the tax burden on companies, and now like Trump, wants to spend her way out of debt.
It simply won’t work.
KURD YOUR ENTHUSIASM
We noted last week (along with a speculation on tariffs, a mug’s game, I realise) how Turkey is surviving unconventional economics. It does sit in the Emerging Markets universe, and is owned in emerging EMEA funds.
Notably, while for some of those countries, the holdings are dominated by banks, for Turkey, it is all real manufacturing, distributing and retailing outfits that attract investment. The odd impact of high inflation.
Although much more tourism will put out more buntings, including those gracing the ruins at Kars.
