Bad news is good news. Well, we hope so for the UK. The economic headlines have been poor for a while, and this week the bond markets had a wobble in tandem with a very sad Rachel Reeves. Before the General Election she found a very receptive audience amongst financial institutions, though the bar had been set very low by the disjointed years of Tory rule. Now bond markets are worrying about UK government debt again, fearing expenditure will spiral out of control. How high will yields have to rise, and prices fall, for institutions to buy the heavy flow of new government bonds, to fund the UK persisting in living beyond its means?
We don’t know the answer. But we do know that equities have averted their gaze somewhat, away from the sovereign debt problem.
The FTSE Small Cap (ex IT) index has broken above the resistance level around 6,000, and is now at 6,200. It is similar with the FTSE 250 index, and both of these domestically-focussed indices have sharply outperformed the FTSE 100 with its global bent.
Why? As I said in the 20th June note, in periods when interest rates are trending lower, stock market performance is substantially better than when they are not. Buyers are forward looking, and thinking about the economic boost which will come from lower rates, with some suggesting that there might be 5 cuts this year, with rates down at 2.75% by end 2026. So the bottom line is that all this domestic despondency increases the likelihood of more rate cuts, or quicker rate cuts, possibly both.
Yet the economy is not terrible, though please don’t share this knowledge with anyone you know at the Bank of England. One small company analyst, to whom we are very close, has noticed an almost unanimous positivity in CEOs meetings since early April, encouraged by resilient demand from their customers, from boots to expensive watches to plumbing and building supplies. UK consumers appear bored with Trump tantrums, and have blocked him out. Job losses have not been terrible, again in contrast to some headlines. National Insurance increases are mostly being dealt with through natural wastage and higher prices.
Hmmm. But a bit of luck is still needed for this UK potential to blossom. We must accept that Trump can drag markets sharply lower overnight with another ill-thought-through tweet. The tariff issue will come to a head any day, as the 30 days pause is expiring. On the other hand, his bonkers Big Beautiful Bill, robbing the poor to give tax cuts to the rich, might feed a short-term sugar rush for US markets.
Trump-induced chaos has gifted China with the opportunity to present itself in a much more positive light to the rest of the world, something to which we will return. For now, Chinese markets are quiet, with the authorities appearing to keep powder dry for the next joust on tariffs. Today it is Japan which is in the tariff cross-hairs, but some face-saving solution can surely be found to the issue of the US exporting long grain rice to short grain Japan?
Looking elsewhere, gold is still having a breather, but it remains under-owned, gold miners remain cheap, and new highs are anticipated. Silver has been relatively strong versus gold in the last month (up 6% versus gold unchanged). Platinum, highlighted in the 13th June note and the prior webinar, has enjoyed its biggest monthly gain in 40 years. If the technical analysis is correct, there is some way to go for all three, particularly for silver and platinum, but volatility is extreme so take care.
This month’s What’s Hot funds are dominated by the bounce in tech which has persisted since the sharp falls in early April. Note that the best of them are not driven by heavy weightings to the Mag7. Perhaps more interesting is the showing by two UK funds, plus a global Value fund, and the sector analysis also has UK smaller companies featuring, spurred by hopes of rate cuts.