Before getting into the meat of the week, I want to introduce you to a guest blog from M&G’s David Parsons, “AI: Terminator or Revolutionary?”. Will AI nuke the world as Skynet did in the Terminator film series? Or can we look forward to a future which is a tad more encouraging? David also considers the investment implications. It’s reasonably plain English, which is great news for those who might struggle a tad with what is unfolding (that’s most of us!). If you have avoided engaging with this subject, I strongly recommend starting now – it’s an easy and informative read.
Geopolitics hadn’t impacted financial markets for years, and didn’t often come on to our radar, but it is now a constant threat with unpredictable and unquantifiable risks. This week it was the turn of President Xi to publicly move centre stage, something he does rarely, and send President Trump a clear message, “come and have a go if you think you’re hard enough”, as the old school hooligan chant goes.
All of this fits into the Ray Dalio playbook as set out in our 25th April note. Right on cue, Ray had an interview with the FT this week prompting the headline “Hedge fund billionaire Dalio says US is slipping towards 1930s-style autocracy” and warning that the US is on the brink of a debt crisis. The risk of such a debt crisis could not be more obvious, and this is one reason why yields on longer dated government bonds, with 20-30 year terms, have been heading up – investors want greater compensation to hold these bonds for longer periods.
On another occasion I can get into the detail of bond pricing. For now, bear in mind that the potential for a debt crisis is coupled with political risk. Long term bond investors, primarily institutions, aren’t just looking for holes in the hull, they have an eye on who is at the helm, and that is not encouraging, whether considering the US, France, or the UK. Of the latter, the UK is probably in the strongest position to right the ship quite quickly – the November Budget will be critical.
Undoubtedly this sense of deep uncertainty is helping the gold price, which has broken upwards as anticipated here in recent weeks, and it is not confined to gold. Gold miners stood out over the week, up 5%, silver miners exceeded 6%, and the metals themselves gained around 3% (gold, silver, platinum).
Inevitably it was gold which hit the headlines, as it hit an all time high on Tuesday, moving rapidly through $3,500 to breach $3,600. Goldman Sachs predicted that gold could head towards $5,000 if Trump keeps threatening the Fed, talk of introducing “digital gold”, and TV adverts to buy gold coins abound… all signs of a trend which is mature, to which I will return in coming weeks.
Global equity markets ignored the implications of all this and drifted through the last week of the Summer. India found a bit of support, up 1%, with domestic investors seemingly cheered by Prime Minister Modi standing up to the bully Trump. FTSE 100 was up slightly (0.6%) and the domestically focussed FTSE 250 down 0.3% - nothing to write home about here.
The FTSE 250 is hesitating where it might be expected, but don’t be surprised if there is a further 4-5% downside before it, and the FTSE 100, bounce to take out the August highs.
Seasonally, Autumn is now upon us, the season of squalls and storms… and crashes. It is some consolation that stock markets do not crash overnight from their peaks – they do not suddenly fall off the cliff. After the ultimate peak we should expect indices to drop and recover, perhaps more than once, over a period of weeks. Only after that might there be the precipitous fall, the crash, say of at least 20% over a day or two.
For now, the UK and US indices, amongst others, appear set for new highs before we need to stay awake at night worrying about the possibility of a crash.
Lastly, a correction on last week’s China analysis. I referred to a “diagonal triangle” on three occasions, which was incorrect. The sideways moving triangle to which I was referring is a contracting triangle, which you might think of as a meandering correction before the stock market in question takes off again to the upside. A diagonal triangle is a different beast altogether, an idiosyncratic uptrend.
If you get the chance, do take a moment to read the guest blog from M&G’s David Parsons, “AI: Terminator or Revolutionary?”. Have a great week.