Brian Bollen's Blog

The UK economy: an independent, vaguely informed comment

The UK economy is not GOING down the toilet.

 

The UK economy WENT down the toilet about 18 years ago. It is now in a deep, deep sewage pipe stuck at the bottom of a giant economic fatberg covered in the faecal debris created by several idiots masquerading as Chancellors of the Exchequer…

Are markets bringing Trump to heel?

In his latest weekly insight, Mark Dowding, BlueBay CIO, RBC BlueBay Asset Management. In this edition, looks at the outlook for the UK, the US, and Asian investors. 

UK gilt issuance: A reduction in long-dated 30-year bond supply in the revised gilt issuance remit from the DMO saw the long end of the curve rally somewhat, having been a short position targeted as a point of vulnerability by a number of hedge fund investors. In meetings with UK policymakers, RBC BlueBay continues to advocate the Bank of England stops QT gilt sales and takes steps to make it more attractive for banks to own gilts rather than interest rate swaps, in order to further help yields and reduce the pressure on the Labour government, against a challenged macro backdrop.

Market constraints: There is a sense that financial markets are acting as a constraint on Presidential power. Coming in the wake of Trump needing to announce a 90-day pause on additional tariffs earlier this month, it seems reasonable to conclude that rather than there being a 'Fed put', which may trigger the FOMC to ease policy in response to market price action, there is more of a 'Trump put' coming into focus, in which disruptive policies may be pushed back or watered down, should market price action veer towards a 'sell America' trade in global markets.

Supply chain strain: Shortages of components can end up adding to prices, which are already being driven upwards, as the dollar sinks in the wake of overseas capital turning away from the country. In this respect, although RBC BlueBay doubts that Washington will shift from its firm desire to end US dependence on China, and there is unlikely to be much meaningful rapprochement between the world’s two largest economies, a more pragmatic approach may allow for a more gradual realignment of production and supply changes, mitigating the potential shock therapy from a ‘cold turkey’ scenario, in which trade comes to a sudden and abrupt halt.

Value in the US: RBC BlueBay sees most value in the US curve in US TIPS. RBC BlueBay believes that recent macro developments will push inflation higher and therefore the recent decline in inflation breakeven rates is counterintuitive, in our view. In light of this, the firm has added exposure in TIPS in the past week. On an absolute basis, RBC BlueBay thinks that real yields should trade below 2% in the 10-year part of the curve.

Asset allocation: Many Asian investors are structurally over-allocated towards the US dollar, and now appear to be re-considering this bias. Therefore, it is tempting to think that, whereas the dollar has been a multi-year beneficiary of international capital flows in the recent past, we may have witnessed an important inflection point that could herald an extended period of dollar weakness.

 

Trump and Dump

Tariff turmoil…it’s been a wild ride this week!

Mark Dowding, BlueBay CIO, RBC BlueBay Asset Management, looks at the outlook for the US, Europe, and the UK.

Financial assets underwent some wild swings over the past week, as markets continued to reel from last week’s US tariff announcements. In the wake of a market slump, a subsequent decision to pause higher rate tariffs for 90 days has led to some investor relief. 

However, China remains subject to penal duties, even as others are levied 10% tariffs. This is set to materially disrupt trade between the world’s two largest economies, and our sense is that there is little appetite to row back much, given a more strategic desire on the part of Washington to pull supply chains and businesses away from a country it views as a potentially hostile adversary. 

As markets have come to understand that US trade policy represents a stagflationary, adverse supply shock, it was telling how an initial flight to quality, which helped bond yields to rally, moved into reverse, with it also becoming clear that there is little that central banks can do to support growth, if inflation is moving sharply in the opposite direction. 

The rise in long dated bond yields risked destabilising markets further in something of a ‘Liz Truss’ style moment, and perhaps this was the pretext for Trump’s tariff delay. Spiking volatility had seen a widespread ‘stop-out’ of fund positioning as losses accumulated around global markets, with liquidity worse than at any point since the Covid shock in March 2020.

ESG Remains a Central Topic for Institutional Investors and Fund Initiators in Europe

Robert Bluhm, Group Head of Sustainability at Universal Investment, provides a welcome break from tariff nattering.

For some time now, and especially since the inauguration of Donald Trump as US President, the topic of ESG (environmental, social and governance considerations) has seemed to irreversibly fade into obscurity. Major corporations are shutting down their Diversity, Equity & Inclusion (DEI) programmes, and global financial institutions are withdrawing en masse from the Net-Zero Banking Alliance (NZBA).

US tariffs impact

In his latest weekly insight, Mark Dowding, BlueBay CIO, RBC BlueBay Asset Management, he looks at the impact of US tariffs on the US, European, UK, and Japanese economies.

• US tariffs impact: The average global tariff is approximately 18%, and on this basis, RBC BlueBay thinks that US growth will slow to around 1% for the next several quarters, whilst inflation jumps to approximately 5%. RBC BlueBay continues to believe that it will be hard for central banks to respond by easing rates, and therefore the rally in bond yields appears overdone.
• European outlook: In Europe, RBC BlueBay also sees prospects for slower growth and higher prices, as the EU retaliates to Trump’s tariffs. As in the US, the firm doubts that the ECB will be able to deliver much by way of monetary easing.
• UK economy: The UK situation is more challenged, and RBC BlueBay strongly senses that the Bank of England would like to cut rates if it can. However, the firm thinks that cutting rates in the UK would be a policy error and that CPI will be up around 4% this summer.
• Japan-US relationship: In Japan, there was disappointment at an elevated tariff, when policy officials had been hoping for more favourable treatment by the US administration. Ultimately, RBC BlueBay won’t be surprised to see Japanese tariffs reduced, given the desire in Washington to maintain a close relationship with Tokyo, and considering Japan’s strategic importance to the US, as it faces up to China. 
• Tariff outlook: Looking further ahead, RBC BlueBay expects that ultimately, the US administration will pivot away from tariffs via executive orders, to a universal tariff legislated through Congress, which might sit at 10%, but which will only be enacted much later this year