Moving on up

• China equities advanced +2.36%
• Silver and gold added +6.79% and +5.32% respectively (in dollar terms)
• Bitcoin jumped over 20% to around $77,400; concern about the US’s fiscal position and currency debasement were a catalyst

• Japan equities shed -3.87% and world growth equities -2.22%
• The US dollar index against a basket of currencies fell -0.87%; the dollar slipped -0.56% against sterling

(All equity data is MSCI; all data in sterling unless stated)

Investors’ concerns about inflation and debt pushed global government bond yields higher last week. Triggered by the US-Iran standoff, higher oil prices risk feeding more inflation into the economy via the refined products we use, such as diesel. The difference in prices between a barrel of crude and a refined product – known as a crack spread – is in some cases hitting all-time highs.

Meanwhile, US government debt topped $40trn for the first time. Whilst the absolute level itself may not be alarming, the growing cost of debt interest is making some investors queasy, as the US’s debt/GDP ratio approaches 120%.

Higher bond yields (and therefore lower bond prices, as the two are inversely correlated), signal that investors are demanding a higher return for the perceived risks of lending to Uncle Sam. Accordingly, the yield on the 30-year US Treasury (UST) hit 5.3%, the highest since 2007. The US is not alone. The equivalent UK gilt yield hit 5.8%, and Japan’s JGB 4%, a multi-decade high.

In a move reminiscent of Operation Twist in 2011, the US Treasury intervened in debt markets to attempt to bring long-term yields, and therefore borrowing costs, down. The ‘twist’ refers to its selling of shorter-dated T-bills between 6 months and 2 years’ maturity in order to fund its buying of 10-30 year USTs – at a rate of roughly $20bn per quarter. Whilst peanuts in the scheme of things, the US Treasury is signalling its intent. The move should eventually bring yields down and may somewhat weaken the US dollar.

The governments of many advanced economies appear to have little appetite to raise taxes and cut spending. With or without an end to the US-Iran conflict and some respite from higher oil prices, questions of fiscal probity will likely keep government bond yields higher for longer. Central bankers pondering interest rate moves have their work cut out.

Ironically, despite inflation and fiscal concerns pushing yields up, higher yields may themselves be attractive to investors with selective government bonds doing more heavy lifting in portfolios. From a multi-asset perspective, they are another lever to attempt to deliver returns whilst mitigating risk.

Last week's data suggests the UK’s economy is on a relatively solid footing but highlights a key tension. Employment conditions remain stable, household and consumer confidence are improving and underlying spending trends are still positive. But inflation remains a challenge.

UK Consumer Price Index (CPI) inflation rose to 2.9% from 2.6% in June, the first increase in the annual rate since March. The increase was largely driven by a 13% rise in regulated household energy bills and other housing-related costs, while services inflation eased. Although below last year's levels, inflation data suggests price pressures have not fully disappeared, reinforcing the Bank of England's (BoE) cautious approach on interest rates.

The UK’s unemployment rate stayed at 4.9% in the three months to June, with a steady 30.3 million payrolled employees. Vacancies edged lower in the three months to July, offering scant evidence of a significant deterioration in employment conditions. Hiring has cooled compared with recent years, but the jobs market continues to show resilience.

Consumer spending data was softer. Retail sales volumes fell 0.5% in July following strong gains in May and June, with clothing and footwear sales down 2.7%. Some retailers suggested that early summer promotions brought spending forward into June. Despite the monthly decline, the broader trend is positive, with retail sales over the three months to July up 1.1% compared with the previous three months and 1.6% higher than a year ago.

The strongest signal came from consumer confidence. The GfK Consumer Confidence Index rose to -14 in August from -17 in July, a two-year high that beat expectations. Confidence around major purchases also reached its highest level since December 2021, suggesting improving sentiment towards both personal finances and the wider economy.

Overall, higher inflation in July hints that the BoE’s path back to its 2% target may not be smooth, with policymakers likely to proceed cautiously. While markets still expect interest rates to trend lower over time, the latest data supports the view that rates could remain higher-for-longer than previously anticipated.

Canada stepped away from a trade deal which in its view may have subordinated it to the US as a 51st state. The deal would have reportedly forced Canada to turn its back on China. The US will place a 50% tariff on some Canadian imports; Canada will respond “dollar-for-dollar”. The loonie, or Canadian dollar, weakened on the news.

• US retail sales fell by 0.6% in July – Consumers spent less in July after Amazon Prime Day in June and fading tax refunds weighed on sales. It was the first monthly decline since last October last year and well below expectations of a 0.1% rise
• China changes sail – Following disruption in the Strait of Hormuz, Chinese vessels are reportedly rerouting via the Arctic’s Northern Sea Route, potentially cutting journey times to the UK and Europe by as much as half
• Chinese retail sales growth slows to 0.6% in July – Significantly below expectations of a 1.5% rise. Automobile sales fell 17% in the year-to-July, a major detractor
• Japan inflation – Japan’s inflation rate accelerated for the fourth month running, rising 1.9% in the year-to July from 1.6% in June. Although the highest level reported this year, inflation still remains just below the Bank of Japan’s 2% target
• OpenAI’s 18% second quarter revenue growth disappoints – The artificial intelligence company’s operating loss also widened by $3bn over the period to $12.3bn, delaying a turn to profitability. The results are behind rival Anthropic’s, whose revenue more than doubled
• Unitree Robotics (Yushu Technology Co Ltd) – The Chinese humanoid robotics company shares debuted in Shanghai last week, making an intra-day high around 600% above its opening price. Shares available to retail investors were more than 5,500 times oversubscribed
• Bitcoin – Following the dollar’s decline amid the US government’s bond buyback plan, Bitcoin surged c.20%, ending the week at c.$77,000 per bitcoin

Disclaimer

Past performance is not a reliable indicator of future returns. Nothing herein should be construed as a recommendation to hold, buy or sell any security or encourage any investment decision. The mention of any particular asset class, sub-asset class or company does not imply that it is held, or may ever be held, in any product or service.