Global markets have regained a significant degree of confidence in the last few months as fears of a global trade war receded.
Having now sealed several agreements with its major trading partners, the US has avoided the worst-case scenario of a collapse in the global trading system, settling instead for the largest increase in US import tariffs in almost one hundred years.
While clearly still significant in size, this marks a de-escalation in global trade uncertainty along with the likely avoidance of a tariff-induced economic recession. This has been shown in recent US stock market earnings reports, where companies have beaten the somewhat pessimistic analyst expectations.
One of the big talking points in markets over the last few months has been around the ongoing role of US assets, particularly the dollar and Treasury bonds, in the global financial system.
While there is no clear alternative, confidence and trust in the US has taken a hit with the dollar having materially weakened against most major currencies since the start of the year.
In addition, the position of Chair of the Federal Reserve is up for renewal next year which has opened a debate around the politicisation of the supposedly independent US central bank. An overly political pick could well further undermine confidence in US fiscal stability.
Where some have pointed to Europe as a candidate to take advantage of the US’s repositioning, there are clear questions the bloc faces around its own fiscal sustainability, its growth outlook, and its lack of coordination on the world stage.
While the recent election in Germany is a start at taking economic and defence modernisation seriously in Europe’s largest economy, questions are starting to appear around just how sustained any rebound in European confidence could last.
Outside equity markets, the market is increasingly talking on the theme of government fiscal sustainability. There is nowhere more acutely exposed to this risk than here in the United Kingdom.
As investors return from their summer holidays, it is increasingly likely that the Autumn Budget will come into focus, with Chancellor Rachel Reeves likely to face several conflicting pressures around the UK’s uncertain fiscal position.
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