Sideline story: markets take a back seat to sport
Whether it was football, tennis, rugby or simply making the most of the summer weather, there was something for everyone this week. England edged their way into the World Cup semi-final, while Canaccord Wealth's own cycling team successfully completed the ‘Tour de Canaccord’ ride from London to Paris in support of our company’s charitable foundation. Against a busy sporting backdrop, financial markets were comparatively subdued, with major equity indices ending the week broadly unchanged and bond yields higher.
The week began on the back foot as the ceasefire between the US and Iran collapsed and the two sides exchanged strikes, pushing oil prices higher and elevating inflation concerns. Yet despite President Trump declaring the ceasefire "over", markets remained sceptical that a material escalation was likely, concluding that there is little appetite in Washington to be dragged back into a regional quagmire. As I commented on CNBC a few weeks ago, although the US has dominated the kinetic war, Iran is winning the economic war with the Strait of Hormuz once again closed. As both sides see themselves as ‘winning’ it’s likely more conflict is ahead of us before real progress can be made towards a sustainable peace deal.
That scepticism towards material escalation helped cap volatility, and US indices clawed back early losses as a late rebound in semiconductor and AI-related shares carried the growth-heavy benchmarks higher; Europe, more exposed to the geopolitical backdrop, fared less well.
The more interesting undercurrent, in our view, is the sheer scale of new equity and debt issuance. Demand remains robust for now – this week's jumbo Amazon corporate bond issue was simply the latest in a long line – but the volume of cash being raised is adding pressure to upside momentum, and it feels natural to expect markets to start questioning the efficiency of these gargantuan investments. For now, demand absorbs the supply, but the bar is quietly rising as the cheques get larger.
Yields pushed higher last week driven by the renewed tension in the Middle East and a somewhat hawkish set of Fed minutes. For fixed income investors, the more durable issue is that the robust AI investment dynamic makes it likely that US inflation is slow to fall as gasoline prices remain sticky despite softer crude, chip prices are firm, and with signs of economic heat we are carefully monitoring inflation risks. This should keep the Fed on a hawkish path for the time being (keeping interest rates higher for longer), and we would argue money markets are now fairly discounting the road ahead.
Closer to home, UK politics provided the drama – Nigel Farage's resignation and Clacton-on-Sea by-election stunt on one hand, and Andy Burnham securing the backing to succeed Keir Starmer on the other. Gilts had another difficult week, reacting sharply to investors’ concerns about the UK’s finances and politics.
The delicate state of the public finances appears to be dawning on Burnham and his team, and with risks still skewed towards further government slippage, we expect an elevated fiscal and political risk premium to persist.