Credit markets and risk assets in general have had many things thrown at them over this quarter and uncertainty has reigned. As geopolitics and regional conflicts remain to the fore the economic picture remains clouded. The Middle Eastern conflict seems to ebb and flow hour-by-hour and US involvement was a further escalation. The crass coining of ‘Make Iran Great Again’ was astonishing. The economic fear was for crude oil prices, but after the initial spike oil prices actually fell back to where they started, though the focus on oil is diluted as the US is now a net exporter.

President Trump’s second term has encompassed the issuance of 170 executive orders, effectively bypassing the Senate and displaying the erratic behaviour normally reserved for a dictator.  Worries about the effect of tariffs on the US deficit led Moody’s to downgrade the US’ credit rating from AAA.  Whilst this was not unexpected, as they were the last agency to do so (Fitch moved in 2023 and S&P in 2011), it does add to the feeling that the credibility of the US, and the US dollar is eroding, leading investors to move away from US assets.

The tariff story rolls on and is far from over, the US/China tariff roll-back generated some excitement as it removed a worst case. The 9th July deadline came round quickly so no surprise when it was extended to 1st August. The main outliers remain Japan and the European Union. who are still seeking a deal. At first glance the higher tariffs on peripheral small Asian economies with significant trade surpluses to the US are not so relevant, presumably designed to stop the rerouting of goods. In early July, Trump stated: “Today we’re doing copper” which meant he slapped a 50% tariff on the metal. The US imports 50% of the copper it needs and although it might have huge copper deposits, they can’t be mined and refined overnight. The net result was that copper prices spiked higher in the US but fell on the London Metal Exchanges. If this is not inflationary, I don’t know what is. So far, we haven’t actually seen much inflation or activity fallout from the tariff uncertainty and precious little effect on risk assets as US stocks explore new highs. Unfortunately, Trump doesn’t take this as markets ignoring his tariffs, instead he sees it as their validation.

Trump’s propensity to lash out at anyone and everyone remains unabated, and the predictable falling out with Elon Musk has led Musk to announce he is setting up his own rival political party.  The attacks on Federal Reserve Chairman Powell have continued (apparently, he is one of the dumbest, most destructive people in government...) and widened to more of Trump’s associates and now includes the cost of the refurbishment of the Fed’s HQ.  They are also trying to push the idea of a ‘shadow Chairman’, who would take over in May following the end of Powell’s term, whose pronouncements would carry more weight than his.  So, we are seeing the return of the concept of ‘fiscal dominance’ where the Federal Reserve becomes less independent and moves its priorities from employment and inflation to financing the Government.

The Bank of England held the Base Rate at 4.25% as UK CPI stayed above their 2% target. Money markets discount two/three more cuts before a floor of 3.5%, which feels like the right level unless we see a dramatic drop-off in economic activity. The Bank is still selling Gilts (acquired since the 2008 crisis and in the aftermath of COVID), which continues to weigh on the Gilt market (push up longer-term interest rates) alongside the Government’s large funding plans. As defined benefit pension schemes wind down, we are losing a natural buyer for Gilts and are more and more reliant on foreign investors. Concerns about fiscal policy and the state of the country’s finances have returned with a vengeance. The defeat over welfare reform has turned their sums upside down and the public distress of the Chancellor was rather sad.

The UK/US tariff deal means that we remain at 10%, but with no assurance on individual sectoral tariffs. The EU remains as our biggest trading partner, but we do however hold a lot of US credit risk, $690bn of Treasuries, now a bigger holding than the $680bn held by China. A much heralded deal on fishing (actually, only a baby step), food trade and youth mobility was struck between the EU and the UK. But this does mark a turning point in relations between the two.

The US Federal Reserve has stood its ground and held their interest rates in defiance of the President.  Strong employment figures, steady GDP and inflation concerns (inflation expectations have spiked to a 45-year high) have pushed forecasts of the next rate cut to July, though there might not be any this year at all. Fiscal worries and a weak US Treasury auction led to a spike in yields and the ‘term premia’ (paying more to borrow for longer), the thirty-year rate hitting 5.15%. Trump’s “One Big Beautiful” tax bill was signed into law. The potential effects of these tax cuts on US borrowing levels are dramatic, particularly if the tariff experiment doesn’t raise the revenues that Trump is seeking.

The ECB cut their base rate by a quarter point at their last meeting and 2% looks to be a level they are happy with.  Eurozone activity is perking up (although distorted somewhat by frontloading ahead of tariffs) despite the still fragile political landscape. Europe appears to have, maybe, ended up with a 10% tariff deal, which would be encouraging, although 30% has just been threatened. Chancellor Merz’s €46bn tax- break package has been passed into law by the German upper house and there are high hopes that this will provide a quick boost for their economy.

Euro and Dollar credit spreads widened a little due to recent events but regained that ground in short order. Sterling credit spreads have had a strong quarter and are still offering the best all-in yields, we also have the highest sovereign yields of any developed economy. Thanks to this we have seen limited issuance into sterling in comparison to euro (May was the busiest month ever) and USD. What we have seen in sterling has been of good quality, especially in some infrastructure names.  The water sector still looks shaky and the Thames Water story goes from bad to worse.

The full Quarterly Review is available here. 

July 2025

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The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment arrangements.

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