Hello there, and thanks for joining the monthly webinar. It's Mark Dowding here and I look forward to speaking for the next 25 minutes or thereabouts, sharing some of our thoughts and views around markets.

Here we are 30th of June, middle of summer, scorching hot today, and I guess in football terms, we've reached pretty much the halftime part of the match, haven't we? We're exactly bang on halfway through the year. Certainly a year where it's felt like a lot has been going on in the world around us. A lot of that sort of obviously focused around what's been happening out the White House and the Trump administration.

At the same time, when you look at financial markets, it does feel like over the course of the last couple of months everything has pretty much been calm, things have been relatively quiet, and indeed when it comes to things like equity markets, notwithstanding the 12 day war in the Middle East and all, effectively, markets have managed to quietly carry on, climbing that wall of worry.

So I think this has led to some head scratching in some quarters and certainly a bit of a moment to reflect and assess where we stand here and now today and what potentially is going to be ahead of us driving those markets as we kick off the second half, as we move through the

course of this week.

So from that perspective, I think the one thing I would say in beginning, a few comments around the economy is that when we're looking at the economic data, it does look like we are seeing some evidence that some of the US sort of activity numbers are slowing a bit.

You, you're seeing this in the weekly claims numbers when it comes to the jobs market and I would've thought that the monthly payroll number that we see, which has released this Thursday, could be a little bit softer than we've seen in recent months.

That said, with pressure on immigration, it probably means that you won't see much of a move in the unemployment rate given that you've got that sort of tightening taking place elsewhere, but there does seem to be a bit of a more muted growth trajectory, and I think that this is something that we've been sort of speaking about maybe for the last several months.

In that light, I mean, for example, you'll see the city supplies index in terms of the economic supplies index is actually sort of down at relatively low levels at the moment. Again, sort of symptomatic at the fact that the economic numbers are coming out on the softer side.

At the same time, we are also looking at inflation. Thus far, inflation has been relatively well behaved in the US. It's effectively gone sideways over the last number of months, hasn't it? Now, I think the one thing that we would discern going forward would be that as tariff price hikes are passed on, we are expecting those inflation numbers to climb, albeit it may not be something that we see in the next set of monthly numbers.

If anything, it looks like some of the past, it could actually happen perhaps later in the summer. And so when you look at what sort of unfolding here, there's a bit of a sense that growth is a little bit softer. There's a sense in which inflation could be a little bit higher, but nothing too dramatic.

And moreover, the thing that really strikes us is there's really quite a lot of uncertainty and conjecture in terms of where the economy is going to be in six months or 12 months from now, and of course, much of that may actually end up hinging back on what's delivered from a policy perspective.

But it does strike us that when we have conversations with the Federal Reserve at the moment, it's very much a case that there's not a lot of clarity and therefore those central bankers are telling us that effectively forward guidance has lost its relevance.

It's very difficult to give forward guidance in terms of the path of policy on a forward-looking basis going forward from here. I think Powell and colleagues would rather be in a wait and see mode, let's see what the data does, and then be in a position toreact off the back of that.

So that would be the narrative.

And I think it leads me to sort of make one particular point, which would be that when we are looking at sort of the economy and I would say markets, we could almost sort of bracket at the moment those things that we simply don't really have the answer to versus other things that we might feel more confident about.

And when it comes to the directionality of the bond market and interest rates, I'd say at the moment the White House doesn't really know, the Fed doesn't really know. If they don't really know, it's going to be very hard for us to know very clearly.

So from that point of view, it's difficult to express a very strong directional bias. But then when we turn to the things that we do know, one thing that we can be confident on is that we are in a world where we are seeing ongoing heavy debt supply, and in that light we've got the budget currently with the Senate.

We're expecting a budget deal to get done this month, because if it doesn't get done this month before recess, you'll end up losing the window for reconciliation and it'll be much more difficult to then make a budget deal trying to bring together Democrats in more of a bipartisan fashion, and so we do think there'll be some compromise on the budget, but what we will see on a budget is a deficit for the year ahead of another 7% of GDP, even when you allow for all of the tariff revenue that is being collected.

It's estimated that within that budget you'll have about 250 to 300 billion of tariff revenue, and so in a way, you actually need the tariffs just to stop the budget deficit getting even worse. And obviously this is a very elevated level of fiscal sort of deficits for what is an economy which has been in a fairly lengthy, protracted positive part of an economic cycle, isn't it?

And so from that perspective, we think that this is an ongoing pressure to longer dated bonds. At the same time, the other thing that I think we can say that we know is that we know that Trump, we know the administration is going to be beating on Powell, trying to get him to cut interest rates at the earliest opportunity.

In conversations that I've been having with White House, they've really been slamming Powell, they've been decrying the fact that he's behind the curve, that he should be sort of looking to push interest rates down. And in part I feel the message coming through from the administration here is that they want to see interest rates to come down because that's pretty much the only mechanism to actually bring the deficit down.

And so this of course is leading to a narrative as to whether we'll see an early announcement of Powell's successor and there's a bit of a political game being played here, but if some of those Fed governors want to get into the good books of the boss, maybe they start to flip towards wanting to deliver more monetary easing as well. So if anything, we can see pressure downwards at the front end of the yield curve, but maybe more upward pressure at the back end.

And so it does lead me feeling relatively confident about the idea, the narrative of curve steeping. It is a theme that we think will play out over the course of the summer based on what we are actually seeing, and hand in hand, I think the other thing that we can also infer, we think we are likely to see is ongoing weakness in the US dollar.

Much of the dollar weakness we've seen thus far has been on the back of Asian investors increasing their hedge ratios. They were under hedged around the time of liberation day, and particularly because the dollar has started reacting negatively during periods of asset market weakness. It means that if asset markets go down, those investors are even more concerned now that their losses could actually be compounded through the FX channel, and so they've wanted to raise their hedge ratios, but what we haven't seen at all yet is any asset allocation shifts with any dollar assets being sold.

But we do think we are going to be seeing those asset allocation shifts to come. We've been meeting with very many large investors and it's been a pretty consistent theme that the dollar content, the US asset content within their broader asset allocation has peaked and they're actually looking to navigate that lower. This may not come through the outcome of actually selling securities, it's more question of where net money at the margins will be invested going forward from this particular point.

So we do think that we are going to remain in something of a weaker dollar regime. And so here, we can sort of pick two particular trends we think are easier to make a call on than on market direction per se.

As for the other sort of big thing looming on the horizon, obviously on July 9, we have the tariff deadline. It's widely expected that that deadline is going to be pushed back. Bluntly, the administration has made very little progress at all in terms of negotiating any trade deals with partners, with the exception of course of the UK.

And so what we've heard from the White House is that as long as those trade discussions are ongoing and are live and being conducted in good faith, they'll look to extend the timelines out. And in particular, this has always, always been inevitable ever since the court challenge on some of these IBD tariffs anyway, which has put their validity into a bit of doubt.

That said, the idea that the tariffs are extended, I don't think that Trump is going to want to be seen here effectively capitulating on his agenda. This whole narrative of Trump being called a TACO has probably got under his skin I would suggest, and so from that point of view, I wouldn't be surprised to see the US flexing its muscles and maybe handing down some additional trade tariffs as we sort of go through this upcoming period.

And in that context, we'd be looking at sector tariffs, the 301 tariffs potentially on European pharma. Of course here we have a situation where a large amount of US pharma is located in Ireland principally for tax reasons. The US wants that industry back, it wants those revenues back, and we think that ultimately the EU is unlikely to keep going into bat for Ireland on this particular issue.

So this is something maybe to be mindful of over the course of the next couple of weeks that there could be a bit of a counter punch by Trump not wanting to be seen weak, even if the tariff deadlines are being extended, and this, in a way, we think could be something that leads to a bit of a market wobble.

We'll have to wait and see the contours of how that plays out in the course of the coming days. Otherwise, moving across the Atlantic now, I think the other thing that obviously we've been sort of witnessing of late has been this sort of ongoing narrative of the US applying pressure on the Europeans to spend more on defence.

But ultimately the truth here is that Europe was planning to raise that defence spending anyway. That said the moves to actually increase spending on defence and security to 5% of GDP by 2035. This is a big jump, a big, big jump from where we are today, and you wonder whether it's going to be possible doing that and pursuing things like net zero or whether things like net zero need to go completely out the window because now there are other imperatives which are being focused on, that the voters and others perhaps are pushing for just a little bit more.

But this narrative of delivering this fiscal push is going to be something that leads to a lot more European debt, isn't it? If you look at Germany as a case in point, you'll actually see today in issuance there's around about 1.9 trillion worth of German Bunds.

The additional spending commitments that Germany has signed up to over the next 10 years will add another 1 trillion to that debt. So an increase of 50% in net Bund supply is coming our way, and this is going to be something which is a trend that is being replicated elsewhere across Europe as well.

In the UK, this sort of push to raise defence spending and Starmer being sort of dragged into this as well, is also something which is creating Labour a bit of a headache. It's quite difficult clamping down on welfare spending at a time when you're trying to throw a load of more money at defence.

But within the fiscal strait jacket of the OBR framework that the UK is operating to, this clearly means there are tough decisions ahead, either tough decisions on spending or tough decisions on taxation.

So the UK is an area where we continue to be quite concerned around the direction of travel. If we do see a generalised move lower in Gilt yields, we think at 440, that's probably a level at which you'd want to be short of 10-year Gilts. And otherwise, again, we are concerned around the trajectory at the long end of the market, although that could be a little bit helped in the short term by the fact that we do think it's about high time for the Bank of England to ditch QT and ditch its bond sales.

We also are looking for changes in the bank's liquidity ratios to make it easier to own government debt as well. So there could be some factors more technical that could support longer dated bonds.

But intrinsically the UK story isn't a great story and it's compounded by the fact that inflation continues to look too high. Certainly I feel like my experience of inflation is a lot more than the 4% that the data suggests. Every bill that comes through every renewal seems to go up a much more material chunk than that, and I do feel that, in a way, that there's almost a sense that I have that there has almost become a way in which people are becoming desensitised to the idea of price rises and inflation more sort of recently. You know, seeing this in wage claims and what people are bargaining for when it comes to the jobs market.

Moving further east across in Japan, here, again, there's been surprise that the Japanese haven't managed to get a trade deal done. I think they've taken issue with the fact that the US is pushing them to do more, again, on defence spending, which the Japanese are quite reticent about.

And also having spoken with Japanese policy makers, I do get a sense that they're feeling quite hurt, quite offended by the US actions on liberation day. They felt they got unfairly treated on that particular trade day and in a way almost betrayed given the closeness of the relationships they've had for many years.

With Japan having an upper house election on the 20th of July as well, it's also not at all

convenient for them to try and sort of make too many compromises in the here and now.

And so in that sense, the fact that there isn't a trade deal done, we do think it's starting to impact the BOJ's thinking, and so where earlier in the year we might have thought that the BOJ was in line to actually hike rates again in July, that of course is now very, very unlikely.

We'd already been hearing from the BOJ if such a move was in the offing, and it now looks like a rate move in Japan. The next one we think is only going to be coming towards the end of the year. But even that might depend a bit on the timing of any possible sort of US rate cuts and what's happening on the US economy at that particular time.

All of that said, at the long end of the market, at least we are happy that they have been taking measures to actually reduce long dated bond supply that's helping to stabilise the technicals. We still see the very long end of the curve. The 10s, 30s curve in Japan looks way too steep for us in terms of a developed market curve, and in part we think that's because the 10-year part, the curve has looked artificially expensive ever since the hangover of yield curve control, and that's something that can correct over time.

So we continue to have a degree of conviction there on the yield curve. And so a number of yield curve trades across different markets. But in general, I would sort of summarise by saying that in terms of active risk we are running at the minute, we are probably running active levels of risk in our strategies, probably close to the bottom decile of what we have run historically across the entirety of the Blue Bay platform.

In credit, we are relatively content to hold credit because we think that recession risks are relatively muted, but we aren't really excited by the valuation on offer in credit. Yes, European financials look attractive and there are other pockets we might be able to sort of highlight as well.

For example, AAA CLOs we thought has been a place where there is cheap, safe carry-on offer perhaps, but by and large, when we look at index spreads, when we look at spreads in IG and in high yield, it strikes us that there isn't a lot to actually compensate investors given some of the potential risks that we are currently facing.

And one of the other thoughts we've really been sort of playing with is that maybe in the course of the Trump presidency, what we'll actually learn, we'll end up seeing is periods of part calm, punctuated by periods of volatility. It's almost like you'll see a big wave hit and then in between the wave everything is calm, but then things build and then the next wave is coming, and from that point of view, if you are using that metaphor, you could say that there was a big wave, of course, in the early part of April. We've been in a period of calm since, but we're a bit mistrustful as to how long this period of calm will actually persist before the next shock takes markets to one side, and we want to be in a position that if you do see that price action, we are well placed to be able to add risk at more attractive levels.

And so we are happy to keep that dry powder. At the same time, we don't want to run underweight or short in credit partly because the technical bid for bonds remains really quite strong.

One of the things that we've sort of reflected on here is that you can look at the net supply of corporate bonds and say this net supply keeps growing and growing, but that doesn't take account of the fact that this year there's a lot being paid back to investors in coupons, in terms of interest coupons.

A few years ago interest rates were super low and so the coupon flow was next to nothing in a way. But now that coupon flow is more material that's giving money back to investors, putting money back into their hands, which then finds its way back into the market, and in a way some of that coupon income is helping to take care of some of that net supply.

We'd also see a pretty strong technical in Europe. One of the things we've highlighted in like the CLO space is that typically we've been used to seeing 70, 80, 90 active warehouses for European CLOs. The current number is above 150. It shows you some of the strength of the demand for European paper in the AAA space, partly coming out of jurisdictions such as Japan.

But if those CLOs print, that creates a lot of demand for high yielding loans, which again is another credit supportive factor. So all of this is creating a strong technical, it's helping the market, it's compressing spreads. At the same time, we don't want to get too excited. We think that it kind of makes sense staying close to home.

So yes, we are climbing a wall of worry. We are climbing this wall of worry in equity markets. We don't want to come across as too bearish, but we do want to be looking for signs that this next wave of volatility is about to hit and is about to be upon us, and we want to be positioned so that we're in a good state and shape to be able to deliver returns if that should come.

We didn't quite catch the wave that came through markets in April, we want to make sure that we ride the next one much more successfully. That said, I mean strategy is a back above benchmark as we reach the midpoint of the year pretty much across the platform. So things do feel like they're moving in the right direction, but of course delivering the numbers, delivering the performance is what we are being paid to do and that's what we are committed to delivering.

And so this is how we are looking at the world. We are confident that we are going to see active opportunities ahead, but we also know that in markets like these, you want to be careful in terms of what you chase, particularly when valuations just aren't really there.

So that's really the landscape. There's some of the thoughts I wanted to share, I said I'd speak for about 25 minutes, I'll leave my comments there, and I'm now going to be picking up my phone and going to any questions and I can see that a couple have come through.

The first of these is around which Asian currencies could benefit from the repatriation narrative. Now here, I think that in Asia, if there is a repatriation, there are a few countries that could stand to benefit, but where we've actually looked at the risk/reward actually looking the best is actually currencies like the Korean won.

Korea runs a current account surplus. We look at that as a pretty robust macro story and intrinsically quite an undervalued currency when you actually make the adjustments for the current account and the external asset position.

So Korea we think is one to watch. I'd also observe that the Chinese renminbi has been lagging behind other currencies as other currencies have rallied against the dollar. So the CNH has lagged behind.

So we think the risk reward there is becoming a bit more interesting again. But of course if there is a much bigger move, a much bigger dislocation, there are many other Asian currencies, Asian countries I should say, with large net asset positions when it comes to the US markets. So this is something to be mindful of, but again, it's another reason why we think we're going to be remaining in a bit of a weaker dollar world.

The next question is, we've seen potential central bank intervention in Taiwan. Is it likely to be in the agenda during tariff negotiations?

Well, in terms of Taiwan, in a way, Taiwan was to unhedged currency holdings what Ireland is to tax minimization strategies, if I put it that way, in terms of financial markets, and obviously we've ended up seeing Taiwanese investors being caught out by the big move stronger in the Taiwan dollar.

Effectively, for many years, Taiwan has also been disguising a lot of the overseas investments and seeking to suppress Taiwan dollar strength.

We do think that this is going to be a factor pushing that currency stronger, but because you've already seen a bit of a move, of course you saw a 10% move in Taiwan, that's why Taiwan wouldn't be our top pick right now. That's why we'd be highlighting one such as the Korean won.

In terms of duration positioning in credit, well bluntly, we are bang on benchmark in terms of our duration positioning. As I say, we don't have much of a directional view at the minute, but what we do have is a steepening view on the US curve in terms of the underlying rate structure, and elsewhere, we have that sort of reverse position, if you like, in the Japanese market.

I've been asked a question about convertibles. In terms of convertibles, this is an area that we don't have a strong view at this particular time. I think that again, this is one of those asset classes that's quite idiosyncratic. It's more driven, in a way, bottom up though we do know that a lot of CB issuance is linked. It is quite tech heavy in terms of the sector underlying decomposition.

So again, where you are in terms of equity delta, in terms of your CBs will obviously be a driver to return depending on what equity markets deliver. But generally speaking, I would say that in terms of issuance and also investor demand, this hasn't been an asset class that has been seeing a huge amount of interest over the course of the last few years, honestly, and so it is not something that we are putting at the top of the list of opportunities as we see them.

And there may be a last question there, there was numbers coming out of Germany in terms of spending and issuance very large, translating this to possible ECB hikes from 2027. How confident are we that the money is going to be spent in a way that boosts growth?

Well, I can't tell you what's going to be happening in 2027. What I can tell you is that money is starting to be spent already. There's been some scepticism around this, but in as much as you are spending money, in as much as you're delivering a fiscal boost, we do think that this is going to translate through a growth multiplier to mean that European growth rates are 1.5% plus going forward from here, and we wouldn't be at all surprised to see Europe actually outgrow the United States in the course of the coming 12 months therein the end of US growth exceptionalism.

So when you're throwing this amount of money, we do think that that will have a growth benefit. But what that means in terms of the economy 12 months out or into 2027, a much more difficult question. And then lastly, since the BOJ lifted the ceiling on tenure JGB curve control, it seems you are no longer getting a stronger yen driving 10-year yields and a lower dollar driving 10 year.

I think there's a question, it was a long question. I'm no good at reading and talking at the same time. But the point in the question here is that in order for the yen to rally, we need to see the BOJ normalise interest rates. At the moment, the yen has been going up against the dollar, but it has been lagging behind everything else.

We really think that the BOJ does need to do its job, it does need to be normalising interest rate policy, and we're confident that it will do over time. Inflation is going to be higher, that will be merited. The yen remains very cheap. Get there on holiday while you can, while it's still cheap, while you can afford to go there, it's a great place to visit. But beyond that, it is a reason why that BOJ dovishness in the near term means that just in the short term, the yen is no longer our top pick in the FX space.

With that, I'm going to leave my comments. I've been speaking for dead on 30 minutes. Thanks for staying with us today. Appreciate the questions that were asked and your ongoing support and interaction with us.

I hope that you're finding these updates of use to you. I look forward to being online again in another month from now. But for now, all the very best. Enjoy that hot weather and make sure you keep hydrated. Need to keep the fluids up in this weather, all the best.

Bye now.