Hello there, and welcome to this month's webinar, where, as per usual, I'm planning to spend the next 25 minutes of time reviewing some of our thoughts around recent macro developments and how we're currently looking at the world.

At the end of those comments, we always try and leave a bit of time for some questions, some Q&A, and if you look on your screen, you should be able to see, there's a website address, slido.com, along with an access code, which will be DFD22June, I think it should be on your screen.

Into that there, and, I'll be delighted to, take questions at the end of this piece. So, with that being the case, I'll jump straight in, and I guess, my sort of reflection this month is that, actually the, the sort of broader narrative is more about central banks and inflation, perhaps more than it's about the Middle East. The Middle East, sort of story has died more into the background with a bit of a truce being established. But it does mean that Market's going back to focusing more on the data.

And from that perspective, we had a somewhat hawkish central bank meeting from the Federal Reserve last week. The first one, chaired by Kevin Warsh.

Ostensibly, I guess what we would observe when we look at the US at the moment is an economy that looks to be in pretty good health, obviously powered by business investment spending. This insatiable appetite for anything around AI is obviously driving a lot of debt issuance, a lot of money being thrown at the economy, and that's really having sort of an impact in terms of growth data.

To the point where, sort of, the economy may be growing on a trajectory close to around 3% at the current point in time. And in many respects, when you look a broad slew of US economic data, there's not much that you can point to that would really suggest to you that the economy is looking particularly weak anywhere.

Indeed, there isn't anything that's telling you that monetary policy is particularly restrictive at this particular moment in time. So, given that inflation on the CPI measure is up at 4.2, it's been above the Fed's target for more than 5 years, you can kind of understand why an incoming Fed chair like Warsh is wanting to assert the Fed's inflation-fighting credentials. Inflation is very unpopular, it's an issue at the polls, affordability is likely to be the big topic at the midterms. And so, we can understand that, Warsh is eager to try and talk inflation down. I guess the question is whether he's going to be following those words with policy action. So if you look at markets now, we've actually seen.

In the wake of a relatively hawkish Fed, markets moved to discount one hike from the Federal Reserve in September this year, with the second hike to follow around about March 27th. So, two hikes are pretty much priced.

And so, markets are certainly leading this way. And it's kind of interesting, I speak to some who'll be sort of more in the camp that actually if you really do need to tighten monetary policy, bring it into more of a tight setting to get inflation down, who knows? Interest rates may need to go up 75 basis points or 100 basis points over the course of the coming year. After all, the strength of what we're seeing in AI is showing no sign of slowing down, and that may need more forceful policy restraint.

There'll be others who might sort of come to the conclusion that actually this move up in inflation may well moderate with oil prices coming down, and it could be that we've seen the top in terms of the monthly CPI prints, in terms of the data last month.

And if that is the case, and if inflation does end up on a downward trajectory, maybe the Federal Reserve will be more given to the idea of trying to look through the inflation overshoot and not acting.

And ultimately there, I think I've kind of summarized why the markets, in a way, has been left guessing. Excuse me, under Warsh, we have a Fed that doesn't want to issue forward guidance, and so…

In that respect, it almost feels like every policy meeting can potentially be a live meeting, and so there is this array of different views and opinions in terms of what the Fed will be doing.

I think for myself, the fact that the market's pricing him 50 basis points, somewhere between doing 100 and doing nothing, seems like a fairly sensible pricing for the time being, so…

We wouldn't have a very strong view on the pricing of the Fed, right here and right now. But we would be highlighting that when it comes to Treasuries, we would expect to see some continued underperformance of US Treasuries relative to markets overseas.

And from that perspective, we continue to highlight that the growth trajectory in Europe is obviously looking a lot weaker than it is in the United States. We don't see the benefits of the AI boom, tax cuts, deregulation, driving European growth in anywhere near the sort of fashion that we see across the Atlantic.

And so, with that weaker growth trajectory, you can kind of see how the overshoot in inflation may be a bit more temporal in nature. And indeed, even today, Christine Lagarde has come out and said that she doesn't see the need for further forceful policy action to actually encounter the inflation overshoot on the back of the Iran crisis.

So, perhaps there is some line of thinking that in the context of the Eurozone, having seen the ECB hike once, there may be one more hike. Who knows? The ECB may actually decide that the one hike is enough, and if inflation's coming back down, it's one and done.

But moreover, if we do see a weaker trajectory in terms of the European economy, you can make more of a case for how you might return towards rate cuts in 2027, perhaps in the Eurozone, than is the case in the US for the time being. So, from that perspective, we have a relative preference for Eurozone fixed income relative to the US, and from that point of view.

We've cited some value in short-dated euro yields. Effectively here, you're pricing more than two rate hikes in Europe, and then rates staying at that elevated level. To the point where, sort of 2-year swap rates today, at, sort of 275, are quite a long way ahead of where cash rates sit at 225. Sitting long of that swap rate there seems like a sensible risk-reward trade for us, so being long there in Europe, but obviously more cautious in US is our preference.

And then turning to the UK, what a country we've got in the UK at the moment. Another day, another week, another Prime Minister, hey? I have joked in the past, it almost feels like we've inherited what were the instability and the rotation of prime ministers that we saw once upon a time in Italy 10 or 15 years ago.

Maybe the gilt market has become more like the BTP market in the same basis, but we have, before I speak about the politics, when it comes to the UK and the Bank of England, we've tended to see, historically, how the UK is more prone to shocks on both sides, and so in many respects, the, sort of European or the gilt market can be more volatile, both when it's selling off and both when it's rallying.

And if we were purely looking just at the economic fundamentals, we might be sort of saying that with two hikes being priced in the UK, you could end up in a situation where the Bank of England does less monetary tightening than that, if the upmove on inflation isn't too problematic.

I would note that last week's inflation number in the UK was a bit better, and compared to 2022, we seem to be seeing a much weaker inflation impulse in the UK than we did a couple of years ago.

And therefore, UK inflation is currently sat well below where US inflation is, for example. And from that point of view, just looking at UK interest rates, we might start to get a little bit interested on the long side, thinking that, the Bank of England's got this sort of underlying, intrinsic, sort of more dovish bias that they'd like to reveal.

But then the problem in terms of looking at anything in the UK at the moment is it comes down to the politics. Now, it's been an interesting market reaction today. We obviously have the impending coronation of Andy Burnham as the next Prime Minister. There won't be a leadership challenge, it seems like a streeting's been, bought off.

And it's kind of been interesting that in markets today, markets maybe have jumped to the conclusion that Streeting will end up with the Chancellor's job. I'm not sure that he will actually end up getting that mandate. I think that that could well go to others. And so the idea that, that actually, under Burnham, we're going to get something that is very fiscally responsible, I think, for me, is something that I still feel uncomfortable with. From my perspective, the move to Burnham represents more of a decisive move to the left.

More of a deliberate, assertive plan to spend more, invest more, and of course, at the same time, tax more.

But I think all of this smacks of the risk of fiscal slippage, and I'm more given to think that markets may be inclined to test Burnham's mettle at some point, and that may create an uncomfortable moment for the gilt market.

Noting that many other investors that we meet are positioned on the long side on gilts. They've tended to be, sort of long and long this year, but they haven't capitulated. I do see that if there is, sort of, that sort of, political schism, perhaps, UK yields could be more vulnerable. And so, although I can see some cheapness in terms of valuation on fundamentals.

I'd rather be buying at higher yields when others, perhaps, are capitulating. But otherwise, for the time being, I think expecting maybe some risk to emerge is perhaps the right thing to do in the context of the UK.

Otherwise, elsewhere, last week we also saw an interest rate decision coming from the Bank of Japan. They were hiking by 25 basis points. That was largely expected.

The problem in Japan, though, is that, earlier in the year, it looked like Japan was going to be slowly and steadily hiking at a time when other central banks were easing. But now Japan has stayed on that slow and steady course of hiking. It comes at a time when interest rates elsewhere are going higher.

And therefore, interest rate differentials between Japan and other markets either staying unchanged, or potentially growing wider through the course of the year, and that's creating pressure on the Japanese yen. So this is something to watch for. If we do end up with the yen more decisively breaking through 162, then maybe we're in a zone where we need to rethink the valuation and where the yen goes next. If intervention and the threat of intervention is unable to hold the yen at around this particular point, who knows we could actually be pushing up towards a 170 number in the absence of the BOJ quickening their tightening pace.

But we think they're quite unlikely to want to jump on board with the idea of more rate hikes more early, largely on the basis that Takaichi, the Prime Minister, is very intent on trying to maximise nominal GDP growth, and therefore, her preference is to go slow and steady, and so I think it's only if you see a bigger move in the yen that Japan will be sort of pushed, perhaps, into more assertive action.

Otherwise, we think they're in a more moderate path. Otherwise, when it comes to Japan, unlike other markets, the Japanese yield curve is incredibly steep. Elsewhere, yield curves today are much more flat, so…

If we do end up with shorter-dated yields going higher in Japan, the long end of the curve continues to feel quite well protected, through our lens. But otherwise, the Japanese economy is doing relatively well. Certainly much better than the European economy is on a relative basis.

In terms of other things to cover, I think within Europe, I'd mentioned that there isn't a lot of volatility in spreads in the Eurozone at the moment. In a way, I think that one of the impacts of Donald Trump has actually been greater European solidarity, and in fact, we also see this

In terms of countries like Hungary, where I get a sense that the EU is very eager to encourage the idea that Hungary becomes an EU accession candidate. And this is something which is actually benefiting, sort of, Hungarian assets in recent weeks, and that's something that we've had some exposure to across our particular investment platform.

I'd also highlight that Iceland is a country that will be having a referendum. It's more of a referendum about a referendum, with a view to joining the EU. That will be taking place at the end of August. And so that's something also that we're watching.

I think, in a way, the fact that US policy is more unpredictable, I think is causing maybe greater solidarity in Europe, and maybe, that more sort of pro, sort of EU bias. All of that said, I don't think that extends as far as the UK. I can't see Andy Burnham wanting to rush towards, the idea that the UK should rejoin the EU anytime soon, but who knows?

That could become something that goes into a manifesto, perhaps in the next Parliament. Who knows? It could be a decisive sort of question at a future point in time, but here and now, I would sort of voice the thought that even if the UK wanted back in, I'm not sure that the rest of Europe would really want us. So, from that point of view, I'm not sure how welcome we would be, particularly if there's a risk that a party like Reform and Nigel Farage were to win the next election. There's no way that the EU would want us as part of their club with that guy hanging around in Westminster in a couple of years from now.

Otherwise, elsewhere, I would note that in FX, this outperformance of the US economy, this more hawkish trajectory on US rates has been favouring the dollar. So we've seen the dollar across the board move towards its highs for the year.

All of this said, we've highlighted the fact that we do see this underlying sort of shift in asset allocation, maybe away from U.S. assets, more of a focus towards more domestically orientated portfolios. So, there are medium-term trends that we think count against the dollar, but just in the short term, it's this sort of secular strength of the US economy, which is driving the agenda, just in the here and now, so I think we will need to be focused on what that means in terms of upcoming, sort of, Fed meetings, notably in July, of course. And as I said earlier, we could potentially see how the July meeting could be a live meeting for the Fed. I don't think it is a live meeting for any of the other central banks, but that's something that will be, sort of, testing, in, in the weeks ahead.

But this narrative of a somewhat stronger dollar is something that can weigh a bit on emerging markets. We've seen some pressure on local rates, particularly positions that have been well-owned, including places like Brazil have been under pressure.

And so this can be an issue, but we can still see a lot of sort of value in assets like Brazil, where bonds trade at 14% when you have 4% inflation. Fundamentally speaking, that market is looking very cheap through our eyes. And certainly when it comes to political risk.

I guess the news over the weekend, we saw the election win for the right-wing party in Colombia. Again, perhaps has a bit of a beneficial read-through if things are moving across the continent, perhaps more in that sort of right-leaning direction.

But we have seen a big recovery in Colombia over the course of the past month as you move away from the left-wing stance more towards something that's more right-wing, pro-the-US, and has that sort of more populist hue to it, but also one that has more of a clamp down on the corruption, the violence that is taking place in the country, and is also looking at more sort of budget responsibility.

Elsewhere in emerging markets, we've become a bit more optimistic on the outlook for the conflict in Russia-Ukraine. It feels increasingly to us that Russia is in a conflict that it now wants to bring to a close you'd like to get out of, and so we think we could be closer to, a negotiated peace outcome in Ukraine than we have been at any time since the conflict started in 2022.

Otherwise, turning back to the Middle East, look, the, the deal that has been agreed, let's face it, Trump has effectively capitulated, he's given the Iranians what they've wanted, Iran is leaving this, conflict in… impaired position relative to where it started, with this effective control over the Strait of Hormuz.

It's emerged as a stronger regional power. And this is something that's clearly very problematic for the Gulf states and also Israel as well. So there is a bit of a sense when you look at it, it feels like a bit of an unstable equilibrium, so…

So it's great that we're making progress towards peace, but uncertain in our eyes how durable that this is going to be. And so, we wouldn't be surprised to see ongoing volatility on a regional basis. We wouldn't be surprised to see ongoing disruption in the region and to trade flows. And even last night, we saw a big fire at the gas refinery in Qatar, Ras-Laffan, which has been pushing up natural gas prices. But ostensibly speaking, we still think there's a lot of damage that's been done to supply chains over the course of the last couple of months, and that's going to take a number of months to work its way through the global economy, and so from that perspective.

We've always thought that once the conflict ended, there'd be a period where oil prices would remain not too far from $80 a barrel, so from that perspective. We think that we're sort of priced in the good news, but we're likely to be left with this lingering sort of disruption, which obviously Europe is much more exposed to in terms of its impact on relative supply chain issues.

Otherwise, elsewhere in, and credit markets, they continue to take their key from equities. Equity markets are obviously sort of very bullishly minded, and so that continues to drive demand. It drives appetite for yield. It's driving appetite for people to leverage up to actually reach for high yields, to apply leverage to product that's driving demand. And even though we are sort of seeing the situation where we have a wall of issuance coming from the hyperscalers, which is

Being something of a restraint on spreads being able to go any tighter, we're still in this sort of environment where, in credit markets, the mindset continues to be glass half full rather than glass half empty.

And that's something that is continuing to ensure that the issuance that is being sort of delivered is meeting with relatively robust demand. So, from that perspective. Credit markets are moving ahead in a reasonable position, but we think we're at the moment where there's just not a lot of value too much in a lot of credit asset classes, and it's more about investing for carry, and so we're more focused on relative value opportunities and increased dispersion in credit, and we'd be much, sort of more in favour of adding to beta exposure if we did see more of a market repricing over the summer.

Who knows, on the back of a wobble in enthusiasm around AI as a theme, something like that could, well, take, equities into a retracement, and I think that that could potentially be a buying opportunity. So, so that's how we'd be looking at, sort of, risk assets, more broadly.

But otherwise, as said, to summarize, our views are somewhat bearish on US rates, more constructive on front-end Euro rates. We still think that there's going to be lingering inflation pressure in the months ahead, so it's not a time to be pricing inflation out.

And otherwise, in areas like emerging markets, again, picking our spots is going to be incredibly important to continuing to deliver portfolio performance. Now, with that, I'm going to pick up my phone. I've been going for 22 minutes, so I've left a few minutes, as I mentioned at the end.

In terms of, questions, and so I'll just turn to those now. So, the first one regards, the Fed and balance sheet, policy.

So, how significant a shift will we see from the Fed in terms of their policy framework? Well, I mean, this is a good question. Warsh himself has been sort of very explicit about wanting to see a smaller balance sheet. I think the problem is that others that we meet with on the Fed don't believe that the Fed can reasonably sort of shrink its balance sheet without losing control over where interest rates sit.

In fact, last year, the back end of 25, the Fed was sort of on a balance sheet reduction at that time, and what we saw was that as liquidity was drained, you ended up with a situation where in the corridor of where interest rates trade, where the Fed has got an upper bound and a lower bound, you drifted from the middle towards the upper bound, and there was a risk that you would go above the upper bound on interest rates if you kept on shrinking the balance sheet.

And so at that point, you actually needed to… stop that sort of process of balance sheet reduction. And the problem now is, if you try and shrink the balance sheet again, you may end up seeing effective interest rates going up, and actually moving out of that Fed corridor. So, there's some scepticism whether you'll be able to deliver a balance sheet, reduction just by itself. But I think one of the things that has been interesting to me is, if you think about the US economy, where we actually need to see more policy restraint is actually draining liquidity. It's actually cooling market sentiment, cooling down some of this enthusiasm around AI, cooling down some of this issuance with corporate debt, so…

Actually measures to actually curb liquidity expansion actually might be the right idea. By contrast, you've got areas like the housing market, which are much weaker, which would likely to see, sort of, lower interest rates in order to bring the housing market more into balance.

So, it may be that what Warsh does is he tries to steer the committee in this direction. And I think one step you might see at the July meeting is that in the Fed statement, you may end up seeing the commitment to delivering ample reserves being dropped. I think that would be a precursor to maybe a bit more…

Action in terms of balance sheet policy, but in practice, I'm not sure how proactive you can actually be with this.

The next question I have is, do you think markets have become too quick to assume geopolitical risks are temporary and not worth pricing?

It's a good question. One observation I'd have here is that markets in general always struggle to know how to price geopolitical risk, and because they don't really know how to price it, they'll often try and look through it.

That means at times, when I look at markets, there can be a degree of complacency around things like geopolitical risk.

But when we speak about geopolitical risk, I think what we need to be more focused on is how is that geopolitical risk going to be impacting the global economy? Because it's the global economy, that will drive interest rates, that will drive financial asset prices.

In this context, you could say that a conflict like Russia-Ukraine has been a nasty, unpleasant conflict over the last few years, but hasn't really been relevant at all to markets, because effectively it's been a frozen conflict, and it's not really having much of an impact on the global economy.

Where the Middle East conflict was having a bigger bearing is the fact that, obviously, when you've got 25% of oil, of fertilizer, other critical materials such as helium and other sort of products, that moved through that Strait of Hormuz, clearly the fact that that is closed can have a much bigger bearing on the global economy, and so that's why it's been more relevant.

But looking forward, over the course of the months and quarters to come. I think we're going to be in a world where political risk, geopolitical risk is on the increase. I think the world is becoming a less stable, a less safe place. I think we see more upheaval, not less upheaval.

And so it does mean that we're going to be, I think, more exposed to bouts of geopolitical risk having an impact on markets.

And what we'll end up with is periods of calm where everyone is discounting this, and then periods of mini-panic, where everyone seeks to price those risks in. So, I can't tell you where the next geopolitical risk will occur, whether it will be back in the Middle East, maybe it'll be with China and Taiwan, maybe it'll be somewhere else, we don't really know.

But I think with Trump in the White House, with the world more divergent, more fractured than it has been for decades, I think that we can't be completely dismissive in that regard.

All of that said, the sun's shining, the weather's warm, markets are in buoyant mood just for the time being. Who knows how long, this, summary conditions will last for. I guess here in the UK, we're used to knowing that the sun comes out, you rush outside as quickly as you can, because you don't know when summer's going to come to an end, and with that cheerful note, I would sort of remind you all that we're now at the point of the calendar where the days are getting shorter, so winter's coming again, right? So, on that note, we need to be aware of some of those downsides that could be around the corner. But with that, I'm going to sign off this month. I'm hoping you're finding these calls informative and useful. I look forward to joining again on another call this time next month, but for now, all the best to all of you. Good luck with those markets. Thank you.