Uncertainty over the effectiveness of fiscal policy across key European economies is driving conditions resembling a “death loop”, where higher interest rates on government bonds could eventually lead to austerity measures.
The United Kingdom government’s long-term borrowing costs reached their highest level since 1998 earlier in the week, with yield on 30-year government bonds hitting a high of 5.75% on Wednesday but easing to 5.57% on Friday.
Bank of England governor Andrew Bailey said during the week that it was "important not to focus too much" on longer-term bond yields, and noted yields had been rising “across the developed world”.
Yields on 30-year French, German, and Dutch bonds reached their highest levels since 2011, while the United States saw yields at their highest in more than a month.
JBWere senior strategist Phil Borkin said bond investors were demanding higher returns to lend to economies that have “a poor starting point” in terms of their fiscal position, and were facing political instability around the path forward.
“The UK certainly saw that this week, where there's just nervousness around a softer growth outlook, higher interest rates, poor productivity growth, and probably downward revisions to growth forecasts,” said Borkin.
“I'm not of the opinion that we're about to have a very nasty fiscal crisis, but the risks are certainly growing that these pressures will episodically cause worries. It's certainly not the first time this year by any means, and probably won't be the last either.”
UK chancellor Rachel Reeves this week acknowledged that the UK economy was “not working” well enough for people, as she announced her second budget would be released on November 26.
JBWere senior strategist Phil Borkin.
Tariff tussle
Meanwhile, the US Court of Appeal’s decision ruling President Donald Trump’s retaliatory tariffs to be illegal also feed into the global investment picture, but that will likely be appealed to the Supreme Court. Regardless of that outcome, Borkin said Trump will likely persist with his tariff policies via any means possible.
“There are a lot of other avenues for Trump to still put these tariffs in place, so I think the base case still has to be that, come hell or high water, this is a core policy of the Trump administration – tariffs will be put in place.”
But any impediment to the tariff regime is likely to increase uncertainty, he noted.
“The Republican Party has passed a large bill, which is stimulatory at the margin, and tariffs were seen as one way to offset some of the fiscal costs of that,” he said.
“So, if we're in an environment where that's more difficult for them to do, then again, it raises the concerns around the sustainability of the US fiscal situation.”
Tech stocks
But, as yields started to ease throughout the week, technology-related stocks began to rally again. The Nasdaq 100 index recovered from a mid-week low, down 1.8% since the preceding Friday, to be up 0.9% as the week drew to a close (NZ time).
Google owner Alphabet’s stock popped 8.7% on Tuesday thanks to a US federal court finding that it would not be compelled to sell its Chrome browser as a penalty for an anti-trust judgment last year, which found the company was operating an illegal online search monopoly.
The company will be forced to make certain data available to competitors in order to promote competition, and will not be able to enter into exclusive contracts relating to the distribution of its services, such as with device makers.
“That was a reassuring message for Alphabet, and that provided reassurance to the market that this big tech story – the AI theme – the antitrust concerns, and regulatory concerns have faded a little bit.
“Bond markets played a bit of a role in that worry but, ultimately, it was more of an idiosyncratic story in the end that helped tech – and hence the US equity market – still have a reasonable week overall.”
Another key tech company, Broadcom – which develops custom microchips for Google and other cloud companies – beat earnings expectations with its third-quarter earnings announcement on Friday, disclosing revenue of US$16.96 billion ($28.93b) against US$15.83b expected.
The company is being touted as a competitor to market darling Nvidia, and has seen its value rise 32% in the year to date. After-market trading showed a circa 4% appreciation in the stock’s value after the earning announcement on Friday. Its market capitalisation stood at US$1.44 trillion at Thursday's close (US time).
While investors can become preoccupied with worry about geopolitics and macroeconomic factors, the fundamentals of such large tech companies were still looking “very strong” said Borkin, which should put things into perspective for market participants.
“These geopolitical headlines often just cause volatility, but don't escalate into something … Sometimes you've got to try and look through the noise and focus on the fundamentals. That's not easy sometimes, but that's usually the safest advice.”
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