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“Reagen proved deficits don’t matter.” – Dick Cheney
Do deficits matter? Andy Burnham thinks they do and has hinted raising taxes. This could be good for gilts, less good for the rest of us, by Saxo UK Investor Strategist, Neil Wilson
We’re still talking Treasury Scott Bessent’s decision to intervene in bond markets, a move that is seemingly reviving what a few years back I dubbed the ‘4D trade’ – debt debasement & dollar devaluation. This has been very good for gold and crypto assets, and negative for the US dollar. Bitcoin topped $80k for the first time since May, up nearly 30% this month alone, with gains almost entirely made since Treasury’s buyback announcement. Note also positive regulatory moves and Senate to vote on Clarity Act in mid-Sep. Gold meanwhile has advanced to $4,700, hitting a fresh three-month high with the break above the 200-day moving average at $4,513 triggering fresh momentum buying, while a heavy call skew in the options market signals bullishness. More from Ole on this.
Although the powerful 4-day rally has taken a bit of a breather, with prices backing off resistance at $4,700 back to $4,616 this morning, the ability of gold to withstand higher yields, particularly higher real yields, means the metal is seen not just as the hedge against inflation but also that deficits ultimately do matter.
Worth just highlighting the backdrop and what we mean by 4D, some of which are pro-inflationary choices by policymakers, some just events, dear boy.
- Unclear fiscal outlook across developed countries and rising deficits
- US running super-loose pro-cyclical fiscal stance with 6% deficit with economy at full employment
- AI capex debt boom competing for demand
- Increased military spending
- Shift from price-insensitive buyers (institutions) of bonds to price-sensitive (private)
- Rising inflation expectations both in near-term (war, supply disruptions) and longer term…
- ,,,due to fiscal dominance fears – Fed stays loose to finance the ever-growing debt pile
We are into a new fiscal deficit and inflationary paradigm. I refer to a 2023 speech by ECB president Christine Lagarde that I locked into at the time. This I said was a “signal that we are about to go into a protracted economic (and maybe real) war that will require the mobilisation of the state and people – developed world central banks (Fed, ECB, BoE, BoC, RBA) will act together to orchestrate fiscal spending and suppress yields”. We may not be at this point of fiscal dominance yet but the market is saying it’s got concerns.
Yesterday reports surfaced that Treasury could use its near $1tn General Account to fund the increased purchases of government bonds announced last week. The general assumption was raising Treasury bond buybacks from $2bn per operation to $4bn would entail more front-end debt issuance, but this may not necessarily be the case. This news appeared to push down on yields at the longer end of the curve, perhaps as it may have told the market that the administration is not going to the path of outright financial repression via some kind of Treasury-Fed compact to control yields. If Treasury were to cap long-end rates by issuing more short-dated treasury bills, it would tie interest expense and the deficit to what the Fed does with the fed funds rate…moving closer to fiscal dominance.
Economic D-Day as it was termed floundered on the beaches somewhat – no new measures on Iran, just threats to other countries to sever economic ties. The dollar gained as there was speculation that it could entail some countries being excluded from the dollar system…oil fell with Brent back below $92 as it didn’t do anything to make it worse in the Strait. European stock markets rebounded early Tuesday with some relief evident from the lack of any material increase in the economic pressure on Iran. Economic D-Day was not as bad as feared, allowing investors to re-enter some trades. Meanwhile reports today say Pakistan’s mediatory visit to Iran was “fruitful”.
Among the movers and shakers, Melrose rallied +9% to lead the FTSE 100 after saying its GKN Aerospace business will resume operations at its Garden Grove facility in California next month. A $100mn claims scheme has been set up to provide for nearby residents who had to evacuate in May due to a chemical incident, whilst investigators have dropped the criminal investigation. Vistry caught the eye on the FTSE 250, rising +17% to top the board after winning a £350mn government grant to build 3,000 affordable homes. Housebuilders look well placed to benefit from a shift in government policy under Burnham.
US stocks were mixed with tech weighing on the broader market while the Dow Jones climbed with utilities and financials higher. The S&P 500 slipped –0.3% while the Nasdaq 100 fell –1% with chipmakers down. Notably Nvidia declined –3% for its seventh consecutive losing session – its worst run since 2022 and comes ahead of Wednesday evening’s earnings report.
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