Hello there, and welcome to the monthly podcast. As those who've joined before, I'll, continue with the, the format that we've been using for these calls, and I'll speak for about 20-25 minutes in terms of some thoughts around global markets.

And so, here we are in July, one of the hotter days of the year, and I guess the temperature is pretty warm outside in financial markets. We're currently sort of witnessing, obviously sort of moves in the Middle East, where, obviously at one point there was hopes, that, a peace deal was being achieved, but, we continued to see a volley of, military exchange and, and threats and abuse being directed across the Persian Gulf.

And the situation, is far from resolved. We, we also, are seeing, sort of, if you like, heat around what's been happening in markets in tech and AI. I'm sure many on the call will have followed the recent performance of the Korean stock market, the KOSPI. Which, having been, up around 100% for the year, has subsequently dropped by about 40%, such that it's only up on, a mere, sort of 25-30% on a year-to-date basis now.

So some huge volatility and some, big moves in leverage, an unwind in leverage, which has actually taken that index below its 200-day moving average. Again, a source of concern, particularly for Korean regulators. I saw a stat that said that 1 in 30 people in the Korean population actually got stopped out of a trade at some point over the course of the past week, which I think is quite a remarkable stat to behold.

Ensuring the prevalence of retail investing and chasing short-term, returns, through some, leveraged vehicles. But, certainly volatility there, volatility in AI more generally, as maybe some questions are being asked around the efficacy of some of the ongoing investment spend and the circularity of financing that is occurring.

I think here, there has been growing angst that if you keep on extrapolating ever, higher, sort of investment spend, that becomes, obviously, a drain on cash flow, but also, you're issuing a lot of debt, you're issuing also equity as well. And this is putting pressure on financing costs.

And we've been seeing spreads for the hyperscalers bleeding wider over the course of the last couple of months, and so that's been another feature in markets where we have seen, obviously a bit of a, a rotation in global equities, as that theme, plays out.

And again, a real sort of, recent source, of interest. And then, I can sort of move to, the other event at hand, which, of course, later today, this evening, here in the UK, we have the second FOMC meeting that Kevin Walsh will be chairing. And, it's interesting that we're going into this meeting with, the odds of a rate hike, actually sort of, relatively elevated. Effectively, markets, on the screens at the moment, I think, are pricing in an implied probability of around 35% to 40% on a Fed hike in a couple of hours' time.

And it's quite interesting that this sort of idea of a split decision, we haven't seen this in terms of Fed policy going into an FOMC meeting for more than 10 years, and maybe it speaks to the new world that we're living in, in a world where effectively, Walsh has communicated that he's done away with fraud guidance. Effectively, every meeting is a live meeting, a meeting where a policy change can be enacted, and from that point of view, there are those who, have come to believe that, Walsh and colleagues, will act to move on policy today. Others who may be more in the camp that such a move is deferred. That said, if you look at market pricing through to the end of September, the probability of a Fed hike is probably priced at close to 100% for 25 basis points by the end of September. So you could argue that, actually, does the timing of a Fed hike matter ever so much? Perhaps it doesn't. We'll find out, depending on the market reaction in a very short while.

I think the, the one thing that you would say is that either coming out of this meeting, we're likely to see an outcome where we see hawkish hike delivered, where many investors will have been sort of caught out to a degree. I think especially investors in equities and credit, they've not really been focused on this sort of near-term Fed risk nearly as much as maybe investors in the rate markets have. But if you end up with Wash keeping rates unchanged, which still is our baseline assessment, we still think it's more likely they defer to September rather than go today. But even if that is the case, we're likely to have something of a hawkish hold. And against that idea of a hawkish hold, again, I don't think that it's likely to see a very big, market reaction in rates markets. On a one-day view, obviously a hike this evening, you probably see, I'd suggest short-dated yields probably sell off around about 10 basis points. If it's a hold, you probably rally by 5 or 6 in the other direction. So that's kind of the magnitude of moves that we'd actually expect in terms of this particular meeting. But generally, I think that when we continue to look at the US economy.

The economic data continues to be pretty robust. We've said before how so much money is being thrown at the US economy, it can almost help, not help itself, but, grow at this particular point in time and more broadly, we do see some evidence of more widespread inflation pressures. It's not just pressure coming through, sort of commodity and energy prices. But also in areas like AI, with chips prices going up. We've seen how Microsoft has raised the price of a lot of its consumer electronics products by 20% relatively recently. We've also seen how the creation of data centers is pushing up power prices in a number of US states. In a way, this, gold rush, this AI sort of, thematic, where a lot of investment is being done in a hurry, sometimes in a manner which is price insensitive. We do see this as a near-term net add to inflation pressures. And otherwise, when it comes to things like energy, I'd also like to take time to highlight that although you might look at the oil price, and you might say, well. We've operated at oil around about $80, $85 before. Do we need to really be ever so bothered with this level of oil prices? I think the one thing to highlight here is that you see, at the moment, very elevated crack spreads. This is something that's unusual to see. But it means that the price of refined products sits well above where crude prices sit, and such is the, the extent of the widening in that crack spread. In many respects, when you look at the price of petroleum, you look at the cost of, sort of diesel, or bunker oil, or other refined product, you're actually looking at a world which is more consistent with crude already operating around $130. And so, from that point of view, you can see that although we have come off the highs that we saw in Q2 in terms of crude oil prices tightness in refined products on the back of damage to refinery capacity is a real issue that's, meaning that those prices are coming down much less. So we continue to be in a camp ourselves that, yes, Warsh can raise rates today. He can talk about, wanting, inflation to come down. He can deliver a hawkish message, but we still think that inflation is likely to continue to overshoot target for a time. I guess that creates a backdrop in which we can see ultimately, perhaps, the Fed, not just hiking once, but maybe hiking a couple of times before the end of the year. And from that point of view, we also think that in looking at inflation-linked bonds and in inflation-linked derivatives.

Markets in general maybe are giving too much credence to the Fed Chair's ability to bring inflation down quickly and maybe are extrapolating too much good news to come on inflation, and noting the fact that CPI has been above target, above 2% for the last 5 years, we don't see it coming down ever so quickly anytime soon. And I think the other thing that I'd also like to add here is that even if Warsh does hike to, this evening.

And you'll see, sort of, lots of write-ups saying how hawkish the Fed is, and how hawkish Warsh is, and he's, if you like, an ultra-hawk, because he'll have taken markets by surprise. I still think instinctively, he's not as hawkish, if you like, as your average Bundesbanker. At the end of the day, I think it may be good to establish inflation-fighting credibility to try and limit any move in inflation expectations, and limit, therefore, second round impacts on prices on the back of higher commodity prices. But still when you look at some of what Walsh has been saying, I think when it comes to the inflation rate, for example, it's not like he's a Bundesbanker who any move above 2.0 on CPI represents a miss to the upside. Again, Walsh has articulated he'll only care about the big figure, so maybe he's pretty cool with the idea of inflation at 2.8, 2.9, and so, from that perspective, I think it would be wrong to come to a conclusion tonight that his ever so, hawkish albeit, I do think that the Fed, obviously acting as a committee, will be sort of acting to want to tighten policy and in some respects, remove some of the rate cuts that were delivered by Powell last year. In hindsight, you can see, say, some of those rate cuts that Powell delivered, in hindsight, now look like something of a mistake, with inflation overshooting in the manner that it is.

But anyway, I think that this backdrop in terms of US rates means that there isn't really a very clear structural trade to be had in US rates, just for the time being, other than to take a view on U.S. inflation break-evens, US inflation derivatives. I think that's where the asymmetry is best at the moment. That's where we want to be taking most of our risk, looking for that sort of, underlying sort of latent, sort of CPI, upside risk. Otherwise, moving to Europe.

The thing that we'd want to highlight in Europe is that in Europe, inflation is much more sensitive to the price of natural gas. And here, one of the things we've become maybe more concerned about over the course of the past month has been how, particularly countries in Northern Europe, including the Netherlands and Germany, have been very slow to start the process of rebuilding their stockpiles of natural gas ahead of the winter season. In a sense, I think that over the course of the last couple of months, there's been a reluctant to actually buy gas at elevated prices in the hope that gas prices, come lower, on the back of the idea that the conflict reaches a resolution and supplies through the Gulf are normalized. But of course, that hasn't really, occurred. And you see TTF, futures in Europe, above $60, and so here we're looking at natural gas prices well above where they were earlier in the year, but we're now at a moment where you can't delay the replenishment of reserves really any longer. You're going to have to start buying at those elevated prices. That's going to end up driving higher energy prices in the context of Europe, and again is something of an upside risk in terms of Eurozone inflation.

I think in that sense, Europe is much more sensitive to gas prices. In the US, it tends to be more crude oil and refined products off crude oil, such as gasoline, which are the bigger driver. But still, in both markets, we're expecting somewhat higher inflation outcomes. And against… in a very macro sense, there, there is a sense here in which, when we're talking about higher inflation risk, we're seeing higher government deficits, record bond issuance. It's not really a great idea for becoming too enthusiastic around owning interest rate duration, even though government bond yields are effectively at a 15-year high in the context of the Eurozone at a 20-year high in the US, a 30-year, a 40-year high when it comes to markets like Japan and the UK. So, optically, I'd say that bond yields do look very cheap, they look elevated.

On a nominal basis, and that's attracted some nominal yield buyers. But still, the headwinds are in place, and it's not at all clear to me that we've seen the high point for yields for 2026, just yet. So, I still think it makes sense to be relatively cautious in terms of taking risk, albeit it's hard to get sort of too bearish at this particular point in time, given the journey that we've already travelled, and given the fact that, financial markets effectively already embedding two more rate hikes from the Federal Reserve, two rate hikes to come from the ECB, and two to three, rate hikes when it comes to the UK economy.

Maybe just turning to the UK for a moment, obviously, we have a new Prime Minister, Andy Burnham. He's come into office. He's trying to talk the talk in terms of saying he's respecting the fiscal framework and looking for savings in areas like welfare, but I guess the one thing to be concerned about is that, some of his sort of spending pledges are starting to add up, and at a time when the UK has effectively lost its fiscal headroom. Because of higher yields, higher inflation, higher borrowing costs. Effectively, in order to fund some of the spending commitments that we're seeing. We think the Burnham could be £20 billion chore, and that's going to require either cuts in spending or it's going to require higher taxation in order to get to that point. And that's even before we talk about doing things such as increasing defense spending, as current Chancellor John Healey was committed to doing.

In the, the context of his, prior job. So, I still see the UK, as fiscally vulnerable I also think that, technically speaking, it's a market that has been a bit more vulnerable, slightly because, the consensus thinking in the investment community has been to be positioned on the long side of the UK, but this idea that investors are positioned overweight, positioned long, I think is maybe something to be somewhat cautious of in case we end up in a situation where you see more of a market correction. So, that's something that we're sort of focusing on, and if we were to take risk in the UK, at the moment, it would be more around the front end of the curve, because if you're in a world where three interest rate hikes from the Bank of England are fully priced. We don't think the Bank of England are going to be delivering more than that. They could be delivering less. And so at that point, the asymmetry starts to go in your favor. And so this is how we're looking at trading the, the June, Sonya contract, from that point of view. But that would be, the, the UK perspective, it would sort of stand to reason, therefore, we don't expect the bank to be hiking this week. I do think the Bank of England, though, is likely to be hiking when it comes to September.

And as shared earlier, I think they could well be joined by the ECB and also the Federal Reserve that particular month. The other central bank that's also meeting this week is the Bank of Japan, and this is also a significant meeting. We've had some comments over the course of the past week or two suggesting that Japan may be prepared to accelerate the path of its monetary policy normalization, it's been on a path where it's been hiking rates twice a year.

But inasmuch as they're lagging behind other countries, so the, the interest rate differential to other markets is growing. That continues to put pressure on the Japanese yen, which is trading now close to 164 relative to the dollar, this idea that the yen's moving weaker, bond yields have been going higher, as fears start to accumulate that the Bank of Japan is behind the curve, has kind of been behind the thinking why. The BOJ has been sort of adjusting its language, and it feels like Takeichi, the Prime Minister, has been sort of relenting on her dovish bias to permit the BOJ to move in that direction.

However, the earthquake that we saw yesterday, or was it the day before, I do think it is a bit of an issue here. I would say that the way that Japanese society thinks, out of respect to those who have lost their lives and suffered as a result of the damage brought by that recent earthquake, I would tend to expect that the BOJ will want to signal no real change.

I'm not too worried about a big fiscal spending package. They won't be spending very much in that particular region in terms of reparations, so it's not something which is a really a material fiscal event, but I do think the risk of the BOJ being less hawkish than had been expected is something which is a bit of a risk for Friday morning.

And so, from that point of view, I might be more concerned that the yen does move weaker towards 165. That said, I'm not sure that I'd be wanting to try and short the yen at this moment in time, because we do know that the Japanese authorities stand ready to, step into that FX market, with a view to buying the yen, and so that could be very penal on any of those who are trying to speculate in the other direction.

Otherwise, I, I think, speaking to credit markets for a moment, I shared at the start of the call how we'd seen some of the recent developments in terms of AI and issuance starting to have an impact on spreads in that particular market. I would say that it has been interesting, just in the course of the past week, it feels like for the first time this year, we're starting to see that sort of weakness, that softness in the hyperscalers start to have more of a widespread impact across credit markets more broadly.

I think that that sort of supply indigestion is becoming a building theme. And I think the other thing to reflect on here is that, obviously we've been in a world where you've been growing government debt, you've been growing corporate debt, you've got all of this issuance flooding the market from everywhere. But at times when liquidity is abundant, all of this issuance can find a home, it all gets absorbed. And this is what we've seen. We've seen an abundance of liquidity against the backdrop of relatively easy financial conditions. But almost by definition, when you end up tightening monetary policy, raising rates, effectively you're tightening the tap on that liquidity flow.

And so, if liquidity does become more scarce, there is this intrinsic question, who's going to be financing all of this debt that starts being issued, particularly with the plans from the hyperscalers to actually issue more debt in 27 relative to 2026. And so, you can see that that can be a source of some market angst. And in economic terms, we often speak about how excessive borrowing, often excessive government borrowing, can end up crowding out other borrowers in the market.

And it should be remembered that companies, if they, end up having credit impairment, defaults, restructuring. This occurs not because they're necessarily loss-making at a moment in time. Credit impairment occurs when companies are in a position where they can't refinance their existing debt, they can't roll it over, they can't find enough buyers an attractive price to finance themselves as a going concern going forwards. And so, if we do move into a world where liquidity is more scarce, then I think that's problematic against this very aggressive supply schedule that we've been operating with.

And so, perhaps, in my mind, no surprise, we're starting to see spreads leak a bit wider over the course of the past week. And I think another big theme that investors will be focused on over the course of the next few days is going to be some of the announcements coming out, the MAG7, in terms of the intended, spend, for 2027. For example, I think that Meta is currently expected to make investments increasing next year, I think from $150 billion up to about $175 billion, but some analysts have been suggesting that that number could be north of $200 billion. So, seeing what we see coming down the pipe in terms of spend plans and issuance coming off that, I think, again, could be quite important for credit market sentiment. We already saw last week how Google came under pressure when they were demonstrating how they were burning through their free cash flow and needing to print more debt and raise more funds.

So, a few important themes going on here, in markets, in what should be a quiet month going into August. You think it's the time of year we go on holidays, markets go quiet, everyone switches off.

But actually, I think the one thing that you can say is, if you look at your screens, Donald Trump hasn't switched off, has he? I mean, he's at it like a Gooden on X today, calling out the Iranians with all sorts of expletives, making all sorts of threats. So, Trump's not going quiet in August.

You look at what's happening in the Korean equity market. I'm trying to remember the last time I saw a major equity market decline by 40% in a month. And yet it's still up on the year. How crazy is that? So, so, sort of market volatility like that doesn't suggest a quiet period ahead. What's happening in terms of stock rotation doesn't expect, speak to market quietness. And some of this uncertainty around central banking, uncertainty about inflation, all of these are sort of potential drivers for volatility that could manifest over the course of the month ahead. So, intrinsically, we've tended to think that, yeah, in hindsight, we were more cautious than we should have been in the second quarter, but still, looking at markets today, we think it makes sense to be patient. We think it makes sense to continue to sit on cash, continue to sit with a portfolio that's relatively conservative. We want to be in a position where we can add risk and buy if there is that hiatus. If there is that sort of sudden change in market conditions, because without a doubt, based on what we were seeing in equity markets in Q2, it felt like the metaphorical barometer that goes between fear and greed it felt like in Q2, everything was kind of going greed crazy, whether it was people chasing a SpaceX IPO, or whether it was people wanting to get rich quick on all sorts of levered product. Greed was very much in fashion if the needle goes back in the other direction, there could be a bit of a washout to be had in August, which obviously is a month where market liquidity is low.

So we're, we're attentive around the catalysts that could be driving that, and I think the, other thing that we would sort of note here is that, although August tends to be a week, a month where a lot of you on the call, I'm hoping, will enjoy your summer holidays ahead of you. For many of us, this will be a month where we're at our screens, at our desks seeking to deliver returns to investors, trying to capitalize on some of the opportunities that may well be manifest. You don't know when these opportunities are going to come along, particularly with some of the headline-driven sort of directional moves that we've been seeing in markets on a year-to-date basis.

With that, I realize I'm overstaying my welcome and my time. I've spoken for 28 minutes, that's gone a bit long, and I've already got a few questions here, so I'll try and rattle through a couple very quickly.

So, which, markets are sending a more reliable signal? Credit markets or equity markets? Well, I think the picture here is mixed. You have parts of the credit market that are really hurting, like private credit is a bit of a bloodbath at the moment. I hope you're not too exposed there, but the outlook in private credit, we think, is challenged. Private credit depends on leverage. It needs lower interest rates, but interest rates, sadly, are going in the other direction than private markets need. So, there's parts of the credit market doing okay, other parts doing badly, so I think the same can be said, and the same is true of equity markets at the moment. But generally speaking, the one thing that I would sort of voice is just this idea that in the rates market, I think people have tended to be more hawkish, more bearish.

If you look at people I know who work in commodities, they've been the most bearish people I know in the course of the last few months. Those people, a long way away from commodity markets or rates markets, have maybe been the most laissez-faire, the most complacent. They've been the ones who've actually been doing the best, actually, in the last quarter, but it wouldn't surprise me if that doesn't reverse in the course of the next few months, but we'll see.

Next question, has the rise of passive investing changed the way macro risks are transmitted into asset prices? A great question. I would say, though, at the end of the day, I don't think a huge amount of money in macro fixed income is really managed on a passive basis.

I think passive investing has been sort of more of a trend that we've seen more generically on the equity side. I think sometimes we say that when it comes to fixed income, I mean, passive is for Muppets, right? There should be an ability to generate alpha in fixed income on a more reliable basis through market inefficiencies, the fact that many agents are not return maximizing, you have nuisance of securities and many other, sort of structural premier embedded markets which create opportunities. And so… so, in general, I don't think that passive is to blame, for, sort of, the transmission of moves. The one thing that I would say, though, is I think that when it comes to credit markets.

Sometimes there can be a complacency that credit markets will look at equity markets, and if everything in the equity market is okay, credit markets will assume it's okay for us as well.

But, just as we're starting to see some of this supply pressure that's building up, this is more, more structurally, a credit market story, not an equity market story. You're buying some of these high PE stocks, and inequities. You get it right, you get the joy of the right tail risk. But in fixed income, we don't have that ability to make 5x, 10x, 20x returns on speculative investments, we're more concerned about getting our coupon paid back. So, I do think that credit investors maybe should be more concerned than they have been of late.

And then lastly, I'm over time, what will it take for the BOJ to persuade domestic investors, to finally keep more money in Japan? Well moves of a foot. We have seen, even, the GFPI in the last few weeks mandate a couple of managers to increase allocations to domestic fixed-income securities.

A lot of institutions, I see, are spending more money in domestic fixed income, domestic assets now, so we do see that rotation away from international assets. That said, when it comes to the yen specifically, what you need to see is a narrowing of the interest rate differential. If the policymakers in Japan keep interest rates too low, lower than they should be. That's the thing that will keep hurting the yen. The reason the yen is structurally undervalued is just because it's a legacy of having had an ultra-accommodative monetary policy over the last 10, 15 years, the accumulation of that stimulus is what's driven the yen to such weak levels on a valuation basis. But now, to correct that, you actually need to start repairing that differential and removing the impetus for those to enjoy the carry by moving their money offshore.

Anyway, with that, I will end the call there. Thank you for joining today. I wish you the best in these markets. I wish you the best for your holiday season ahead of you. And, look forward to speaking to many or all of you, in the next one of these calls at the end of August. With that…

Thanks very much. Goodbye.