Latest Market Update from Tatton Investments

Volatility drops but uncertainty remains

Markets were calmer last week but there was no strong rebound. Falling government bond yields were welcome, after the previous week’s spike in US treasury yields. It now looks like markets once again see tariffs primarily as a growth negative.

Federal Reserve Governor Waller backed that up by suggesting the Fed may have to cut interest rates – but his boss Jerome Powell prefers a wait-and-see approach. Powell’s caution earned him a full-throated attack from Donald Trump, setting up a fight over Fed independence that could rattle bonds once again. They could also be rattled if China uses its nuclear option of selling its vast stock of US treasuries – made likelier by the ban on Nvidia H20 chip sales to China.

Lower yields mean greater liquidity, easing credit pressures and lower implied market volatility. Those conditions help build investor risk appetite and should mean people are more willing to buy stocks. We saw some of that appetite after Taiwan’s TSMC beat its profit forecasts. The chipmaker’s results cheered on tech stocks, proving there is life in the AI boom yet.

We should remember, though, that lower implied volatility (measured by the VIX index) doesn’t mean markets will actually be less volatile. Contrary to the risk-on interpretation, gold prices – the stereotypical safe haven – reached a new all-time high. Returning liquidity will only flow to stocks if they’re seen as profitable, and Trump’s policy chaos undermines that profit outlook. Even TSMC admitted that its earnings could have been driven by a rush to buy ahead of tariffs.

Uncertainty is bad for corporate outlooks, as other company earnings are showing. But the worst may not happen – and there are some encouraging signs: resilient consumer demand everywhere, lower UK and European inflation, and internal opposition to Trump’s economic disruption. Long weekends can sometimes make for nervous trading, but we hope markets are still calm when we return.

Britain on the path to lower rates

UK inflation fell more than expected in March, giving the Bank of England (BoE) scope to cut interest rates. Encouragingly, prices were softer for both goods and services. Revisions to employment data also showed that Britain’s labour market isn’t as tight as feared – and in fact may be seeing layoffs. That relieves inflation pressure and should make the BoE more in line with the dovish European Central Bank (ECB). UK bond markets (gilts) moved to price in a 25 basis point cut at the BoE’s meeting next month, and two more by the end of the year.

Britain’s economy is, of course, Trump-sensitive, but US tariffs will likely mean lower inflation and weaker growth for the UK. This isn’t just due to lost US demand, but redirected goods flooding UK markets (British retailers have warned of Chinese ‘dumping’ because of Trump tariffs). Tariffs would only be inflationary if Britain retaliated, but Downing Street shows no appetite for a tit-for-tat. In fact, it’s more likely the UK tariffs China to sweeten a US-UK trade deal, which would also align with the government’s desire to protect British Steel. Any such tariffs would likely be designed to counterbalance the influx of Chinese goods and hence are unlikely to be inflationary on balance.

Many have worried about government spending potentially pushing up inflation – leading to sporadic gilt tantrums in the last six months. That perception doesn’t match actual fiscal policy, which has tightened. In any case, the higher ‘risk premium’ for gilts can give you the wrong impression of markets’ inflation expectations. Mortgage rates have fallen, suggesting softer prices and ultimately lower BoE rates.

The government seems to view lower rates as the best economic support, rather than fiscal policy. The BoE is likely to give it to them, which is why we think long-term gilt yields look attractive.

Tatton Investments April 22nd 2025