Monday Espresso Podcast - 23rd June 2025

[00:00:00] Nathan Sweeney: It is Monday the 23rd of June. Today I'm joined by James Athey, Bond fund manager here at Marlborough. Good morning, James.

[00:00:07] James Athey: Hi, morning Nathan. Good to be back.

[00:00:10] Nathan Sweeney: Yeah, good to have you on the show this week, James. A lot happening in markets. So I'll just do a quick market recap and then we'll get into some of the key discussion topics with James.

[00:00:18] Nathan Sweeney: But if we look at markets, you can see that risk sentiment dipped and you know that's amid, middle East tensions. So if we look at equity markets broadly, they were mixed slightly lower for the week. And we do have heightened tensions within the Middle East and obviously that's causing investors to be a little bit cautious with positioning and I suppose one of the key things to really point out from last week was we did have a little bit of movements in the oil price, but not notable then we'll talk about that. And I think the standout performer for me was the dollar. So we will talk a little bit about that, but I think let's focus on some of the key data that was coming out last week and some of the meetings we had.

[00:00:57] Nathan Sweeney: So we can start with central banks. So we had the Bank of England, they met last week and they were kind of signaling that they were holding interest rates. And that there would be a gradual path from here. So is there anything to take away from that meeting at all?

[00:01:12] James Athey: No, not really. As we've seen in a number of recent Bank of England meetings, there's definitely divergences of opinion on the committee.

[00:01:19] James Athey: You see that in the voting record, but broadly speaking, when you take the committee as a whole, this notion of patience and a sort of steady journey towards easier policy remains the expected outcome in that respect, you know, the Bank of England is quite similar to a number of other central banks, including the Fed, where they're very data dependent and patience being the key word.

[00:01:43] Nathan Sweeney: Yeah, and I think you mentioned the Fed there and you know, they're coming under a lot of stick from the US president for basically holding interest rates and not cutting interest rates. And he's saying it's costing the country lots of money because they've got, you know, a lot of interest that they have to pay on their debt.

[00:01:59] Nathan Sweeney: Well, I suppose the interesting thing to highlight from the last Central Bank meeting was you did see a couple of the members saying, actually, do you know what? I think we should be cutting interest rates. So that cohort within the committee growing larger, so do you think we're getting closer to rate cuts in the US?

[00:02:17] James Athey: I mean, I guess by definition as time passes, it's likely that we're closer and closer to the next easing. I mean, as you point out, again with the Fed, a really significant divergence. If you look at the so-called dot plot, which is, you know, simply the expectations for interest rates from each individual member of the committee that shows two distinct groups. One group who expect to cut rates twice more this year and one group that does not expect any further cuts in interest rates this year. The former group is slightly bigger than the latter group, but it's still obviously impossible for both groups to be correct and as data you know, comes in over the coming weeks and months, I guess we'll see which side switches in which direction and that will dictate the path of policy, but it's not too surprising that we have this confusion, uncertainty, and divergence when we're essentially faced with stagflationary shocks, higher prices or rising inflation, weaker growth, potentially rising unemployment really strikes at the heart of, and gives us sort of contradictory influence to, you know, the Fed and other central bank's mandates.

[00:03:29] Nathan Sweeney: And interesting, I suppose, you know, Donald Trump's argument is, Hey look, inflation is low, and you know, you can wait to see what happens with tariffs. But you know, if inflation increase in the future because of tariffs, then hey, raise interest rates. But interesting to see, we did have some inflation data out last week, and as Donald Trump pointed out, it is moderating.

[00:03:48] Nathan Sweeney: So we just have to wait and see on that side whether that leads to rate cuts. But I can understand Jerome Powell's position. He's stuck between a rock and our place ultimately. Let's focus on the developments of the weekend. So we've obviously had this war, conflict, between Israel and Iran, you know, trading missiles over the course of the last week and the US has entered the fray.

[00:04:13] Nathan Sweeney: So I think for a lot of people are now, you know, concerned as to what might happen next and what that might mean for markets. So I dunno if you have any views on that.

[00:04:20] James Athey: Sure thing. I mean, I guess the next question after we saw this escalation in military activity between Iran and Israel was whether the US would get involved at all.

[00:04:31] James Athey: Obviously that has happened over the weekend. A fairly decisive fashion. The use of these so-called bunker busters, they are the most powerful non-nuclear weapon in the US arsenal, and the idea was that they would be able to penetrate deep into the rock and underground to get at Iran's nuclear and particularly uranium enrichment facilities.

[00:04:54] James Athey: We've still not had, you know, certain confirmation as to the success of the missions. Of course, the president has declared them a success, but there's a chance that Iran actually was able to move at least some, if not all, of its enriched uranium out of particularly the Fordow facility ahead of time. So question marks in that respect remain.

[00:05:13] James Athey: Of course, the big question for markets is. What does Iran do next and really the big focus, the big transmission for this geopolitical uncertainty to be transmitted into Western economies and financial markets is the oil price. As you noted, we've seen a spike, but nothing really too dramatic. And actually a few times we've seen a big spike.

[00:05:36] James Athey: They've quite quickly retraced over the last week or 10 days. So the nuclear option, if you like, in terms of oils, definitely the strait of Hormus. A huge amount of world oil supply travels through there, not just from Iranian production. And that would have a really meaningful impact on the oil price, pushing that probably above a hundred dollars a barrel.

[00:05:56] James Athey: And that could become a really negative growth shock for the rest of the world.

[00:06:00] Nathan Sweeney: Yeah, so that's the concern. If the oil price increases and stays elevated for a period, then ultimately that can reduce people's discretionary spend. And you know, that could lead to a global slowdown. I suppose, we're not really seeing that with the oil price as you mentioned, because you know, really it hasn't moved that much.

[00:06:17] Nathan Sweeney: So that's market's really telling you that they're not concerned that this conflict, and obviously the US flying in is probably a one and done. So military exercise to obviously disrupt the nuclear capability and that's it, but we don't know. We'll just have to wait and see. But at this point in time, markets are telling you that they're not really worried about that.

[00:06:38] Nathan Sweeney: Okay. So I think that the last thing we'll focus on is the dollar, because a lot of people talking about the dollar and really concerned about the dollar and the fact that it's being quite weak, but we saw it strengthening last week, so you know, really performing that reserve currency status. So what's the view on the dollar over the short term?

[00:06:55] James Athey: Yeah, I mean this is one of the things that's inevitable about financial markets in the short term is that inevitably when sentiment and positioning build up to an extreme, you know, essentially everyone's on one side of the boat and there's a good chance the boat tips over. So, I think a lot of folks were talking about the demise of the dollar.

[00:07:14] James Athey: A lot of short term investors have got short the dollar. It doesn't take much to get a squeeze i.e. to see prices for the dollar rising and forcing people to close those underweight positions. So I think significantly what we've seen is an element of that. More medium term though we do have expectations for a weaker dollar, not because of some of the more dramatic stories around reserve status, you know, being not diminished, but actually ending.

[00:07:42] James Athey: We think that's way overblown and there are no alternatives at all for the US dollar as the key reserve currency, but certainly in terms of international flow, particularly capital flow. So, willing buyers of US assets from rest of the world. That's been a big part of the last 10 years. Global investors buying US assets, increasing US dollar exposure, the US dollar rallies, US equities rally.

[00:08:07] James Athey: They win both ways. Very profitable and very self-fulfilling. The starting point today is that there's a bit of an imbalance globally and so with all of this maverick policymaking, unorthodox policymaking, potentially some shine coming off the extent of the US advantage economically in a global context.

[00:08:27] James Athey: We just need to see some of those flows going elsewhere and that should weigh on the dollar over time, and that's ultimately what we would expect. Not a dramatic decline, not the end of the US dollar, just some greater global diversification.

[00:08:41] Nathan Sweeney: Okay. Excellent. Some really good insight there. I'll just wrap up with a quick look at the week ahead.

[00:08:46] Nathan Sweeney: You know, so we've got some economic data coming out. I think, you know, the key focus for markets will be on developments in the Middle East and what next. So markets are likely to be on edge as they wait to see, will there be a response from Iran or will they look to come to the table and negotiate?

[00:09:03] Nathan Sweeney: Just outside of that, we do have a meeting by Jerome Powell. So he'll be testifying in front of Congress and obviously people will be looking at that to see, okay, is he still as concerned about inflation as he's been talking about, or are we likely to see rate cuts coming through? As you know, he gets more pressure applied by the governments within the US.

[00:09:23] Nathan Sweeney: But people will definitely be focused on that. We've got some manufacturing data coming out of Europe as well, so people are looking to see, you know, how the economy is doing there from a service perspective. Are we still seeing expansion coming through on that side? So key focus for me Middle East.

[00:09:38] Nathan Sweeney: So James, thank you for joining me today and thank you for listeners for listening in and if you do have questions, send them in. We'll bring them up on the show. Have a great week everybody.