Tensions between the US and Iran brought further volatility in oil prices. Nvidia’s latest results kept AI firmly in focus, while the Federal Reserve raised the prospect of another US interest rate rise. Government bond yields also moved higher across much of the developed world, amid persistent inflation and concerns over rising government debt. August saw the US-Iran conflict continue to rumble on, with both sides finding yet more things to disagree over. Oman is playing middleman in the negotiations, or perhaps more aptly, marriage counsellor to the world’s most toxic relationship. Reopening the Strait of Hormuz, meanwhile, appears to be the family dog neither side is willing to give up. This has been giving the oil price palpitations, falling initially before climbing as hopes of a breakthrough faded and heading higher again as we write.
In the US, attention remains fixed on all things AI. Until recently, any mention of AI by one of the big US technology companies was enough to get investors positively giddy. However, as the bills have rolled in, investors have started asking more questions. Nvidia did its best to restore the faith in August. The AI chip designer reported quarterly revenue of $96.2bn, more than double that of a year earlier, while forecasting revenue growth of around 70% in its next financial year. Not bad for a company already among the largest in the world.
Elsewhere, anyone who is anyone (not me) attended the annual Jackson Hole symposium, a retreat for the world’s leading central bankers and economists to finally have someone to talk to over cocktails. New Federal Reserve Chair Kevin Warsh used his first appearance to warn that inflation remains too high and leave the door open to another interest rate rise. Investors duly took the hint, with the implied likelihood of a September increase jumping from around 35% to almost 60%. Finally, government bond yields have been heading higher across much of the developed world, as stubborn inflation and concerns over government debt levels have pushed up borrowing costs. The US has attracted particular attention, with government debt now above $40tn. As the old saying goes, a billion here, a billion there, and eventually it starts to add up. The Treasury has also stepped up purchases of its own longer-dated bonds in an effort to keep yields from rising too far. Rising yields haven’t been especially pleasant for bond investors in the short term, as they push down the value of existing bonds, although they do at least mean investors are now being paid more for lending their money.
Bottom Line
With so much going on in the world – the US and Iran bust-up, lofty interest rates and AI sneaking about everywhere – you’d be forgiven for thinking stock markets would be distracted. Yet they’ve generally performed well this year, pretty much everywhere. Are we overdue a bump in the road? Some market anoraks point to seasonal weakness around this time, although, like train-spotters, they know a lot about trains but are unlikely to be able to tell you when the next one is leaving.
Q&A
What’s on your mind?
Seven prime ministers in a decade. Has it mattered to your portfolio? Andy Burnham is Britain’s seventh prime minister in just over a decade, while John Healey is our third chancellor in barely two years. If it feels as though the country has been governed through a revolving door, you are not imagining it. The churn creates uncertainty and angst, but how much has it mattered to a globally diversified portfolio? Global markets, including the UK, have enjoyed a positive few years. However, diversified investors are unlikely to have been living and dying by UK stocks, bonds or the economy. There are two reasons. First, the UK typically represents a relatively small part of a global portfolio – often a low double-digit or single-digit percentage. Second, many large UK-listed companies earn much of their revenue and profits overseas. This creates an apparent paradox. UK concerns can weigh on the pound, but a weaker pound increases the sterling value of overseas earnings. We saw this following the Brexit referendum, when sterling fell sharply but UK shares subsequently recovered and moved higher. It reinforces a key point: the UK stock market is not the UK economy.
What’s the latest on US tariffs?
US tariffs are back in the headlines as Trump continues to push ahead with his trade agenda. Despite a setback earlier this year, when the Supreme Court ruled against his use of emergency powers to impose tariffs, Trump has found an alternative route. He has since introduced tariffs of 10%–12.5% on goods from 60 major trading partners, including the UK, EU and China. The latest escalation followed the breakdown of trade talks between the US and Canada, prompting Trump to announce a 50% tariff on a range of Canadian imports. Canada has responded with retaliatory tariffs, due to take effect on 8 September, pledging to match the US measures dollar for dollar. The dispute risks pushing up prices on both sides of the border. US businesses reliant on Canadian imports could face higher costs, while Canadian exporters risk losing market share as buyers seek alternative suppliers. More broadly, it adds further uncertainty to global trade. With the US midterm elections approaching, tariffs are likely to remain a key political issue, leaving the outlook increasingly difficult to predict.
What happened in the Meta trial?
Meta, owner of Facebook and Instagram, went on trial in August over allegations that its platforms were deliberately designed to keep children engaged, despite knowing that excessive use and harmful content could damage their mental health. The case focused on features such as infinite scrolling, autoplay and algorithmic recommendations. US states accused Meta of prioritising engagement and revenue, unlawfully collecting children’s data and overstating its safety measures. Meta denied wrongdoing, arguing that the evidence did not prove social media had caused the decline in teenage mental health. Evidence included internal discussions about the commercial impact of stronger safeguards, while Instagram head Adam Mosseri acknowledged that its optional “Take a Break” tool initially attracted little use. Before Mark Zuckerberg could testify or the court reach a verdict, Meta settled. It will pay at least $12.7 billion over ten years, rising to as much as $18 billion if rivals adopt similar protections. Meta must introduce stronger age checks, usage limits, notification restrictions, safer content settings and greater parental control. However, it admitted no liability, leaving the central allegations legally unresolved.