Current Market Drivers

Are we discuss in this week's video with Andrew Hunt, global markets are experiencing a unique divergence, with inflationary pressures persisting in the United States while deflationary forces dominate elsewhere. This split reflects the asymmetric impact of trade policies, where the threat of tariffs initially boosted global trade in the first half of 2025 as goods were moved ahead of implementation, only to create intense deflationary pressure in the second half, particularly across Asia and China.

The real drama, however, is unfolding in government bond markets. Developed world governments face an uncomfortable reality: they're attempting to borrow more than their citizens save. This fundamental imbalance has created visible signs of fiscal panic across major economies. France has lost another Prime Minister over budget battles, Japan's political leadership crumbled amid debates over fiscal stimulus, and the UK government struggles with funding challenges. Even the U.S. Treasury has shifted to issuing primarily short-term bills to manage its funding needs.

Southern European equity markets have emerged as surprising bright spots, with Spain's economic momentum visible in everything from housing market strength to consumer spending. Meanwhile, the UK faces a private sector recession, validating earlier bearish calls on the region.

The Coming Months: A Return to Stealth QE

The fourth quarter of 2025 and early 2026 will likely witness central banks orchestrating what amounts to "stealth QE", not through direct bond purchases, but by creating positively sloped yield curves that incentivise commercial banks to fund government deficits. European banks are already being morally persuaded to perform "national service" by purchasing government bonds, while China has begun monetising approximately $200 billion of government debt monthly.

This coordinated response suggests a buying opportunity may emerge from any near-term market weakness caused by heavy government issuance. The Federal Reserve faces intense pressure to cut rates, citing economic softness, with weak disposable incomes, falling capital spending outside AI, and declining residential investment providing convenient cover for politically expedient rate cuts.

Markets should benefit from this liquidity injection in the short term, though the U.S. dollar may weaken as global central banks ease in concert. The cryptocurrency ecosystem, particularly stablecoins, represents an experimental funding mechanism for governments, though it hasn't yet delivered the treasury demand policymakers hoped for.

2026 and Beyond: The Return of Stagflation

The medium-term outlook appears decidedly different. By responding to fiscal pressures with monetary accommodation while ignoring inflation, central banks risk unleashing sustained price pressures in 2026-2027. This isn't merely a technical concern, it reflects a fundamental breakdown in institutional credibility. No OECD government currently enjoys majority public confidence, and without trust in governments or their central banks, inflation expectations will likely become unanchored.

The combination of tariff effects and persistent fiscal monetisation points toward stagflation, that unwelcome mix of sluggish growth and persistent inflation. This environment will fundamentally challenge traditional portfolio construction, making assets with fixed nominal values (bonds, cash, deposits) particularly vulnerable. The Japanese experience, where citizens are abandoning yen-denominated assets for land and foreign markets, may preview a broader developed market trend.