Walking in the Alabama rain

A bit of profit-taking in the tech sector led to modest declines in the US equity market. Powell hinted at the spectre of stagflation at an event hosted by the Greater Providence Chamber of Commerce, as he talked about moderating economic growth, adding, “near-term risks to inflation are tilted to the upside and risks to employment to the downside—a challenging situation,” he said at the event. “Two-sided risks mean that there is no risk-free path.” In other words, painting an unclear path for US interest rates, possibly a thinly veiled dig at the consequences of Mr Trump’s tariffs. The Vix moved higher again yesterday, as it has been over the past month. Not dramatically, but maybe noteworthy when stocks continue to make new highs. A rising VIX suggests that someone is preparing for a potential pullback.

The OECD released its latest views on the global economic outlook yesterday, which are typically revised, but are worth commenting on. Whilst economic growth remained more resilient than they expected, looking ahead, they describe downside risks as “looming large”: further tariff hikes, increased concerns about fiscal risks, and renewed inflation pressures could weigh on growth. Despite these concerns, they still expect the global economy to grow at 2.9% next year, having upgraded this year’s forecast from 2.9% to 3.2%. They forecast the UK economy to grow at 1% next year, with inflation averaging 2.7%.

I read an interesting piece the other day, international investors remain keen on US stocks but are apparently hedging out the risk of a weaker dollar. When owning international stocks, you inherently take on a currency risk, and one must always bear that in mind. Particularly, the case of buying international bonds. There’s no point in buying a US Treasury yielding 5% only for the currency to move against by a similar or greater amount, wiping out any gain. Hedging that risk out is an option, but it can be expensive. In the case of the US dollar, my view has always been that it tends to strengthen when risk assets come under stress, and statistics generally support this historical trend. So hedging that risk makes no sense. One saw last night that stocks fell, and the USD had a modest rally—just my view. As someone once commented to me, hedges are for gardeners.