The IMF has sounded the alarm over governments’ ballooning debt burdens, warning that higher borrowing costs are making it increasingly expensive to service swollen debt piles and leaving economies more exposed to fresh shocks.
Susannah Streeter, Chief Investment Strategist, Wealth Club: “In true Trump style, the US President has again toyed with the world, claiming he’s in two minds about whether to launch another big strike to annihilate Iran or push for further negotiations. Despite the threats being dangled, the TACO trade is in play to some extent, with markets expecting some kind of deal to be more likely, especially after Trump described talks with Iranian officials as 'very productive'. Brent Crude has weakened a little further, trading around $98 a barrel, helped by some signs of more oil flowing from the Gulf region. Nevertheless, it’s still around a third higher than back in July, a demonstration of just how complex the conflict has become to unwind, especially with advances by Iran-backed Houthi rebels. Although Saudi’s rapid repairs to the East-West oil network have seen oil flows resume, full operations aren't likely to be back up and running for weeks, and there’s always the risk of fresh rebel attacks until a longer-lasting deal is reached. For now, markets are taking a glass-half-full approach, with the FTSE 100 looking set for a positive start to trading and European indices also expected to make some progress.
While leaders have become reluctantly used to Trump’s erratic and dangerous methods of attempting to extricate a deal, his speech at the United Nations again underlines the highly capricious nature of the presidency. UK Prime Minister Andy Burnham’s first face-to-face encounter with Trump was reminiscent of a new teacher meeting an overbearing head – while he got an initial welcome, it won’t be long before his lessons are being interrupted and attempts made to impose a new curriculum. Attention will now turn to Trump's meeting with China's Xi Jinping tomorrow, flagged as a chance to build strategic stability between the two powers. The clock is ticking given a temporary trade deal is set to expire in November. Both want to extract concessions, Trump has Beijing's trove of rare earth minerals in his sights, while gaining access to the most advanced semiconductor technology will be on the Chinese agenda. Signs of progress in extending a trade deal could help trigger a positive move higher for markets, although as the world has experienced, one step forward could quickly be followed by two steps back.
Trump’s swings between being cooperative and obstructive on the world stage don’t bode well for other challenges, not least tackling the US debt mountain. Fresh warning shots about profligate spending by governments have been fired, this time by the International Monetary Fund. Head of the IMF Kristalina Georgieva has lamented the lack of action to bring down the cost of servicing debt by demonstrating more responsibility with budgeting. The energy shock, which has caused a spike in bond yields, shows just how fragile economies have become and how reliant they are on the bond markets to keep government machines running.
The AI trade is masking a chronic problem of overspending, with consumers and companies risking being increasingly weighed down by higher borrowing costs and higher duties and taxes. In the US, it’s Trump’s trade war, increasing costs for importers, which are being passed on, with the wave of infrastructure spending also pushing up inflation. In the UK, painfully higher energy costs look set to trigger more interest rate hikes, just as higher taxes are being clawed from consumers and companies, which risks stifling growth. The squeeze on households is already becoming more visible, with confidence weakening as higher mortgage costs and the prospect of further rate rises weigh on spending.
Yet just as economies are hampered from being able to expand more easily, which would make debt levels more manageable, the spending hose is at full blast, partly to finance debt payments, which are ballooning. The UK’s latest borrowing figures have already highlighted how little room for manoeuvre the government has, adding to the pressure ahead of the Budget. While UK gilt yields have fallen back slightly, they remain worryingly elevated, with 10-year yields above 5.2% and 30-year gilt yields above 5.7%, having recently hit their highest level since comparable records began in 1998.”
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