Welcome to this week’s Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

Today, we’re looking at the IMF’s warning to the UK, soaring Japanese bond yields, and the potential for a streamlined EU-US trade deal.

But first, our number of the week…

+$9 billion

That’s how much money has flowed into US-listed Bitcoin ETFs over the past five weeks, according to Bloomberg. In contrast, over $2.8 billion flowed out of gold ETFs over the same period.

Sidekick Takeaway: Bitcoin has long been referred to as ‘digital gold,’ but this data indicates that the coin is becoming more popular than the metal as a portfolio hedge. Despite widespread market uncertainty, Bitcoin continues to trade near all-time highs.

Now to our main stories…

Only have a minute to read? Here’s the TL;DR:

• In a rebuke usually reserved for developing nations, the IMF warned the UK over the country’s rising fiscal deficits. The fund emphasised the importance of keeping borrowing under control to avoid gilt market pressures.
• A sharp rise in Japanese yields has spooked investors as the BOJ steps back from bond purchases. The government’s efforts to stabilise yields through issuance management could be an important case study for similar proposals in the US and UK.
• In an effort to break the EU-US trade stalemate, EU policymakers are considering a new two-track approach. Prioritising politically sensitive sectors while leaving comprehensive discussions for the future could be one way to get a deal signed quickly. 

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

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Warning Signs: IMF Cautions UK Over Budget

In a sense, the International Monetary Fund (IMF) acts like a fiscal babysitter for governments.

The organisation keeps an eye on deficits and debt around the world, stepping in to offer loans when countries run into trouble.

Historically, this babysitting role has focused on developing countries. The IMF is infamous for its work in Argentina, for example.

But this week, the IMF issued an unusual warning to a developed country: the UK.

IMF: UK risks bond market fallout

In the group’s annual health check on the British economy, IMF policymakers cautioned that the UK could risk a bond market rebellion unless deficit reductions are delivered:

• Rachel Reeves has reiterated her commitment to reduced borrowing, but recent political backlash against spending cuts could make that challenging.
• The IMF’s warning harkens back to Liz Truss’ premiership, when irresponsible fiscal policy sent gilt yields soaring and sparked financial chaos.
• In their report, the IMF emphasised that the government needs ‘to stay the course and deliver the planned deficit reduction over the next five years to… reduce vulnerability to gilt market pressures.’

In fact, the UK is already taking novel steps to lower the deficit as fiscal pressure builds.

Notably, the Debt Management Office is looking to issue more short-term debt, which generally comes with cheaper interest rates (and thus lower borrowing costs).

The IMF’s warning may also bring up unpleasant memories of the fund’s massive 1976 bailout of the UK, which came with drastic public spending cuts attached.

Sidekick Takeaway: Since the pound is no longer on a fixed exchange rate, the UK is highly unlikely to ever need another loan from the IMF. Nonetheless, the fund’s warning is a surprising rebuke to a developed country and one that highlights the challenges the government faces in bringing debt down from ~95% of GDP.

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The Zen Yen? BOJ Pullback Spooks Investors

Japan has long been the poster child for ‘debt monetisation.’

The BOJ, the country’s central bank, has routinely purchased vast sums of government debt. Currently, the BOJ owns more than half of Japan’s national debt.

As a result, Japan has also been the poster child for low long-term interest rates.

But for the first time in decades, this situation is beginning to reverse. As the BOJ steps back from bond purchases, rates are rising.

This month, the 30-year yield eclipsed 3%, reaching an all-time high.

Without the BOJ, who’s buying?

This surge in yields is making investors nervous.

Without the BOJ, it’s not clear if there are enough buyers for Japanese government bonds to keep rates reasonable.

In fact, recent auctions of 20-year and 40-year bonds had concerningly weak demand.

And this doesn’t just matter for Japanese investors. Higher yields on Japanese bonds could draw capital out of other developed markets, pushing Treasury or gilt yields higher.

Last year, a major unwinding of the yen carry trade triggered volatility in global markets, highlighting the knock-on effects of changes in Japanese yields.

In response to surging yields, the Japanese government is considering measures to keep rates in check.

One idea could be to reduce long-dated bond issuance. Rumours of this approach almost immediately sent 30-year yields plunging.

What’s clear, however, is that the Japanese government can no longer depend on the BOJ to keep rates in check. 

Sidekick Takeaway: The Japanese government’s issuance adjustment idea is remarkably similar to proposals in both the US and the UK. Given the BOJ’s historically large presence in the country’s bond market, the next few months could be an important case study in whether issuance management can significantly impact the yield curve.

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Staying Focused: EU Eyes Critical Sectors in Trade Deal

For weeks, EU-US trade negotiations have been effectively stalled.

Reportedly, EU policymakers are growing increasingly frustrated. American policymakers don’t seem to know what they want out of a trade deal.

Recently, Trump threatened to slap an additional 50% tariffs on the EU, only to delay implementation until July 9th.

To bypass the current stalemate, the EU looks set to take a two-track approach: prioritising a deal on critical sectors while leaving other questions unaddressed.

EU set to learn from the UK

For the EU, politically sensitive areas to focus on include metals, pharmaceuticals, and civilian aircraft.

Ursula von der Leyen, President of the European Commission, stated this week that ‘Europe is ready to advance talks swiftly and decisively.’

In the meantime, discussions on universal tariffs and non-tariff barriers could be set aside for a more comprehensive discussion in the future.

In many ways, this is reminiscent of the UK’s approach to securing the first deal of Trump’s trade war.

Like the EU, the UK focused on agreements in just a few key sectors, opting for a smaller immediate deal than a broader delayed one.

Sidekick Takeaway: While EU-US negotiations will likely continue, Trump’s tariffs have been thrown into limbo by a court ruling asserting that the measures could be illegal. While the US government has already appealed, this decision adds significant confusion as to the durability and importance of trade deals in the meantime. 

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Notices

Sidekick Money Ltd is a company registered in England and Wales (No. 13882980). Sidekick Money Ltd is authorised and regulated by the Financial Conduct Authority (FRN 984829). Our address is 21-33 Great Eastern St, London, EC2A 3EJ.

𝘗𝘭𝘦𝘢𝘴𝘦 𝘳𝘦𝘮𝘦𝘮𝘣𝘦𝘳, 𝘪𝘯𝘷𝘦𝘴𝘵𝘪𝘯𝘨 𝘴𝘩𝘰𝘶𝘭𝘥 𝘣𝘦 𝘷𝘪𝘦𝘸𝘦𝘥 𝘢𝘴 𝘭𝘰𝘯𝘨𝘦𝘳 𝘵𝘦𝘳𝘮. 𝘠𝘰𝘶𝘳 𝘤𝘢𝘱𝘪𝘵𝘢𝘭 𝘪𝘴 𝘢𝘵 𝘳𝘪𝘴𝘬 - 𝘵𝘩𝘦 𝘷𝘢𝘭𝘶𝘦 𝘰𝘧 𝘪𝘯𝘷𝘦𝘴𝘵𝘮𝘦𝘯𝘵𝘴 𝘤𝘢𝘯 𝘨𝘰 𝘶𝘱 𝘢𝘯𝘥 𝘥𝘰𝘸𝘯, 𝘢𝘯𝘥 𝘺𝘰𝘶 𝘮𝘢𝘺 𝘨𝘦𝘵 𝘣𝘢𝘤𝘬 𝘭𝘦𝘴𝘴 𝘵𝘩𝘢𝘯 𝘺𝘰𝘶 𝘱𝘶𝘵 𝘪𝘯.

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