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 UK’s latest spending review, European capital market reform, and a potential defence partnership in Ukraine. 

But first, our number of the week…

2.43

That was the ‘bid-to-cover ratio’ on a recent 30-year US Treasury auction, indicating robust demand for US government securities. Government bond auctions, once quiet affairs, have become closely watched as investors fret about a global debt sell-off.

Sidekick Takeaway: In the wake of the auction, US Treasury yields continued to decline, falling to about 4.85% by the end of the day Thursday. A cooler-than-expected US inflation report this week should also help keep global yields under control – for now.

Now to our main stories…

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

• As part of the UK government’s £2 trillion spending review, Rachel Reeves announced significant budget increases to defence and healthcare. However, tax rises could loom in autumn if the country’s economy continues to slip.
• Norway’s $1.8 trillion oil fund called for urgent reform to European capital markets, warning that the continent was falling behind the rest of the world. The fund’s suggestions could help pave the way for increased joint European debt issuance.
• In a controversial move, Renault could be set to manufacture drones in Ukraine at the behest of the French government. As Europe’s military spending expands, expect increased defence partnerships between national champions and national governments. 

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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Reviewing the Books: Labour Plans Trillions in Spending

As part of a long-awaited spending review, Chancellor Rachel Reeves unveiled on Wednesday how the government plans to spend over £2 trillion in the coming years.

As expected, some of the biggest winners were healthcare and defence.

The NHS will receive a 3% bump in day-to-day spending, while defence spending is expected to rise to 2.6% of GDP by 2027.

In contrast, departmental spending cuts were sharp. The Home Office and Foreign Office budgets will fall by 1.7% and 6.9%, respectively.

The review ended up broadly in line with expectations. Nonetheless, it failed to clear up looming questions on budget sustainability that Reeves will soon have to answer. 

Fiscal rules still haunt Labour

Labour’s fiscal strategy is infamous for its system of self-imposed constraints. 

The most fundamental of these is a commitment not to fund day-to-day spending with borrowing. Reeves has so far refused to alter these rules. 

As a result, the Chancellor needed to employ some sleight of hand in order to make the spending review figures work.

Most questionably, Reeves plans to achieve some £13.8 billion in efficiency gains, apparently through increased use of AI. 

That isn't small change. £13.8 billion amounts to roughly 10% of the review’s planned capital spending.

Moreover, the review relies on OBR economic forecasts from March. The UK economy has notably weakened since then.

Fresh OBR forecasts could raise the possibility of additional tax rises in the autumn, a topic that Reeves did not comment on. 

Sidekick Takeaway: While the review offered useful details on how Labour plans to allocate spending in the coming years, it’s clear that fundamental questions remain unanswered. Relying on efficiency gains and dated forecasts to balance the books isn’t a strategy that will last forever.

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Capital Idea: Norway’s Oil Fund Urges Market Reform

With a market value of $1.8 trillion, Norway’s state oil fund is one of the largest institutional investors in the world.

Known as Norges Bank Investment Management, the fund owns roughly 2.5% of every listed company on the European continent. 

That gives Norges enormous influence. And this week, the fund used that influence to try and push Europe toward a more cohesive and unified capital market.

Norges: Europe is ‘falling behind’

On Tuesday, Norges sent a 14-page letter to an EU consultation on streamlining Europe’s financial markets.

In the letter, the fund’s managers noted that European markets have ‘fallen behind in terms of business dynamism and the provision of new investment opportunities.’

To fix that, Norges offered a suite of suggestions on streamlining and modernising the continent’s capital markets, including:

• Reducing the national differences in corporate and bankruptcy law to create a more predictable environment for investors.
• Harmonising investment taxation across Europe, particularly withholding tax. 
• Streamlining the debt issuance process across the continent.

The last of these suggestions is particularly interesting in the current geopolitical environment.

A pan-European debt issuance process could play a significant role in the expansion of joint EU defence bonds, which are currently seeing renewed interest.

Sidekick Takeaway: A harmonised European capital market isn’t just sensible, but may soon be necessary. As the continent ramps up defence spending, mobilising investment for such capital-intensive projects will be far more achievable with streamlined markets across the continent.

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Droning On: Renault Considered for Ukraine Defence Deal

Drones have emerged as a vital weapon in Ukraine’s asymmetric warfare against Russia.

While the weapons cost just several hundred dollars to make, they can be used to devastating effect, as evidenced by Ukraine’s Spider’s Web attack earlier this month.

Now, reports indicate that allies are stepping up to help Ukraine expand the country’s drone production capabilities.

This week, the French government approached Renault, asking the automaker to join a partnership to manufacture drones in Ukraine.

While the deal has yet to come to fruition, it could lay the groundwork for subsequent defense partnerships in the coming years.

National champions are prime defence partners

So far, Renault has yet to decide. But there is no doubt that any potential deal would be controversial.

Renault has not produced defence weaponry since World War II. This partnership would be the first instance of a French business manufacturing weapons on Ukrainian soil.

Nonetheless, it could also provide a foundation for future public/private defence partnerships in Europe.

As the continent’s military spending ramps up, industrial giants like Renault will likely be key players in achieving sufficient manufacturing capacity. 

Moreover, the French government’s 15% stake in Renault gives public interest significant influence in the firm’s decisions. 

French policymakers have argued that the partnership would be a ‘win win’ – building European defence capacity while also providing immediate military support to Ukraine. 

Sidekick Takeaway: The Renault situation is somewhat unique due to the French government’s ownership stake in the firm. However, investors should expect increasingly close partnerships between European national champions and national governments as the continent’s military spending accelerates. 

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Notices

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