Come and have a go if... - Global market update

One question that often raises much debate is “what is the best television series / box set ever made?” The answers will vary depending on the audience (and, in particular, the age of the audience) from things like The Sopranos, or Breaking Bad, or Ted Lasso, or The West Wing. But for me, there is only one answer – The Wire. For those of you not familiar with this small screen masterpiece, it is an American crime drama set in Baltimore, Maryland, comprising 60 episodes over five seasons and introduces a different institution of the city and its relationship to law enforcement while retaining characters and advancing storylines from previous seasons. One of the key characters is Omar Devon Little, a notorious stick-up man who frequently robs street-level drug dealers. Perhaps his greatest line in the show is a warning to would-be aggressors when he tells them, “You come at the king, you best not miss”. 

Over the last few weeks, we have seen US Treasury Secretary Scott Bessent issue a similar style warning to bond and currency traders, but the bark may have been worse than the bite. His most recent utterance focused on the Japanese yen and follows the US decision to buy yen several weeks ago in a clear desire to see the currency strengthen. Bessent proclaimed to all that would listen that he “is the house now, so when we intervene with the Japanese yen, I have pretty good insight into what the Japanese, what the Bank of Japan is going to do, what Japanese policymakers are going to do”.

As a general rule, history has shown that it’s not the best idea to goad markets into betting against you – just ask the Bank of England after the sterling debacle with George Soros! And while Japanese policymakers probably didn’t appreciate Bessent’s insinuation that he knew what they were thinking, the market took him at his word (for now). However, just like his announcement to buy back US government bonds, the impact could prove to be short-lived – last Wednesday’s announcement that buybacks were being tripled wasn’t enough as the market responded with disappointment that he hadn’t used even more shock and awe and pushed up the 10-year Treasury yield to its highest in three years.

Pressure remains on the bond market in the context of surging oil prices and less-than-comforting inflation data, but as of yet the equity market continues to take it in its stride. Whether this proves to be a case of boiling the frog where everything is good until it isn’t, or whether some other issue causes equity investors to sit up and watch, time will tell. 

One possible issue that could ruffle feathers is the midterm elections. As the campaign season has entered its final stretch, Wall Street is busy drawing up game plans for a range of scenarios. Investors have become increasingly confident that Democrats will take the House of Representatives in November while assigning a slight edge to Republicans in the Senate. While confidence in that outcome is not unfounded, it’s far from guaranteed. Democrats are by far the prediction markets’ favourites to take control of the House. The Senate race, however, has grown tighter, with Republicans currently narrowly ahead on Kalshi and Polymarket.

Under normal circumstances, when it comes to election results, Wall Street’s thinking is that with different parties at the helm in the two chambers, the likelihood of drastic policy changes — be it in artificial intelligence, defence or healthcare — will be lower. That would mean less uncertainty for the markets. But decisions under the current administration have shown us that we are not in a normal world – we need only look at the president’s offer last week to give every person in the country $5000 if his Republican Party wins the midterms – buying elections would generally be frowned on in most countries, save the most despotic or corrupt regimes in the world. But when your approval ratings are at record low levels, desperate times call for desperate measures. 

A ‘Blue Wave’ move in these elections could prove to be a nice tailwind for the equity market, but too far could see a knee-jerk reaction from the White House in terms of executive orders or policy decisions – and if that happens, then the renaming of Lake Ontario might seem like a quirky little issue.