Taxing Highs

November proved to be another busy month for markets leading to volatile, but ultimately lacklustre, returns in US and European markets. The US government shutdown obscured the economic picture at the start of the month, creating uncertainty for investors. Meanwhile, UK market participants nervously awaited the budget at the end of the month – in the end, there were few fireworks and government bondholders were reassured as the Chancellor announced a significant increase in the buffer the government has generated within its spending rules.

The bigger picture in the US economy is still one of strong growth – business surveys demonstrate optimism and AI capital expenditure remains huge. Furthermore, dominant US chipmaker, Nvidia, posted incredibly strong third quarter results – dampening fears about the future path of returns for technology stocks which have outpaced most sectors year-to-date. However, employment growth has slowed, muddying the outlook and bringing rate cuts into greater focus. At the last Federal Reserve meeting, where interest rates were cut by 0.25%, Chair Powell emphasised that another cut at the next meeting in December was not a done deal. This has dampened enthusiasm amongst some stock investors. However, attention has started to shift to who will be the next Federal Reserve Chair after Powell steps down in May 2026. It seems likely that President Trump will choose someone who aligns with his view that interest rates should be lower. For this reason, betting markets have recently increased the odds of Kevin Hassett being nominated. He is an American economist who is Director of the National Economic Council, and, crucially, viewed to be a close ally of President Trump. He also has a stake in Coinbase, a cryptocurrency exchange, disclosed to be worth more than USD 1 million – a potential conflict of interest given the Federal Reserve’s evolving role in regulating digital assets.  Nonetheless, Hassett agrees with Trump that interest rates should be lower and has been openly critical of the Federal Reserve for being too slow and so he would likely be a popular choice with investors. Trump is known to make surprise personnel decisions though, so the next appointee is far from certain.

In the UK, vivid memories of 2022’s disastrous budget, which sent bond yields sharply higher, kept investors acutely focused on government bond markets in the run up to the 26^th of November. Rumours of higher income tax rates had pushed Gilt yields lower towards the end of October and in early November. However, news on the 14^th of November that Reeves did not plan to raise income tax rates brought fears of fiscal recklessness and higher Gilt yields. Higher yields mean higher borrowing costs – something the government very much wants to avoid. Policy U-turns have brought a lot of criticism for the confusion and planning difficulties it brings for households and businesses. In the end, Chancellor Reeves’ budget resulted in greater fiscal headroom, largely due to an extension of the freeze on income tax thresholds which takes the tax burden to an all-time high. Although upsetting many, Gilt investors breathed a sigh of relief that concerns over unfunded spending were unwarranted, at least in the near term. Sterling also gained modestly, after depreciating around 5% against the Euro so far this year. A small decline in inflation measures last month, and confirmation of some price freezes in the budget (such as on prescriptions and rail fares), have helped bolster expectations of a December UK rate cut – good news for borrowers and corporate profits and particularly beneficial to smaller companies that tend to be more sensitive to interest rates. The budget wasn’t all good news though – the Office for Budget Responsibility downgraded its projection for UK growth beyond 2025 citing lower productivity (a measure of economic output per hour worked). In addition, if households tighten their spending, due to tax rises and lower take home pay, this could weigh on spending and corporate profits. Nonetheless, getting the budget out of the way provides some clarity and stability, a welcome development for investors.

Bottom Line

Political developments are creating headlines and uncertainty, but politicians are acutely aware of the importance, for borrowers and investors, of containing government bond yields, and also inflation. Economic cycles tend to move slowly, and we expect further interest rate cuts will provide more support to the current one, creating a good backdrop for multi-asset portfolios.

Noteworthy

Kilts versus Gilts

Closer to home, some interesting news came out of Edinburgh this month where the Scottish Government laid out plans to issue the nation’s first ever government debt since the 1700s. Cheekily known as “Kilts” (UK Government bonds are referred to as Gilts), the Scottish government intends to issue £1.5 billion, starting with £300 million of borrowing in the 2026-27 financial year. These bonds will be quasi-sovereign, essentially means the debt is supported by the fiscal strength of the British Government, and so Scotland has been awarded the same AA credit rating as the UK. This is somewhat comparable to bonds issued by, for example, state owned companies or government agencies. The narrative from Holyrood is that this investment grade rating is a signal of the Scottish Government’s credibility. However, ratings agencies have made it clear that this rating is conditional on Scotland remaining part of the UK’s fiscal framework and so a credit ratings downgrade would be expected if the perceived likelihood of Scottish independence increases. When they are issued it is likely that the Scottish Government will have to pay a marginally higher rate of borrowing than the UK Government (largely due to lower liquidity), and again – this difference would grow if Scotland moved closer to independence. It is also worth noting the magnitude of the Kilt market will be tiny in comparison to the UK Gilt market which has over £2.5 trillion of debt in issue. It is an interesting story, especially for those of us living in Scotland, but we do not anticipate holding any exposure to Scottish Government debt at this stage within our portfolios.

Bitcoin craters as sentiment wavers

After rallying more than 60% against the USD from its April low, the price of Bitcoin has since plummeted close to 30% from its October high. The price of the cryptocurrency dropped 17% in November alone, destroying half a trillion USD of crypto value in the process, while investors pulled billions from Crypto Exchange-Traded Products (ETPs), the largest exodus since launch. What has triggered this? For such a volatile, and ultimately speculative, asset class it can be hard to put blame on a singular factor – after all Bitcoin has no cash flows and limited practical use on which to value it. Instead, the swing seems to have been triggered more by a shift in sentiment which is to be expected for such a volatile asset. It is worth noting that the launch of ETPs has made crypto assets far more accessible to retail investors and so has expanded the ownership away from those committed few who will hold the volatile asset through thick and thin – these new holders are more likely to drop the asset when it is under stress. Moreover, the asset is now more institutionally held, these holders are more likely to rebalance their portfolios periodically and so sell those assets which recently outperformed, Bitcoin could be an example of this. There are also some technical factors at play. A possible catalyst could have been a mini crash in October where close to $20bn of crypto was sold at once and exposed some of the low liquidity present in markets. It is likely that the asset also got caught up in the volatile technology stock trading over the month and the rising chatter of a tech bubble bursting. Investors who refer to Bitcoin as “digital gold” would be wise to remember that, although both are supply-constrained assets, Bitcoin is much more volatile – indeed, Gold rose over 5% in November rather than proxying as an indication of market fear.