Daily Commentary

MarketMinder’s View: Per the UK’s Office for National Statistics, “public sector net borrowing – the difference between public spending and income – fell to £1.1bn, down by £2.3bn from the same month a year earlier. The reading was below City predictions for a deficit of £2.6bn and forecasts from the Office for Budget Responsibility (OBR) of £2.1bn.” As with any data series, we don’t recommend reading too much into one month’s results, and July’s figures haven’t altered the OBR’s longer-term projections. It is normal for deficits to fluctuate month to month, given tax revenues are lumpy. But we see two notable takeaways from this news. One, all the dire projections about the state of the UK’s public finances overlooks the possibility that things turn out better than anticipated. For example, “The ONS said the better-than-expected monthly borrowing figure reflected ‘strong increases’ in tax receipts after Reeves’s increase in employer national insurance contributions (NICs), introduced in April. For the financial year so far, compulsory social contributions were £9.5bn higher than in the same period a year earlier. … The UK’s public finances are typically in a strong position in July, owing to a key payment deadline for self-assessed income tax.” We aren’t for or against the NIC tax changes, and we don’t think the UK’s finances are in such a dire state, but the uptick in tax revenues amid ongoing UK economic resilience suggests fears that April’s hikes would roil businesses are thus far wide of the mark. Second, the economists interviewed here still have pretty dour outlooks about the UK’s economy, with one anticipating increased government borrowing and weaker growth for the rest of the year. That suggests reality has a low bar to clear to beat expectations—a bullish development. For more, see last week’s commentary, “The UK’s Mixed Q2 and Hadrian’s Wall of Worry.”  

MarketMinder’s View: In addressing the titular question, the article reports some interesting numbers. “Treasury International Capital (TIC) figures last week showed that foreign investors bought a net $192 billion of U.S. securities in June. This followed a record net purchase of $326 billion in May, swelled by the largest ever inflow from the private sector. Once U.S. investors' purchases of foreign assets are discounted, the net flow of long-term capital into U.S. securities in June was still a healthy $151 billion, taking the total for the second quarter to a record-matching $410 billion.” That sure doesn’t seem like investors view US assets as poor investments, and as described here, “The explanation may be quite simple: capital continues to flood into the U.S. because that is where investors around the world believe they will see the strongest growth and thus earn the highest returns.” We agree—said more simply, money flows to the highest-yielding asset (all else being equal). We would then add that this is also partly just math, given the US continues running a trade deficit, making it a net importer of foreign capital. The concluding paragraphs seem to miss this, questioning the seeming disconnect between capital flows and the US growth outlook and Fed expectations—the former seems upbeat while the latter two are more cautious—but that seems reflective of some skeptical sentiment to us. Overall, the data here reinforce a tip we often share: When in doubt, trust the market. If US public finances or Corporate America were in trouble, markets would say so before folks consciously cottoned on. 

MarketMinder’s View: Please note, MarketMinder is nonpartisan and prefers no political party or politician over another. We share this update on the US and European Union’s (EU’s) trade deal for some of the clarity it provides. “The agreement reached at Trump Turnberry, one of the president’s Scottish golf courses, established a 15 percent tariff on most European goods. That figure is lower than the 50 percent tax that [US President Donald] Trump had threatened. Yet the E.U. also agreed to purchase $750 billion worth of American energy products over the next three years and to invest an additional $600 billion in the United States. Analysts reacted skeptically to those plans, noting that the E.U. does not dictate private-sector spending or investment decisions.” As the article details, some industries will enjoy lower-than-expected duties (e.g., tariffs on European vehicles will fall from 25% to 15%) while others (e.g., wine and spirits) will face much higher levies than before. That said, the three-and-a-half page joint statement isn’t a legally binding document, and negotiators think talks will take weeks (if not months) to iron out the details. We will continue to monitor all trade developments, but even gradually falling uncertainty should benefit markets. For more, see last month’s commentary, “Market Relief and the EU-US Deal to Make a Deal.”