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This month, James and Giles are joined by Jon Kirk as they dive into the big themes that shaped markets in October.
Giles and James discuss the easing tensions surrounding US-China trade talks (01:25), AI headlines after the US corporate earnings season (02:50) and Nvidia’s incredible $5trn valuation.
Our experts unpack the Fed’s hawkish rate cut and what it means for inflation (04:19), Gold’s sharp pullback after record highs (05:50) and the UK’s steady-but-muted outlook - with modest growth and persistent productivity challenges (7:28).
Giles and James discuss the easing tensions surrounding US-China trade talks (01:25), AI headlines after the US corporate earnings season (02:50) and Nvidia’s incredible $5trn valuation.
Our experts unpack the Fed’s hawkish rate cut and what it means for inflation (04:19), Gold’s sharp pullback after record highs (05:50) and the UK’s steady-but-muted outlook - with modest growth and persistent productivity challenges (7:28).
Jon and James explore the growing concerns in private markets as loan failures put credit quality under the spotlight (11:19).
Packed with insight and perspective, this episode asks the question: are we riding a sustainable wave of growth or are cracks starting to show?
This podcast is brought to you by TrinityBridge – trinitybridge.com – and features James Tulloch, Senior Investment Specialist, in conversation with Giles Parkinson, Head of Equities and Jon Kirk, Senior Equity Analyst.
We’ve created this podcast to set out possible approaches. Please do not view it as financial advice, or its content as investment recommendations. Just because an investment or an investment strategy has performed well in the past, it does not mean it will continue to do so. Our predictions are based on information that is currently available, however events and markets can and do change rapidly.
Creators and Guests
What is Insight Talks?
Our in-house experts share our views on the current market conditions facing investors. Brought to you by TrinityBridge.
We've created this podcast to set out possible approaches. Please do not view it as financial advice or its content as investment recommendations. Just because an investment or investment strategy has performed well in the past does not mean that it will continue to do so. Our predictions are based on information that is currently available. However, events and markets can and do change rapidly.
Speaker 2:Hello, and a very warm welcome to the November edition of the Insight Talk podcast with me, James Tolliff. I'm joined as usual by our head of equities, Jas Parkinson. Welcome, Jas. Hey, James.
Speaker 3:Good to see you again. Great to
Speaker 2:see you as as ever. And this month, we're also joined for a second podcast appearance by senior equity analyst, John Kirk, to help us dissect recent developments in the world of US credit with events over the past month or so. Certainly shining a light on on credit markets generally. So, John, welcome. Thanks very much indeed for for joining us again.
Speaker 4:Morning, James. Thanks. Good to be here.
Speaker 2:Okay. We'll delve into recent goings on within US credit shortly, but Giles, let's begin as we often seem to with events at the end of the month. October was ultimately another strongly positive month for global equity markets with any immediate investor concerns eased by US China trade talks late in the month. And it seems they marked another row back from an effective trade embargo, which was threatened amidst somewhat less constructive rhetoric earlier in October, wasn't it?
Speaker 3:Yes. It was certainly quite the round trip, James. So indeed, we got those late month trade talks lifted global sentiment notably. Both sides, China and US, agreed to a one year trade deal that would pause steeper US tariffs and limit China's export controls on on some particular categories such as rare earth minerals. Yeah.
Speaker 3:This is a critical component in some manufacturing supply chains, defense production, AI as well. Mhmm. So that more constructive tone did mark a notable shift over the discourse early in the month. I mean, right at the beginning, we had the Chinese announcement of special export licenses on those rare earths. That triggered Trump's retaliatory threat of a 100% tariffs on all imports from China, for it to be a trade embargo, to your point.
Speaker 3:And then that, in the immediate aftermath, did trigger the largest one day decline in US equity markets since the Liberation Day announcements Yeah. Back in April, so quite a bit of volatility there. Now but the development or the reconciliation, and I think we've ended up today in a better place than maybe we were going into October, was also particularly beneficial to some other Asian markets, most notably Korea and Taiwan. These are very significant semiconductor sectors, and they're heavily integrated into that global AI and electronics manufacturing supply chain and quite reliant on rare earth minerals. Yeah.
Speaker 3:Sure. Sure. Okay. And and and on the
Speaker 2:subject of AI and and buoyant markets, Giles, we've seen another really solid set of results, more or less across the board, during the latest US corporate earnings season, haven't we?
Speaker 3:Yes, indeed. So most of the S and P by market cap has reported earnings so far. 80%, so virtually all those companies, have reported earnings beat, and that's put the index on track for its best quarter in terms of earnings surprises since 2021. Within that, AI related capital expenditure continues to dominate headlines. So big names, big stocks like Alphabet well, all of them, actually, Alphabet, Metrica, Amazon, Microsoft, have all signaled that AI spending is not slowing down next year.
Speaker 3:This AI driven growth remains a critical risk and opportunity for investors, given these companies, these stocks, outsized impacts on the index. And it's very much a bit of a bifurcated story in terms of what's growing, with that dominated by data center and AI spend, and then the rest, frankly.
Speaker 2:Yes. Yeah. Sure. I mean, on that point, Jasmine, how concerned are you perhaps that the market is getting a little bit ahead of themselves here? It's perhaps the most often asked question at the moment.
Speaker 2:You know, is there a bubble in markets? Are they right for a a correction? And the answer depends, I guess, somewhat on on conditions. You know, you've spoken many times before about a core view being that of a soft landing for The US economy, namely that inflation can be brought under control with a period of of tighter monetary policy without that tipping The US economy or the global economy into into recession. And as we spoke of last month, of course, the US Federal Reserve implemented their first rate cut of 2025 in in September, and that was expected to presage a series of further reductions.
Speaker 2:Now the Fed did cut rates again last week, but the vote and subsequent commentary was somewhat more hawkish than than expected, wasn't it? I mean, is there an increasing risk of the Fed moving too slowly? Of course, the The US government shutdown continues to to cloud the picture a little bit, doesn't it?
Speaker 3:Yes. Indeed. And I think that that is a fair summary, James. I mean, shortly before the Fed voted to lower policy rates again, and and we did get a rate cut last month, we had the first official piece of economic data from the US government since the shutdown began at the start of the month, and that was on the inflation front. So whilst the pace of consumer price increases over the last year hit 3%, that's for the first time since January, it was that number was actually lower than expected, and because most observers thought that there would be even more tariff effect.
Speaker 3:Yeah. We're still seeing that undershooting, some of the more cautious or pessimistic expectations. So all else equal, that inflation print ought to have given the Fed breathing a bit of a sigh of relief and maybe more room to cut rates. However, as I mentioned, we did get a rate cut, but the Fed chair Jerome Powell stated that additional rate cuts were not, quote, not guaranteed in December when markets have been fooling pricing in close to 100%. So I think it's fair to say, James, that this apparent hawkishness on the heart of the Fed could challenge that soft landing narrative a little.
Speaker 2:Okay. Okay. Okay. Interesting. And elsewhere in our markets, of course, we saw gold lose some of its shine in October, didn't we?
Speaker 2:We spoke about some of the reasons that gold had surged through the $4,000 per ounce level last month, of course. Is the pullback we've rewitnessed more recently just a mid rally pause or short term overbought conditions, or is it perhaps something more more significant at play here? Yeah. Had volatility in equity markets, had volatility in this commodity market. Mean, it's
Speaker 3:a gold experience its single biggest one day drop in twelve years the week before last. Now what happened to try and paint the picture was just a day after reaching a new all time high, prices had soared to almost $4,400 an ounce. That's US dollars an ounce. They then dropped by 6% the following day to the 4,000 level. I mean, look.
Speaker 3:What's what's been going on here, you know, what's what's been driving the gold price, it really is demand from central banks. That's that's the key buying contingent. They're looking to diversify their holdings away from the dollar, and this has been a dynamic that's been at play for at least the past year. Meanwhile, investors have been piling into gold by the exchange traded funds, and you had solid demand for retail buying. I think in terms of the timing of of the pullback, yes, that US China trade tension softening, and just frankly, short term overbought conditions were perhaps the primary catalyst for some of the heat coming out of the market the week before last.
Speaker 3:Yeah. But think those longer term structural factors behind the appetite for gold are still in place. Last week's move is not being widely viewed as a more significant change in sentiment. The gold price did still rise 6% over the month in sterling terms. That was even better than stock markets.
Speaker 3:Yeah. Okay. Okay. Sure. And over in
Speaker 2:The UK, Giles, we continue the drawn out march towards the the November budget at the end of end of this month. Just this morning, the chancellor had a hastily arranged press conference, the day of recording being the November 4, just to try and set the context, I guess, ahead of the budget in twenty odd days' time. And we continue to get a slew of reports, forecasts, and data releases, which feed market speculation as as we we move towards the the chancellor's day in
Speaker 3:the spotlight, don't we? Yes, indeed. So these reports and data points start start to come in. Big one would be the OBR, downgrading the productivity growth forecast, which is a big part of economic growth. That's maybe created a shortfall of 20,000,000,000.
Speaker 3:Elsewhere, there's been a few points of slippage in terms of particular spending commitments, which actually the Labour government haven't delivered on and wrote back on.
Speaker 2:Yeah. Putting net net all
Speaker 3:of this together, there's one thing, thank the IFS Institute for Fiscal Studies. They projected a reasonable need to find 22,000,000,000 to meet the current shortfall. Now they have also suggested that there was a strong case for going further to create a buffer sufficient to avoid limping from one fiscal event to another, which is where I think both Conservatives and Labour have been for the last few years. And to your point, yes, the latest rhetoric out just this morning is that Reeves is probably going going to do exactly that.
Speaker 2:Yeah, yeah, indeed. And that sort of all important sort of per capita measure of economic output, The UK's much discussed productivity issue seems to be highlighted by the government's official forecaster as well, with speculation mounting that a downgrade to The UK's productivity performance from the Office for Budget Responsibility could mean that the chancellor is facing that that greater than expected gap in in meeting her her tax and and spending rules. Now the OBR will have delivered its final forecast for Reeves' budget just last week, and that will be published alongside the budget itself on the November 26. But the official forecaster has previously been overly optimistic about a bounce back in productivity growth, with that assumption pretty fundamental to long term growth prospects and how much might need to be raised to keep within those those fiscal rules that Chancellor has set for herself. Now Reeves has sought to partly blame Brexit for The UK's difficulties, claiming that the increased costs associated with trade with the EU has bolstered inflation and therefore dampered economic growth by forcing the Bank of England to keep interest rates elevated to control price pressures.
Speaker 2:But on that front, Giles, on the inflation front, there was some slightly more positive news last month, wasn't there?
Speaker 3:Yes. So that latest UK inflation print had The UK measure of CPR holding steady at 3.8% for the third consecutive month in September. That's an unexpected positive for chancellor reads, because the Bank of England and economists have been expecting a further rise to 4%. So what this means is that the latest reading is being seen as the peak with lower inflation readings going into next year. Now UK gilts, I.
Speaker 3:Borrowing costs rallied. The cost of borrowing fell on the back of this news as markets moved to significantly increase the probability of further Bank of England rate cut in December. Today, that pricing sits at 75%, which is some 30% higher than before that inflation data point came out. Mhmm. Earlier in the month, markets hadn't been fully pricing another cut until March '26, so quite significant borrowing cost or rate relief there, the government as well as consumers.
Speaker 3:However, don't get too excited just yet. I think despite the relative light relief that low and expect inflation should bring for government expenditure, the chancellor is still expected to announce tax increases in the autumn budget in an effort to keep a lid on government borrowing costs. All else equal, this this will be bad for growth, which has put further pressure on
Speaker 2:the pound. Yeah. Sure. Sure. Okay.
Speaker 2:We'll obviously watch with interest when the day comes towards the end of end of November. Giles, for now, thank you very much indeed. Great as ever to to get your your insight. We'll pivot now and bring in John at at this point. John, welcome again.
Speaker 2:Thanks very much indeed again for for joining us this month. Now last time you were on the podcast back in July, we discussed private markets in in general. This time, we're going to focus on potentially emerging issues within US credit, which has in turn shone a bit of a light on the growth within private credit markets, which are obviously seen as a as a high risk area. But it's the more immediate or broader investor concerns on on US credit, which we'll focus on on today. And and, obviously, great to have
Speaker 4:you back on the podcast to help us try and make sense of it all and understand what the implications might be. So let's let's jump right in. Perhaps why can can you explain why markets have become a little bit worried about US credit quality recently? Thanks, James. Yeah.
Speaker 4:We've had a a number of unexpected corporate loans going bad and defaults happening in The US. So these are quite large in some circumstances. We're looking at an auto parts supplier, an auto loans book, commercial real estate book, and also a loan to a US telecoms entrepreneur, all gone bad sort of unexpectedly. Mhmm. Now, what seems to tie these things together is there is fairly strong evidence of fraud in all four cases.
Speaker 4:Right. And so while it's very unsettling to have these kind of things happening, it doesn't look yet like this is something that's systemic. And in fact, I think what's really important here is to recognize that the scale of the problems that we've had so far are quite small. So if you add them all up, you get to around about $12,000,000,000. It sounds like quite a lot, but actually, in the context of The US banking system, that's a very small number indeed.
Speaker 4:So so far, it looks manageable, but I think it's been enough to raise concerns amongst markets. Yeah, sure. So and for the time being,
Speaker 2:at least, of a systemic credit problem forming are perhaps sort of misplaced. I think that's right. I mean,
Speaker 4:I think for now, assuming that these are all fraud, and unfortunately, evidence is fairly strong that they are, I think they should be treated as idiosyncratic. Now having said that, I think it's important to recognise that we are towards the top of the cycle in terms of the credit cycle in The US, and, you know, history shows us that at the top of the cycle, certain sort of practices start to creep into lending, which you might describe as systemic. So for example, due diligence activities perhaps become a little more relaxed than they might have been. We also see evidence that lending standards in general may have slipped a bit. So a good a good piece of evidence of that is from S and P, from Standard and Poor's, who indicated that around 90% or more than 90% of leveraged loans in The US in 2024 were covenant light.
Speaker 4:So in other words, lenders had had conceded quite a lot to the borrowers in terms of the terms of those loans. Mhmm. That number was only 20% coming into the global financial crisis in 2007, so that appears to me to be fairly significant. So if there is anything systemic going on here, think it's just that we've got top of the cycle behavior happening, which could cause problems further down the line. Now as we sit today, and just following on from Giles' comments about corporate earnings in the third quarter in The US are very strong, and that includes the banking system, actually.
Speaker 4:The banks almost universally produced very strong results, including pretty good indications on credit quality as well. Most of them seeing credit quality essentially flat quarter to quarter, or perhaps even improving. So so it doesn't feel like we are at the point of the bubble bursting. Mhmm. It just feels like, you know, the the markets are jittery because we are at a stage where, frankly, credit losses can't really get any lower.
Speaker 2:Okay. Okay. And could there be a private credit problem forming which could expose the the largest private market players, or is this is this sort of consigned to the to the mainstream banks?
Speaker 4:For now, it's the mainstream banks. So the loans that I mentioned earlier actually were all made by the banking system, not by private credit. So the private credit industry has become quite vocal about this in pointing it out, because there are question marks around private credit. Now I think, for now, that isn't where the problem is arising, but people are nervous, or investors are nervous, for a number of reasons. The most important one, really, is that private credit has grown very, very quickly.
Speaker 4:Sure. So it's expanded fivefold since 2009, and also there is a sense that private credit is making riskier loans, perhaps. This is the sense, whether or not it's true, we'll find out in time. But for now, there is a sense that with all that very strong growth, they're actually also making relatively risky loans. So for example, private credit these days tends to provide quite a lot of the leverage to the private equity industry, and the private equity industry is notorious for using high levels of leverage.
Speaker 4:So there are indications there of risk. I I should just say that, you know, the the banking system and the private credit system are actually interlinked, as always. In financial services, most things are interlinked.
Speaker 2:Mhmm.
Speaker 4:And in this case, what we observe is that the the volume of lending that the banking system, US banking system, has provided to private equity and the private credit world has also grown very quickly. That's doubled in the last six or seven years. So so the two are closely related.
Speaker 2:Yeah. Sure. Okay. And then and thinking sort of more broadly then about that that relation, how should equity investors be thinking about these these worries? So I think, you know, I think it's fair to say, given if you look
Speaker 4:at things like credit spreads being very narrow and the credit losses being reported by the banking system being very low, particularly on the back of a period of relatively strong loan growth, I think it's fair to say that we are in somewhat of a credit bubble in The US. Now, you know, everything I said so far, I I I think will show that I don't think we are seeing that bubble bursting right now, but I think it's fair to say, and again, you know, based on on some of the comments that Giles made earlier, that actually the outlook for The US economy is perhaps not quite as clear as it was, and therefore investors just need to bear that in mind. And I think when I look at some of The US credit names that I cover, and more broadly than that, they're all this is the equities now. They're all trading on fairly high valuation multiples, and it's fairly clear from the volatility that some of those loan defaults I mentioned earlier caused in markets, it's fairly clear that investors have become quite nervous, and I think that's entirely understandable.
Speaker 2:Yeah. Yeah. Absolutely. Okay. Alright, John.
Speaker 2:Thank you very much indeed. Wonderful to be able to get your your insight again. I'm sure we'll revisit that topic or another one with you again in the not too distant future. But for the time thank you very much. Thanks, James.
Speaker 2:And Giles, thanks again, as ever, to you for your insights as well. Cheers, James. Thanks a lot. Listeners, if you'd like to explore further commentary from our experts, please do visit trinitybridge.com, where you'll find plenty of material on the Insights section of the website. As ever, we'll return next month to record another podcast, but ahead of that, and separately, there'll be plenty of commentary released on the forthcoming UK budget, so do look out for that.
Speaker 4:But for now, thank you very much indeed, and goodbye.