CIO's Market Watch - October

US trade talks went on the road.

US trade tariffs have been less prominent in the news recently, however, deals with other countries are complex and even when they are announced the real detail will still be in need of negotiation. The topic is clearly one that is high on the President’s agenda, even whilst he is involved with high profile discussions relating to conflicts globally.

As the world’s largest economy, the US has trading relationships all over the world across many industries and services. Clearly Asian countries are very important as the US wants to access their large and growing markets, whilst it has a need of many of their manufactured goods and resources. The region is so important that the President has made the effort to go on a big trip to Asia. As well as deals with Cambodia, Malaysia, Vietnam and Thailand being announced, there were visits to the key countries of Japan and South Korea and whilst there he met with Chinese President Xi Jinping.

In the case of Japan and China, and to a lesser extent South Korea, it would have been a case of “you scratch my back ….”. China wants access to US technology, such as Nvidia’s semiconductors that are power the growth in AI, whilst the US wants Chinese resources, such as rare earth minerals. These are important discussions for the world economy and, in the case of China, are being conducted between two countries whose trade relationship is adversarial to say the least.

However, they are all talking and, it seems, coming to mutually agreeable arrangements, for now anyway. Global economic growth has some fragility to it and these deals are important to maintain that growth.

Meanwhile, back at home, if you hadn’t heard, there’s a budget coming soon.

Personally, I’ve got to a stage that I just want it out of the way so we can all move on. It is difficult to know just how many of the reported measures will, can or need to be actually implemented. That’s because we don’t know the scale of the problem. Estimates of the size of the gap in public finances that needs to be filled vary from £20bn to £50bn, that’s a big difference and a huge amount of money.

I imagine as we near the date, more concrete leaks of the measures will become known - it doesn’t make sense to announce all the news in one go; give people time to digest it. This is also important for financial markets, in particular government bonds and currencies. If you think back to the ill-considered and badly presented budget in the short lived Liz Truss government, the reaction of markets had direct and significant impacts on the economy and businesses that did not unwind quickly. It is vital that the Chancellor does not spook the bond market, otherwise a very difficult government fiscal position could get sharply worse.

However, hopefully, that is a known risk and therefore one that can be managed. I am coming round to the view that by the time we get to the budget itself, all the bad news will be known and therefore factored into the valuations of UK financial markets. This does leave some room for optimism, particularly if measures are announced that are supportive of UK capital markets, such as changes to the ISA rules, and there are no significant new employment policies that may hurt businesses.

Bad memories.

If you have read the book or watched the film The Big Short, the story of the reasons for the collapse in financial markets and the global financial crisis, you will have learnt about MBS (Mortgage Backed Securities, which were bundles of homes loans sold to investors), CDOs (Collateralized Debt Obligations; complex instruments that pooled various types of debt, including MBS, and sliced them into tranches with different risk levels), and CDS (Credit Default Swaps; insurance-like contracts that pay out if a borrower defaults). They were relatively new instruments, that were not well understood, generated big fees for the issuers, and created very high leverage (or levels of debt) in the financial system. They were all interlinked and when they unwound the pain was extreme.

These instruments still exist, and in the case of MBS and CDS, they are extensively used but are much better understood and managed. As we sit here in 2025, there is a new kid on the block; private credit, which has been growing quickly. It is largely a US phenomenon, but it exists everywhere.

Private credit is loans and other forms of debt financing provided by non-bank institutions, typically to companies that are not publicly traded. It’s a segment of the broader private markets and has grown significantly in recent years, especially as traditional banks have pulled back from certain types of lending due to regulatory constraints.

It’s provided by asset managers, hedge funds, private equity firms, amongst other institutions, and new companies set up to do so. The loans are typically made to smaller businesses and sometimes ones that are in poor financial health. The structure of the loans can be complex and onerous and they usually carry high interest rates that need to be paid.

The reason there are concerns over private credit are that it is lightly regulated, no one knows the scale, although Morgan Stanley estimate it is $3 trillion in size. Furthermore, it is very opaque by nature, so if the interest on the loans or the loans themselves fail the impact could snowball, with lenders failing, valuations of bonds falling, defaults spreading into other types of loans, companies going bankrupt, jobs being lost, banks being pulled into the spiral, the economy getting damaged. You can see how it might remind me of 2008.

The reason for mentioning this, is that in October there were two high profile bankruptcies in the US auto industry that involved private credit funding. Combined, they were irrelevant in scale, however, it was enough to worry fragile bond markets for a day or two.

Of all the elements to worry about at present, this one is growing, partly because of the lack of information. The defaults drew comment from Jamie Dimon, CEO of JP Morgan, who said “When you see one cockroach, there are probably more. Everyone should be forewarned on this one.” Worth noting.