Article last updated 30 September 2025.
The UK was the biggest loser in a tough quarter for global equity markets.
Despite a wave of bad news for many of the US technology giants, the S&P 500 was the strongest major developed market in local currency terms over the past three months. Worries about rising inflation and faster interest rate hikes were compounded by America’s belligerent trade policy, causing sharp share price falls around the world.
Facebook’s careless treatment of users’ private data, Uber’s first fatal crash with a self-driving car and the President’s angry tweets created a blizzard of bad publicity for the tech sector, which has been the predominant driver of US stock markets. By mid-March, the S&P 500 Information Technology Sector was up almost 12% for the year, before it slumped rapidly to post a quarterly return of just 3.2%. Over the weekend, China outlined its response to American tariffs. It has focused retaliatory tariffs on pork and wine, alongside other products, but reiterated its aversion to an out-and-out trade war. The US is expected to detail exactly how its $60bn of tariffs on Chinese imports will be levied later this week.
For all the poor stock market and trade news, however, the US economy remains strong. The number of people signing on for unemployment benefits is easily the lowest since the 1970s, US core inflation has been steady at roughly 1.7-1.8% for almost a year and annualised GDP growth has been floating round 3% since mid-2017.
1 week
3 months
6 months
1 year
FTSE All-Share*
1.7%
-6.9%
-2.3%
0.7%
FTSE 100*
2.0%
-7.2%
-2.6%
-0.4%
FTSE 250*
0.8%
-5.7%
-1.2%
5.1%
FTSE SmallCap*
0.1%
-4.8%
-0.9%
6.5%
S&P 500*
2.9%
-4.4%
0.9%
0.7%
Euro Stoxx*
1.9%
-3.9%
-3.8%
5.6%
Topix**
3.5%
-2.6%
4.9%
6.9%
Shanghai SE**
1.9%
-4.4%
-4.5%
-3.7%
FTSE Emerging Index**
0.5%
-2.2%
3.8%
7.3%
Source: FE Analytics, data sterling total return to *29 March; ** to 30 March
Libor’s last scare
One measure that has been headed in a concerning direction is Dollar Libor. Libor (the London Interbank Overnight Rate) is the interest rate that global banks charge other banks to borrow money that is unsecured, i.e. cash that will go up in smoke if the borrowing bank does a Lehman. It is also widely used as a benchmark rate for loans. There are different Libors for borrowing in different currencies and for different lengths of time. The one that has caught everyone’s attention is Dollar Libor.
Three-month Dollar Libor has climbed rapidly from about 1.30% in the third quarter to 2.31% today. That’s a very quick appreciation in a rate that should be quite stable; it’s easily outstripped the rise in the Fed Funds rate and is running ahead of the Overnight Index Swap (OIS) which is considered a completely risk-free interest rate. The difference, or spread, between Libor and the OIS is usually a good measure of lurking liquidity problems in the global banking system. This is pretty intuitive because if you take the Libor rate and subtract the rate offered for zero risk, then the remainder should be the amount that banks charge for the risk of a bank collapsing. The greater the chance of a bank failing, the higher this charge will be. Back in 2007, as the clouds were gathering before the global financial crisis, this Libor-OIS spread spiked noticeably.
Now, this time around we think the driver is actually a quirk of the US tax reform, rather than an omen on impending doom. It’s difficult to know for certain, but we feel this is a decent theory. First, it’s only Dollar Libor that has spiked, the rates for other currencies, like sterling and yen, haven’t budged. Typically, when banks are worried about their loans being swallowed up in a financial catastrophe it doesn’t matter which currency they are denominated in.
Added to that, our financial stress index hasn’t registered any worries – neither has the St Louis Federal Reserve’s. The European Central Bank’s version has ticked slightly higher in recent weeks, but we believe that’s because it gives weight to stock market moves. Finally, if banks were really at risk you would expect to see their share prices tumble and insurance contracts on their debt skyrocket. That hasn’t happened.
So why does tax reform seem like a likely driver? By eye, Dollar Libor seems to have started its rapid ascent right after the House of Representatives approved the first draft of the tax plan that offered a strong incentive to repatriate overseas profits. A January Goldman Sachs report details how the largest corporate cash hoarders are storing their offshore money. Most of the cash is invested in dollar corporate bonds with maturities between one and five years. In fact, the eight largest cash hoarders account for 8% of all the short-dated dollar corporate bonds in issue! To take advantage of the amnesty rate of repatriation created by the December’s tax act, these companies have to sell these bonds to bring the cash back to the US. We believe this selling has pushed up short-term interest rates which have in turn pushed up Libor (all short-term interest rate movements tend to influence each other).
Also, a little-noticed clause in the tax act attempts to prevent companies from washing money round the globe to lower their taxes. However, it may be making it difficult for foreign multinationals to fund their US divisions with their own cash (held at their foreign head office). This would increase demand for loans that are based on Libor, which everything being equal, would push Libor higher the same as any supply/demand dynamic.
This is still just a hunch though. And it doesn’t negate the fact that the average 90-day borrowing cost for non-financial firms has more than doubled since last year. We will be watching this measure closely.
Bonds
UK 10-Year yield @ 1.35%
US 10-Year yield @ 2.74%
Germany 10-Year yield @ 0.49%
Italy 10-Year yield @ 1.78%
Spain 10-Year yield @ 1.16%
Economic data and companies reporting for week commencing 3 April
Tuesday 3 April
UK: UK PMI Manufacturing
EU: Eurozone PMI Manufacturing; GER: Retail Sales
Wednesday 4 April
UK: PMI Construction
US: Mortgage Applications, ADP Employment Change, PMI Services, PMI Composite, ISM Nonmanufacturing/Services, Factory Orders, Durable Goods Orders, US Crude Oil Inventories
EU: Unemployment Rate; CPI
Thursday 5 April
UK: PMI Services, PMI Composite
US: Initial Jobless Claims, Trade Balance
EU: PMI Services, PMI Composite, Retail Sales; FRA: PMI Services, PMI Composite; GER: Factory Orders; ITA: PMI Services, PMI Composite
Friday 6 April
UK: Unit Labour Costs (Q4)
US: Nonfarm Payrolls, Unemployment Rate, Average Hourly Earnings, Consumer Credit, Fed Chair Jay Powell Gives Economic Update
EU: FRA: PMI Retail; GER: Industrial Production, PMI Construction, PMI Retail; ITA: PMI Retail
Julian Chillingworth
Chief Investment Officer