The Supreme Court has delivered a devastating judgment against former President Donald Trump, ruling that his financial records must be handed over to a New York prosecutor. The decision, which strikes at the heart of Trump's long-held assertion of absolute immunity, sent ripples of political uncertainty across the Atlantic. Yet, in a curious twist, UK markets rallied on the day, powered by a stronger-than-expected signal from the Federal Reserve that it will maintain its accommodative stance.
For those of us who have spent decades watching the interplay between politics and markets, this is a fascinating divergence. Typically, a bombshell legal ruling against a former US president would trigger a flight to safety, pushing investors towards the dollar and US Treasuries. Instead, the FTSE 100 closed higher, with gilt yields edging down as the market absorbed the Fed's commitment to low interest rates.
Let's be clear: this is not about Trump's personal fate. Markets don't care about his legal troubles per se. They care about instability, and Trump's ongoing saga has been a source of volatility since 2016. The Supreme Court ruling, while dramatic, removes a layer of uncertainty. It says, in effect, that no one is above the law, a principle that underpins the rule of law systems that global investors hold dear. The market's muted reaction to the political drama suggests that investors are looking through the noise and focusing on the macro picture.
And what a macro picture it is. The Federal Reserve's decision to keep interest rates at near zero, combined with its pledge to continue asset purchases, has been the lifeblood of risk assets globally. UK markets, always sensitive to dollar liquidity flows, have benefited handsomely. The pound has firmed against the dollar, and the FTSE 100 has recovered much of its pandemic losses. However, this rally is built on a fragile foundation of central bank support and government borrowing. The UK's fiscal position is precarious, with public sector net debt exceeding 100 per cent of GDP. The Bank of England's quantitative easing programme has kept gilt yields artificially low, but there are limits to how long this can continue.
The Supreme Court ruling also has implications for UK investors. If the political turmoil in the US escalates, we could see capital flight from dollar-denominated assets, which would boost the pound and UK equities in the short term. But the long-term outlook is more concerning. A weakened US economy would reduce demand for UK exports, and a disorderly resolution to Trump's legal battles could trigger a risk-off event that would hit global markets indiscriminately.
It's time for some fiscal realism from the UK government. Rishi Sunak's mini-Budget was a masterclass in political spin, but the numbers don't add up. We are borrowing to pay for current spending, not investment. The Bank of England is financing a significant chunk of that borrowing by printing money. This is not a sustainable strategy. The bond market vigilantes are dormant for now, but they will wake up one day, and the hangover will be severe.
In the meantime, the market's focus will remain on central bank policy and the pace of economic recovery. The Supreme Court ruling is a sideshow, albeit a significant one. For investors, the key question is whether the Fed can maintain its credibility while keeping rates low. If inflation ticks up, the market will start to price in rate hikes, and the gilt market will follow suit. That would be the real blow to UK markets, not Trump's legal troubles.
So, let's not get carried away by today's rally. It's a relief rally, not a structural change. The underlying vulnerabilities remain. The UK's current account deficit, the reliance on foreign capital, the overvalued housing market, these are the real threats to financial stability. The Supreme Court can't fix those. Only prudent fiscal policy and structural reform can. But don't hold your breath waiting for that.
