Three NatWest specialists – Ross Walker, Chief UK Economist; Scott Livingstone, International Advisor; and Imogen Bachra, Head of Non-Dollar Rates Strategy – discussed a range of macroeconomic subjects that could impact the financial markets. 

The Middle East still a potential tinderbox

The panellists noted that rising tensions in the Middle East have resulted in an ongoing shipping crisis, and that the uncertainty this is causing isn’t going away. Scott Livingstone discussed how the risks seem fairly localised in the Red Sea, but an increase in shipping costs could exacerbate inflation, which, as Imogen Bachra noted, central bankers have been working to bring down for the past two years.

Livingstone suggested that the conflict is unlikely to end until there’s a political settlement in Gaza. So far, American diplomacy has isolated that conflict from the wider region, he said. But behind the scenes of the Gaza conflict there is still an Iranian nuclear programme, which remains a serious issue: Iran trebled its uranium production in Q4 2023. Livingstone sees potential for this issue to escalate. 

Uncertainty about China and Ukraine

Elsewhere, relations between China and the US have been strained but are now a little more stable. But the conflict between the West and China is not really about Taiwan, real estate (Taiwan’s status notwithstanding) or ideology – it’s about technology. “The issue is a competition for dominance over the development of future strategic technologies and the supply chains for microchips, quantum computing, AI, space and synthetic biosciences,” said Livingstone. 

Meanwhile, the Russia-Ukraine conflict has had a huge impact on the energy markets, especially natural gas, and has been a major source of volatility in the financial markets over the past two years, noted Bachra. The panel pointed to a worrying state of play and ongoing uncertainty amid the difficulties of getting aid from the EU and US to support Ukraine’s war effort.

A year of elections

2024 is a major election year, with more than 60 taking place around the world. The possibility of another Trump presidency could mean the US “steps aside from its role as the leader of the rules-based international order. If Trump looks to create an isolated America, that would be a game-changer,” said Livingstone. He added that if the results of November’s US presidential election are contested there could be even more polarisation within US politics, with knock-on effects for its foreign policy. 

There is also a UK general election on the horizon, and commentators are considering what tax cuts the Chancellor might pull out of his hat during the Budget on 6 March. But “the really interesting Budget will be the first one after the election, because that’s when some big decisions will need to be made,” said Walker.  

Walker said he thinks the UK is still on track for rate cuts this year. The Bank of England could make some relatively easy cuts in the second half of the year without posing any medium-term risk to inflation, he suggested. 

In a second panel discussion chaired by NatWest’s Head of Debt & Financing Solutions Carla Floyd, two valued customers; and David Basra, Head of Sponsor & Specialist Financing Solutions at NatWest, considered how companies and investors could handle the long-term impacts of a shifting and uncertain macroeconomic environment.

The importance of treasury

A customer noted the role of treasury has become more important against a backdrop of high interest rates, and that large corporate actions increasingly require sophisticated treasurers to source capital on favourable terms. “One of the structural changes we've seen is treasurers being involved in major business decisions because it's not necessarily easy to get money, and in unloved sectors that conversation is becoming more difficult,” they said.

Putting cash to work

Another customer explained that 2023 had been a turning point for fixed income following a tough 2022 in performance terms as interest rates had moved from zero to 5% in very short order in response to surging inflation. Now people are looking at bonds again as there are some attractive yields on offer.

Companies and individuals alike have built up huge amounts of cash, and there is around USD 1 trillion in money market funds in the US. As bond yields rise, that money will be looking for a home as investors fear missing out. “Our clients are generally the big wealth managers and that’s their biggest challenge – getting that cash to work”.

Playing it safe

Floyd painted a picture of corporate insolvencies rising, and she asked the panel their views on the resultant risks and opportunities. One customer said companies have become more conservative about refinancing their debt, and that CFOs want to be sure they are covered for every possible black swan event in the next 12–18 months even though doing so involves additional costs. “The financial planning is there from a rates point of view, and that’s going to lead to corporates having excess liquidity to make sure the treasurer is not at fault if anything goes wrong,” they said. 

Basra agreed that clients are being proactive in terms of duration and liquidity, taking money out of the market when they can, or amending and extending terms. “This environment has been so volatile that you need to plan and you need to be ready to go when you see a window. The treasury side of banks and corporates has become incredibly important,” he said.