What this chart shows
In blue is the average of base rates across the world’s major currencies: the dollar, euro, yen and sterling. This is what investors can earn, per annum, by leaving their money in cash. The red line is a proxy for ‘uncertainty in markets’, derived from the VIX index and the MOVE index, which measure volatility in equity and bond markets respectively. When volatility is high, it means investors are uncertain about the future direction of markets.
Today, uncertainty is high (above its 10-year average, shown by the green line) and for good reason – wars; tariffs; inflation; mass layoffs of government workers in the US; the ripping up of the status quo; the implications of AI…and so on. Meanwhile average cash rates at 3% have moved up significantly compared to the era post the Great Financial Crisis.
Why this is important
Imagine I offered you an investment that had zero correlation to other asset classes (remember, correlations are the key to building better portfolios); and that was guaranteed to be flat when the equity market was down – not flat on average; or seven out of ten times similar to other investments which purport to protect capital. Every time! What does this investment cost today, you ask? It pays you nearly 3%. Remarkable.
Being tactical with cash – i.e. knowing when to raise it and when to deploy it – is part of our toolkit. Cash will never be the highest returning investment, but earning an average rate of 3% over 12 months is not bad by historical standards and very attractive in the context of the last decade. In turn, this sets a high hurdle for other defensive asset classes, including gold and hedge funds. With intense uncertainty over the economic outlook, it is pleasing as asset allocators to find that we can earn a reasonable return on cash and cash equivalents, which is why we hold some in portfolios.
Across global markets, economies are grappling with persistent inflation, slowing growth, and rising uncertainties. Central banks are adopting a cautious approach, maintaining interest rates amid mixed signals from economic data, while governments and businesses struggle to navigate rising costs, trade tensions, and supply chain disruptions.
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The Federal Reserve opted to keep interest rates steady at 4.25%–4.50%, citing ongoing concerns about inflation despite potential economic slowdowns due to global tensions.
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February retail sales increased by 0.2%, rebounding from a decline of 1.2% in the prior month but still below expectations of a 0.6% rise, pointing to weaker consumer spending and growing caution among US households.
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Major companies such as Meta, Wayfair, and Starbucks announced significant layoffs, attributing them to rising operational costs and the integration of automation.
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President Trump's comments did not rule out a potential recession resulting from his tariffs, exacerbating investor worries about economic slowdown.
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The Bank of England (BoE) maintained its policy rate at 4.5%, balancing concerns over inflation with the risks posed by slower economic growth amid global uncertainties.
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Chancellor Rachel Reeves outlined a new round of public sector cuts, aiming to address the fiscal deficit while avoiding tax hikes.
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Despite the challenges, surveys indicate a small uptick in business confidence, beating analyst expectations but highlighting how households remain cautious.
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Consumer inflation expectations for the short-term hit their highest level in over a year, further complicating the BoE’s monetary policy decisions. The survey showed households expect inflation to be 3.9% for the year ahead, up from 3.5% in January.
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A new fiscal stimulus package from the German government aims to boost domestic consumption and counteract external trade pressures.
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February inflation data indicated that inflationary pressures across the Eurozone may have reached a plateau, which could ease the ECB’s policy stance. CPI for February came in at 2.3% year-on-year, while Core CPI remained unchanged at 2.6% year-on-year.
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Ongoing tensions between the EU and US have led to a declining trade surplus from $14.2bn to $14bn, as tariffs and other trade barriers impact key exports.
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European stock markets outperformed US equities, with the MSCI Europe Index breaking out of a 17-year secular bear market, signalling the potential start of a decade-long bull market.
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China’s January-February economic data showed stronger-than-expected industrial production, boosted by equipment manufacturing and high-tech manufacturing.
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The People’s Bank of China kept the 1-year and 5-year loan prime rates unchanged, opting for a wait-and-see approach as it evaluates the effects of recent policy shifts and ongoing global trade tensions.
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February inflation data revealed that prices remain above the Bank of Japan’s 2% target, putting pressure on the central bank’s stance on monetary policy.
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Global oil prices showed volatility, reflecting mixed market sentiment about future economic growth and the potential impact of geopolitical tensions in the Middle East.
