Monday Espresso Podcast - 3rd April 2023

[00:00:00] Nathan Sweeney: It's Monday the 3rd of April, and today I'm actually joined by Scott Truder. Scott is our EM and Asia analyst within the team. So we'll get some insights from Scott in a second. As always, there's a lot happening in markets, which some of you may have missed. So let's start with a quick recap of markets last week.

[00:00:19] Nathan Sweeney: So if I look at markets, last week, it was actually a positive week across markets. We had the FTSE was up 3% and Europe was just up over 4%. So let's take a quick recap on what was driving those market returns last week.

[00:00:34] Nathan Sweeney: So over to you, Scott. Let's start with Eurozone. We had some inflation figures there.

[00:00:39] Scott Truter: Yeah, so the inflation figures out in Europe last week were actually better than expected. So the headline figure was 6.9% and that was versus 7.1% that the market expected. However, core inflation and that excludes energy, food, alcohol and tobacco prices, rose to 5.7%, which is a new high, though that was expected.

[00:01:03] Nathan Sweeney: Yeah. Now, remember everybody, inflation concerns have been one of the reasons that the market was selling off quite a lot last year, and now we're seeing that inflation coming out better than expected, and this is one of the reasons why we saw that positive result in markets last week.

[00:01:18] Nathan Sweeney: Now additionally, we had some growth figures out in the UK last week. So how did that look, Scott?

[00:01:23] Scott Truter: Yeah, so the UK managed to avoid a recession in 2022. That's probably thanks to government subsidies for energy bills and this is the revised data that's come out.

[00:01:33] Scott Truter: So for the fourth quarter, GDP actually grew by 0.1%, and that's compared to those initial estimates of it being flat and it only shrank by 0.1% in the third quarter last year and again, that's compared to the initial estimate, which was a 0.2% contraction.

[00:01:49] Nathan Sweeney: So again, what we're seeing here is that growth was better than expected and that was one of the drivers behind the UK market performance last week so as mentioned, the UK stock market up 3%, but actually last week closed out the end of Q1, so it'd actually be good to get a recap of how markets performed in the first quarter of the year.

[00:02:09] Scott Truter: Yeah, so given all the volatility and the negative news we saw and heard, I think generally almost every market was up during this first quarter. I think US Tech was quite strong the NASDAQ was up over 17%, so it's bouncing quite nicely when you compare it to last year, 2022, the NASDAQ was down 24%.

[00:02:29] Scott Truter: So we see a really strong start to 2023 there, also you saw that Europe was up over 12% as well, and then even fixed income, UK government bonds were positive for the quarter. So we're seeing a lot of green all across markets at the moment.

[00:02:43] Nathan Sweeney: Now that's quite interesting because obviously a lot has been thrown at markets in the first quarter of this year.

[00:02:49] Nathan Sweeney: So like recently, we've had this concern about the banking system and obviously will this lead to contagion in the banking system, a sort of financial collapse akin to what happened in 2008, but what we're seeing here is actually, no it doesn't look like there's any sort of contagion within the banking system, and markets are starting to level out a little bit and the volatility is reducing after the previous couple of weeks of volatility in markets and that's because the banking system is actually on quite a firm footing.

[00:03:21] Nathan Sweeney: So even though we've had all of this volatility around the banking sector, markets have been positive over the quarter. So that to me is quite a positive result.
[00:03:30] Nathan Sweeney: If you look at what's happening underneath the surface, you can see that bank stocks were actually weak on the quarter but as Scott mentioned, those tech returns were really positive.

[00:03:41] Nathan Sweeney: So why is that? So the real reason here is that all of this volatility within the banking sector has increased the likelihood that central banks stop raising rates sooner, or they start cutting rates sooner.

[00:03:58] Nathan Sweeney: So the markets now believe that we are past the peak in terms of bond yields and that it's likely that we start to get cuts in interest rates towards the back end of this year.

[00:04:09] Nathan Sweeney: And that means that these tech companies, their profitability is likely to increase, because they'll have less headwinds from higher costs, so you're seeing that strong reversal in tech in the first quarter, which is offsetting the weak performance that we've seen in banks.

[00:04:25] Nathan Sweeney: So all in all markets kind of working their way through all of this volatility that we have in markets moving forward, which is quite a positive.

[00:04:35] Nathan Sweeney: Let's take a quick look just actually at the week ahead before we wrap up. So this week we have what is known as PMI data, so it's purchasing manager indices and basically, this is just a survey of different managers who work in the manufacturing and service sector just to see what they're doing.

[00:04:51] Nathan Sweeney: Are they buying stock or are they reducing the amount of stock they have, and it gives you kind of a window into the manufacturing and service sector.

[00:04:58] Nathan Sweeney: So people will be looking at that data, which comes out across Europe. We also have house price data in the UK and we have the all important jobs report in the US and the reason that's important is because it's an indicator of a potential recession. If you see unemployment tick up, it increases the likelihood of a recession.

[00:05:16] Nathan Sweeney: But unemployment in the US is currently 3.6% and companies are still hiring. So thank you for listening in, goodbye and have a good week.