Monday Espresso Podcast -11th April 2022

[00:00:00] Sheldon MacDonald: It's the 11th of April already, the final week before Easter, a nice long weekend ahead. In the meantime though, last week, most markets around the world were weaker except for the UK.

[00:00:10] Sheldon MacDonald: The UK performing actually quite strongly led by commodities and bank stocks, we've spoken about this before the makeup of the UK market, actually well-placed in the current environment, but as I said, most markets were weaker. Nathan, reasons for that?

[00:00:23] Nathan Sweeney: Yeah, so last week we had the minutes from the Fed, so this is the US central bank releasing minutes following the meeting that they had the previous month.

[00:00:31] Nathan Sweeney: And when people looked at those minutes, it highlighted the fact that the US central bank is looking to increase interest rates at a quicker pace than expected.

[00:00:40] Nathan Sweeney: So the market is now pricing in an 80% chance of a 50 basis points or a half percent rise in interest rates at the next meeting, which happens in early May. So because of this we saw some risk off sentiment in markets.

[00:00:54] Sheldon MacDonald: Yes, inflation, as it has been for most of the year, remains in focus. And last week it was all around food prices.

[00:01:00] Sheldon MacDonald: So we saw a food price increase report that came out. Food prices in the US rising 12% in March alone. Of course, we get the overall CPI index that will be due out tomorrow. Last month we saw inflation of 7.9%, that was the highest in 40 years, but some offsetting factors this time perhaps.

[00:01:20] Nathan Sweeney: Yeah, so I think if we look at the oil price, the oil price peaked at around $125 a barrel, and actually last week, it closed just below a hundred dollars.

[00:01:29] Nathan Sweeney: So that's been one of the biggest factors in terms of inflation over the course of the last year, so it'd be interesting to see what that does to inflation figures.

[00:01:38] Nathan Sweeney: And then additionally, a lot of commentators were expecting that inflation would peak in March, so again, that'll be an important thing to keep in mind.

[00:01:46] Sheldon MacDonald: Sure. So, as we said before, inflation remains in focus. In the meantime, the expectation of faster, higher rate hikes means that bonds continue to weaken, struggling again last week. Moving to the equity side, the first quarter earning season that starts tomorrow, so we look forward to the next couple of weeks, seeing what the big heavyweights in the US have delivered.

[00:02:07] Nathan Sweeney: Yeah, so if we look at what the market is expecting, the market believes that earnings will grow by about four and a half percent from last year, at this quarter.

[00:02:15] Nathan Sweeney: But the interesting point to highlight, is that companies generally surprised to the upside, so their earnings numbers are generally better than expected.

[00:02:24] Nathan Sweeney: If you look at the average number over the last five years, that tends to run at about just over 8%. So if we actually get companies surprising to the upside by 8%, plus that four and a half percent, that gives you quite a healthy earnings number of around about 12 and a half percent.

[00:02:40] Sheldon MacDonald: Yes, we look forward, as I say, to see what companies are doing, that will give us an indication of what the potential impacts have been of the war and the higher inflation.

[00:02:49] Sheldon MacDonald: Looking ahead for the week, as we mentioned, inflation remains in the highlight. We've got that CPI indication out of the US tomorrow and also the ECB are meeting and we'll see what they do with European rates.

[00:03:00] Nathan Sweeney: It's interesting obviously, because Europe has been, very much, behind the curve in terms of trying to tackle inflation by raising interest rates.

[00:03:08] Nathan Sweeney: The language coming out of the ECB has been more hawkish, so I think a lot of people will be focusing to see what they have to say. Will they be actually raising rates this time?

[00:03:17] Sheldon MacDonald: So, difficult conditions, still for the market, still a difficult period. Surprisingly, the VIX hasn't really shot up too much of the current level of the VIX index also called the fear index, it's a level of the cost of insuring a portfolio.

[00:03:30] Sheldon MacDonald: That's been hovering around the 20% level and that really is the average that we've seen for the last 20, 30 years, so markets really not in panic mode, but certainly some things for us to watch out for in the weeks ahead. That's it for this week and we hope you'll join us again next week.

[00:03:46] Nathan Sweeney: Thank you.