Monday Espresso Podcast - 7th March 2022

[00:00:00] Sheldon MacDonald: It's the 7th of March. We had quite a week in markets last week, difficult week, certainly in the light of the invasion of Ukraine, still grabbing all the headlines last week.

[00:00:09] Now we've said all along that the impacts of the invasion would really play out in the world stage in world markets, through the inflation mechanism.

[00:00:17] Russia is only 2% of global goods trade, but they make up 11% of global oil exports, 17% of natural gas exports, and within Europe, that makes up 40% of Europe's imports. They are also a third of global wheat production.

[00:00:33] Now we've seen oil, natural gas, wheat, all of those other commodities as well, hitting record highs.

[00:00:40] So we're going to get inflation coming through on the energy and the heating front, as well as on the food inflation side.

[00:00:46] Now Europe has already been dealing with inflation, we saw some numbers on inflation last week Nathan?

[00:00:51] Nathan Sweeney: So that's interesting the whole piece around inflation and what to expect going forward, because indeed we did have numbers out from Europe.

[00:00:58] So inflation coming in at 5.8%. So this is the fourth consecutive month that inflation has come in higher. But given what you've said about commodity prices, It's likely that we see higher inflation coming through in the near term, basically for Europe.

[00:01:15] Sheldon MacDonald: Now we do have central banks meeting in the next couple of weeks.

[00:01:18] All eyes will be on them, seeing what they do about inflation. The difficulty that central banks face now is that they're probably expecting weaker demand. So can the economies survive higher rates?

[00:01:29] We've already seen Jerome Powell speaking last week in congressional testimony, effectively ruling out a 50 basis point hike in the next meeting, market's definitely still expecting 25 basis points coming through though.

[00:01:41] But that point about whether it's central banks can afford to raise rates really speaks to the potential for recession in Europe. And we're already seeing markets starting to think about this, and certainly it's been a difficult environment for markets in the last.

[00:01:56] Nathan Sweeney: Yes, but if you look at some of the data that's actually coming out, it has been quite positive. The market is very focused on what's happening in Ukraine, but things like PMI data has come in ahead of expectations.

[00:02:07] So underneath the surface, some economies are still quite strong.

[00:02:11] Sheldon MacDonald: Some economies quite strong, but as we've said, it's all playing out in Europe.

[00:02:14] We did see, as I say, a difficult week, last week with European stocks down between 8 and 10%.

[00:02:20] The UK falling in sympathy, really, we think with Europe also down about 8% last week.

[00:02:26] The US market a relative safe Haven, only down about 1.25%, the S&P 500.

[00:02:32] Bond markets, interesting patterns to the bond markets. In gilts, we saw shorter dated bonds losing ground, but longer dated bonds actually improving.

[00:02:42] So the shorter dated bonds really anticipating that higher inflation and potential for rate hikes.

[00:02:47] Longer dated bonds, improving in price in expectation of weaker growth going forward, so definitely an interesting picture playing out.

[00:02:57] Another angle that we've seen playing out in the whole crisis is the ESG side of things.

[00:03:02] Nathan Sweeney: Yeah. So you've definitely seen a wave of companies coming out in support of Ukraine, boycotting, Russia, and energy companies are in that complex of companies looking to boycott buying Russian oil.

[00:03:14] However on Friday news broke that Shell had bought some Russian crude oil at a discounted price, because obviously it's very difficult for Russia to sell its order at the moment, so it's selling it at a discounted rate and you saw a frenzy of activity on social media, so negative backlash here.

[00:03:33] And Shell came out quite quickly and reversed their tact, and they essentially said that they would look to put any profits from that trade into a fund to support humanitarian aid. So social media, obviously being a big driver of how companies think particularly.

[00:03:50] Sheldon MacDonald: Yes. And as you mentioned, several companies effectively implementing their own sanctions by boycotting Russia and Russian goods or exports into Russia.

[00:03:58] So it speaks really to this wave of ESG awareness that we're seeing around the market from investors and companies alike, and the willingness to sacrifice potential gains in the name of positive ESG moves.

[00:04:13] So certainly a theme that is taking root around the world.

[00:04:16] So that's the look back at last week, what about this week ahead, Nathan?

[00:04:20] Nathan Sweeney: So interestingly, we actually have inflation data coming out in the US and if you remember, those figures were running quite high at about 7.5%.

[00:04:28] Inflation is actually expected to come in at about 7.9%, so all eyes will be on that to see what way that trend is going.

[00:04:36] Additionally, we also have some inflation data out in China. We've got GDP figures for January, for the UK as well. So something else for the market to focus on.

[00:04:45] Sheldon MacDonald: Yes, certainly, let's hope markets can focus on that and things in Ukraine settle down sooner rather than later.

[00:04:51] Thank you very much and join us again next week.

[00:04:54] Nathan Sweeney: Thank you.