Monday Espresso Podcast 11th July 2022

[00:00:00] Sheldon MacDonald: It's the 11th of July today. Lots to speak about this week and chief among those would be what's going on in UK politics with Boris announcing his resignation. Raj so far this week, or last week we saw actually fairly little reaction in the markets.

[00:00:16] Raj Manon: Yes. It's certainly increased the level of uncertainty with regards to who will be the next leader, and also will there be a general election.

[00:00:24] Raj Manon: So politically a very dramatic week, but for financial markets, very little reaction, as you said, and that's because a large share of the UK stock market has global operations and this news has hardly any effect on globally operating companies.

[00:00:40] Raj Manon: For domestically operating companies the impact is unclear.

[00:00:44] Sheldon MacDonald: Yeah, it seems like tax is shaping up to be the big issue that the leadership, battle, is gonna be fought on, so perhaps as we move forward, some potential for some impact on growth, on the cost of living, on inflation and so on.

[00:00:58] Sheldon MacDonald: You mentioned though, how much of the FTSE 100, at least, earns offshore. Now we've got Sterling close to a two year low at the moment, and that's actually a positive for UK markets.

[00:01:09] Raj Manon: That's correct. So when those overseas earnings get translated back to Sterling, that actually benefits companies operating profits, and two thirds of FTSE earnings are generated offshore.

[00:01:23] Sheldon MacDonald: Yep. Two thirds, some say even more than that, but certainly the UK doing well or UK PLC doing quite well out of the weaker Sterling at the moment.

[00:01:32] Sheldon MacDonald: Also UK equity markets boosted by the fact that just structurally they're in the right place, so the index of FTSE 100 has very large share of companies in the energy space.
[00:01:42] Sheldon MacDonald: Oddly enough, those won't have done all that well last week with oil dipping below a hundred for the first time in quite a few months.

[00:01:49] Nathan Sweeney: So we have fears of recession, obviously banding about at the moment. So this pulled the oil price down below a $100 a barrel at the beginning of the week, but you actually saw a rebound towards the end of the week, so oil ended around $105 a barrel.

[00:02:04] Nathan Sweeney: This was because we had some good data out in the US. So the jobs report came out, so unemployment data.

[00:02:11] Nathan Sweeney: So, if we drill into that, the unemployment data is basically saying there's no recession in sight. But the question is, have markets got that wrong?

[00:02:19] Nathan Sweeney: We saw 372,000 new jobs were generated during the week.

[00:02:25] Nathan Sweeney: Unemployment stayed at 3.6%, but if you look into the data, you'll see that there's a couple of other things happening.

[00:02:31] Nathan Sweeney: So, you'd see that wage growth is slowing, job openings are declining, and job quits are declining, and we haven't really seen that data filter through yet.

[00:02:42] Nathan Sweeney: So, there could be some weakness in store going forward on the jobs front.

[00:02:47] Sheldon MacDonald: Certainly, one of the big issues that the Fed is tackling is the strength, the heat, in the jobs market, is one thing they do feel they need to cool to avoid runaway inflation.

[00:02:58] Sheldon MacDonald: So the question rarely is can the economy achieve a soft landing? Can we get inflation under control without heading into a recession?

[00:03:05] Sheldon MacDonald: And perhaps the market a little bit buoyed by the fact that actually jobs still okay and perhaps, you know, despite some of the moves that we've already seen on the interest rate front, the economy, still able to handle those interest rate hikes.

[00:03:20] Sheldon MacDonald: Just a word of warning, so we did see a fairly strong rally in US equity, certainly and mostly around the world last week is this though another bear market rally. We've seen in March, we've seen in May and June strong rebounds off the bottom only then to fall lower.

[00:03:38] Sheldon MacDonald: So, the question is, can this rally persist now. One word of warning is that credit markets last week, didn't follow through.

[00:03:45] Sheldon MacDonald: Now, typically credit markets being a risk market, you would see them move in tandem with the equity market. Last week though credit, market's not really rallying as we saw equity markets rally.

[00:03:56] Sheldon MacDonald: So just some, some question marks still, as always, around the future trajectory of markets, the future trajectory of interest rates and inflation and growth. That takes us then to looking at the week ahead.

[00:04:08] Nathan Sweeney: Yes, and I think this will be important in answering those question marks because we get company earnings in the US.

[00:04:14] Nathan Sweeney: So, we get Q2 earning. And if we look at expectations, companies are expected to grow their earnings by 4.1%.

[00:04:22] Nathan Sweeney: Now we know that companies like to hold a bit of information back and they try to surprise with their earnings results and if you look at the average beat or on those earnings or the average surprise on those earnings. Generally, if you look back over the last 10 years, companies have surprised by 5.5% on the upside. So beating those expectations by an additional 5.5%.

[00:04:45] Nathan Sweeney: So if that's the case that we put earnings on, you know, a continued strong footing, but markets will be looking for any signs that inflation impacts those earnings and we get earnings, which are weaker than expected. So that'll be a key focus for investors over the course of the coming weeks

[00:05:03] Sheldon MacDonald: As always lots to watch this week and the weeks and months ahead, we hope you'll join us again next week.

[00:05:09] Sheldon MacDonald: Thank you.

[00:05:09] Nathan Sweeney: Thank you. Bye-bye.