Monday Espresso Podcast 12th August 2022

[00:00:00] Nathan Sweeney: Good morning everybody, it's the 12th of September. Today I'm joined by Gurjit Soggi, portfolio manager and our European analyst.

[00:00:09] Nathan Sweeney: We'll get some insights from Gurjit into the recent European Central Bank meeting and other news.

[00:00:14] Nathan Sweeney: Let's start with a quick look at market moves last week.

[00:00:18] Nathan Sweeney: Many equity markets posted positive returns for the week, the standout performance coming from the US.

[00:00:24] Nathan Sweeney: The S&P returned 3.68% for the week, as investors bought up oversold stocks, particularly in the consumer discretionary area.

[00:00:33] Nathan Sweeney: Bond markets were weaker due to interest rate rises in Europe and inflation concerns.

[00:00:38] Nathan Sweeney: Oil fell due to expectations of falling demand as all these interest rate rises are expected to reduce consumer demand as consumers face higher mortgages and energy bills.

[00:00:50] Nathan Sweeney: Now, moving over to Gurjit. What's the latest from the European Central Bank meeting.

[00:00:55] Gurjit Soggi: So the ECB announced a jumbo rate rise last Thursday, increasing the policy rate by 75 basis points.

[00:01:04] Gurjit Soggi: The move was widely anticipated given the fact that the central bank is seen as being behind the curve when considering the persistently high inflation numbers, which have been coming out of the continent.

[00:01:17] Gurjit Soggi: Furthermore, the European market closed around half a percent higher on the news suggesting that it has already been priced into markets.

[00:01:26] Gurjit Soggi: The decision was unanimous and reflected the increasingly hawkish tone from the governing council and this move is expected to be repeated in October following comments by President Lagarde.

[00:01:38] Gurjit Soggi: President Lagarde stated that policy rate remains far below levels that ensure the return of inflation below 2% and these comments point to further rapid tightening in future meetings.

[00:01:52] Nathan Sweeney: So, where does that leave interest rates in Europe and how high are they expected to go this year?

[00:01:58] Gurjit Soggi: They raised rates from zero to 0.75% and are expected to rise to 2% by year end, factoring in all available data today.

[00:02:08] Nathan Sweeney: Okay. So definitely lots more interest rate rises to come in Europe. So the ECB is definitely getting tough on inflation.

[00:02:16] Nathan Sweeney: Have we seen any other measures to tackle inflation?

[00:02:19] Gurjit Soggi: So Russia finally took the step, which many European countries had been fearing and cut off all gas supplies through the Nord stream pipeline last week. Consumer confidence hit all time lows, falling below levels last seen both in the COVID crash and the global financial crisis.

[00:02:39] Gurjit Soggi: Germany, which is heavily reliant on Russian energy supplies responded by announcing a second support package for business and households and the intention was to offset rocketing prices and diversify supplies.

[00:02:54] Gurjit Soggi: The economists now expect the German economy to contract by three to 4% in 2023 and this is an improvement on the previous forecast of a five to 6% contraction on the back of higher than expected storage rates and also measures taken to reduce consumption.

[00:03:14] Nathan Sweeney: Thank you Gurjit, lots of interesting snippets there and we actually saw some similar measures being announced in the UK last week.

[00:03:21] Nathan Sweeney: So under plans announced last Thursday, the government will spend £150 billion to cap energy costs at £2,500 pounds per household for the next two years.

[00:03:34] Nathan Sweeney: So the government will likely have to issue government bonds to pay for the support package.

[00:03:39] Nathan Sweeney: Obviously, this is weighing on currency as well as a lot of investors consider the impact of the issuance of all of this debt. So let's take a quick look at the week ahead.

[00:03:51] Nathan Sweeney: The big focus this week will be inflation data, which is set to be released in the US and the UK. Each of which is likely to move in different directions.

[00:04:04] Nathan Sweeney: The US data is expected to fall, as petrol prices continue to ease. Whereas UK data is expected to rise due to the increases in utilities and food prices.

[00:04:16] Nathan Sweeney: Finally, China will be releasing industrial production, retail sales, and investment growth data for August. And lastly, and most importantly, we also have the sad news that Queen Elizabeth II, the longest serving Monarch in British history has passed age 96 after 70 years on the throne.

[00:04:38] Nathan Sweeney: King Charles III has been proclaimed. Tributes to the Queen have been pouring in from leaders across the world. The funeral of her majesty Queen Elizabeth II will take place on Monday, the 19th of September. UK trading markets will be closed for the day as will much of the UK to mourn the Queen's passing.

[00:04:58] Nathan Sweeney: Thank you for taking the time to listen in, have a great week and goodbye from me.