Monday Espresso Podcast - 13th March 2023

[00:00:00] Sheldon MacDonald: It is the 13th of March today. Let's start off with the good news. Good news in the uk last week, we saw UK GDP growth coming in higher than expected at 0.3% month on month and also we saw retail sales coming in better than expected.

[00:00:17] Sheldon MacDonald: So this continues the trend that we've been seeing with the economy showing strong resilience but despite that, the market falling slightly, the UK market down two and a half percent last week.

[00:00:28] Nathan Sweeney: Yeah, so this is a classic example of good news is bad news because ultimately, if you have good economic data coming out, it shows strength in the economy and therefore that has the potential to lead to inflation and central banks, as we know, are vigilant when it comes to inflation, which could mean interest rates remaining higher or actually going up.

[00:00:49] Nathan Sweeney: Hence, you saw a market reaction to the negative side.

[00:00:53] Sheldon MacDonald: As I said, the UK falling two and a half percent worst hit last week was the US market down four and a half percent.

[00:00:59] Sheldon MacDonald: That's the worst week of the year so far and obviously the, the big news out of the US last week, the collapse of Silicon Valley Bank.

[00:01:08] Nathan Sweeney: Yeah, so Silicon Valley Bank. So what does that bank do? Essentially, the bank provides loans and financing to startup in the US. So it's slightly different to your normal, traditional high street bank.

[00:01:21] Nathan Sweeney: So what went wrong? Two things really to point out here. So if you're a bank, you try to make money by putting money into fixed income or some kind of asset to generate cash. So if you're putting your money into bonds, that's well and good until interest rates go up. Because if interest rates go up, bond prices go down and essentially you're losing money.

[00:01:43] Nathan Sweeney: So the bank had a lot of money in fixed income and was losing a lot of money last year as interest rates were going up. Now the problem really came about when people started to withdraw their assets.

[00:01:55] Nathan Sweeney: So why were these tech startups withdrawing their assets in the first place? Ultimately, as interest rates have gone up, it meant that financing costs for funding tech startups were increasing, and therefore less people were willing to fund these companies.

[00:02:08] Nathan Sweeney: So the companies themselves had to draw down their own cash deposits from the bank, which then caused the bank to sell those bonds at a loss.

[00:02:17] Nathan Sweeney: So ultimately, you saw the share price collapsing last week and the regulators stepping in to take control of the bank and over the weekend you've had the Federal Reserve, or the Central Bank in the US has come out to say that they will make any depositors for that bank whole, irrespective of if they're insured because you're insured up to $250,000 in the US or if they're uninsured.

[00:02:44] Nathan Sweeney: So basically this is a bailout of that bank. So what the authorities are looking to do in the US is to provide reassurance to the market and the financial system, that there's no real problem here, that they're willing to bail it out and provide the support that's necessary during this trying time.

[00:03:03] Sheldon MacDonald: And of course in the UK this morning, we've seen that HSBC is stepping into buy the UK arm of Silicon Valley Bank.

[00:03:11] Sheldon MacDonald: So in the short term confidence I guess in the system is restored, but still some longer term concerns lingering the practice of banks of taking in short-term deposits and then lending out in the long term, where long-term rates are now currently lower than the short-term rates. That is very concerning, and people wondering about the long-term solvency and liquidity of banks.

[00:03:36] Sheldon MacDonald: In the meantime though, as I said, in the short term, things are looking okay. What it does do though is it clouds the interest rate outlook. So will the Fed be swayed by what's going on, by what they've seen now and the, perhaps the fragility, of the banking system will there be swayed to keep rates at a lower level?

[00:03:53] Sheldon MacDonald: So we had seen interest rate hike expectations increasing, the chances of a 50 basis point hike in the next meeting, which is only next week remember. The chances of a 50 basis point hike up to 40% now. Although still the favourite is that we'll get a 25 basis point hike, 60% chance of that.

[00:04:13] Sheldon MacDonald: Markets will be watching closely the CPI figure that's due out this week. That'll be, as I say, closely watched everyone wondering what the Fed is going to do. In the meantime, other concerns or factors in that decision? We did see a jobs report out last week.

[00:04:29] Nathan Sweeney: Yeah. So, you know, unemployment has been really low within the US but actually you did see a slight tick up in that data.

[00:04:35] Nathan Sweeney: So you have seen companies obviously laying off staff. I suppose the good news for the market is that, you see wage growth is coming down, and that's one of the key concerns around inflation. If you get wage growth coming through, it could lead to inflation being higher for longer, so that could help the Fed and we'll obviously get some more clarity on that inflation data this week, you know, as you all remember, inflation hit a multi-decade high last year.

[00:05:02] Nathan Sweeney: It's currently about 6.4% in the US and if you see a material move down in that the markets will be buoyed, so we'll be tracking that quite closely.

[00:05:11] Sheldon MacDonald: So as always, lots to keep us interested, a fascinating period in markets, and we look forward to speaking you again next week. Thank you.