Monday Espresso Podcast - 14th March 2022

[00:00:00] Nathan Sweeney: Welcome to the Monday Espresso Podcast.

[00:00:02] It's the 14th of March, we had a mixed week last week from markets events and Ukraine, a surge in commodity prices and inflation set the scene for markets last week.

[00:00:11] Today I'm joined by Scott Truter our EM and Asia analyst. We'll get some insights from Scott on that region.

[00:00:17] There's quite a lot happening, so people may have missed some of the events happening in that region, particularly given the events in Ukraine, which are obviously terrible.

[00:00:25] So let's start with a quick look at the market moves last week, we saw the US lagging as well as Asia and interesting news was that Europe had strong outperformance.

[00:00:35] So if we look at the Euro stocks, it was actually up 5.17%. We did see oil come off on the week. It was off about 5% on the week, and gold was up modestly, so it was up 1% in dollar terms.

[00:00:49] The reason Europe had such good outperformance last week is because the region was very oversold and investors are looking to take advantage of those oversold stocks.

[00:00:59] So let's start off with a deep dive on Asia and over to you Scott, so what's happening in the region? How are markets performing?

[00:01:06] Scott Truter: Yep, so broadly the MSCI Asia ex Japan index was down 3.8% and the MSCI emerging markets index was down 5% both in dollar terms, and then we saw that the Shanghai composite was also down just under 4% aswell.

[00:01:24] Nathan Sweeney: Yeah, so some big moves there, so what was driving that weakness over the week?

[00:01:28] Scott Truter: So we've seen some further concern around COVID-19 and possible outbreaks. So we've seen that China has placed 17.5 Million residents of Shenzen into lockdown for at least a week, as they tried to holt that.

[00:01:40] There's also been continued concern around the war in Ukraine, and that's put pressured prices on industrial metals and agricultural commodities. And there's also been the concerns around delisting of Chinese companies in the US ADR's.

[00:01:55] So we saw last week, the US Securities and Exchange Commission identified five Chinese companies that could be subject to delisting from US exchange if they failed to comply with the audit requirements.

[00:02:07] And the crux of that is that the SEC wants complete access to the books of these US listed Chinese companies, but Beijing has blocked domestic companies and the local accounting firms from complying with these requests.

[00:02:19] Nathan Sweeney: Okay so, all of that's quite interesting and I expect that that may lead to some weakness in the region, but the question is, is the government doing anything to tackle this?

[00:02:27] Scott Truter: Yeah, so they have their annual conference of the National People's Congress and that finished this week.

[00:02:33] So Beijing set a goal for gross domestic product to expand at about 5.5%. So that's generally at the upper estimate or above what many analysts have forecast and it raises expectations that Beijing will dial back these tough structural reforms they've planned and step up further stimulus.

[00:02:50] It was also announced that within that the defense budget would see a boost of 7.1% and there's suggestions that China's COVID policy may become more targeted in the future, so quite a few things to keep an eye on.

[00:03:02] Nathan Sweeney: That sounds inflationary to me, so is inflation a problem in the region?

[00:03:05] Scott Truter: The short answer is no, in contrast to developed countries, the inflation data in China was 0.9% for the year to February 22.

[00:03:14] So we're seeing quite a difference there with compared to things like the US.

[00:03:18] Nathan Sweeney: Yeah, actually, speaking of the US we did have inflation data last week, and as everybody probably knows that figure's gone higher.

[00:03:25] So we have inflation currently at 7.9% over the last 12 months, this is the highest reading in 40 years.

[00:03:32] Roughly a third of that increase is coming from the increase in energy prices. So that's been a big focal point for inflation.

[00:03:39] Speaking of energy prices, we did see some big moves in the oil price last week. So oil closed around $109 a barrel last week was $150 in the week before, but it did move up to about $125.

[00:03:53] So obviously events in Ukraine obviously impacting the oil price, but what you did see was the United Arab Emirates came out and they indicated that they would look to increase production.

[00:04:03] They are part of OPEC, so that would obviously have to be discussed within that meeting, but that's why you saw oil come off about 5% for the week.

[00:04:11] Just a quick update on some ESG news. So we saw that the price of nickel roughly doubled on Tuesday last week, and this has because Russia exports about 9% of the world's supply. And this is a big component in electric vehicle batteries, so you can see why that could impact supply chains from here.

[00:04:31] I think the key thing to take away here is that the transition to clean energy, it's not going to be seamless, but if you think about the war in Ukraine, it's actually causing a surge in energy prices, and this is accelerating plans by European governments to reduce their reliance on Russian gas and oil on fossil fuel in general.

[00:04:51] So let's take a quick look at the week ahead.

[00:04:54] So what we have is we've got a lot of central bank meetings. We've got the Bank of England meeting on Thursday, expecting maybe a 25 basis point increase there.

[00:05:01] We've got the Bank of Japan on Friday, nothing expected there, but the big news will be the Fed.

[00:05:07] So after a lot of talk about raising rates, we're going to see that rate rise coming through on Wednesday, so 25 basis points, but the market's really going to focus on what the central bank has to say about the landscape going forward, given the events in Ukraine and the uncertainty around that.

[00:05:23] So I'd like to thank you all for listening today, so that's a thank you and goodbye for me and thank you and goodbye from Scott.

[00:05:30] Scott Truter: Thanks.