Monday Espresso Podcast 18th July 2022

[00:00:00] Sheldon MacDonald: It is the 18th of July today. Good morning, a weaker week again for equity markets last week seems that the bounce that we saw the previous week wasn't to be repeated. Although we did see a bounce towards the end of the week, Friday itself was pretty strong.

[00:00:16] Sheldon MacDonald: In the US market, the reaction really to stronger retail sales numbers that we saw there and a strong jobs report and also falling inflation expectations.

[00:00:26] Sheldon MacDonald: We'll come back to that in a second. The weakest area for markets last week though, were emerging markets in particular, China.

[00:00:33] Sheldon MacDonald: We've got Scott with us today. Scott, some comments on that.

[00:00:36] Scott Truter: Yeah, of course. So the China GDP numbers for the second quarter of the year were released on Friday. The economy advanced 0.4%.

[00:00:45] Scott Truter: It was always expected that the figure was going to be lower than the first quarter. But it still missed the market expectations, which was for 1% growth. Main impacts were the very strict COVID restrictions and the struggling property sector.

[00:00:59] Sheldon MacDonald: So difficult there for China. It's been a bit of a volatile ride in Chinese equities in equities in general, actually for the past year.

[00:01:07] Sheldon MacDonald: Now I mentioned that I'd circle back to falling inflation expectations because actually this was the week when we saw in the US the inflation print come out and we saw the highest CPI level for 40 years. The CPI level over 9.1%.

[00:01:23] Sheldon MacDonald: Which clearly is at odds with falling inflation expectations. However, slightly more positively.

[00:01:29] Sheldon MacDonald: We did see core inflation, which excludes the volatile food and energy sectors. We did see that falling and that dropped below 6%. 5.9% it was.

[00:01:39] Sheldon MacDonald: So where's that coming from? Well, we have got weaker commodity prices and that's encouraging the wheat price is now back down below pre-invasion levels. So that's obviously positive for food, price, inflation, and also positive on the oil front.

[00:01:53] Sheldon MacDonald: We've got oil sticking below the $100 level. It peaked at $122 some weeks ago, but encouraging that it's staying below that a hundred percent level.

[00:02:04] Sheldon MacDonald: These moves on inflation expectations. That was positive on the bond front. Bond markets having a pretty good week reacting to the weaker growth expectations, and also those falling inflation expectations.

[00:02:19] Sheldon MacDonald: Now we also had an impact on currency markets and we've mentioned a couple of times, Sterling has been weakening. We've got Raj with us as well today. Raj some comments on that.

[00:02:29] Raj Manon: Yes, so on Thursday during another bout of general risk aversion, Sterling fell below $1.18 against the US dollar, and Sterling's been losing ground against the US dollar all year, the total fall in value against the US dollar now being over 13%.

[00:02:47] Raj Manon: The reasons for that are weakening economic growth, persistently higher inflation, and more recently, uncertainty over the leadership election.

[00:02:57] Raj Manon: Now, also last week we had figures regarding the UK's trade deficit and that had widened for the fourth straight month to £27.9 billion and that's in the three months to May and the reason for that are that even though exports are rising fast, imports are increasing at a faster rate and the export of goods to the EU being the key detractor to those figures.

[00:03:23] Raj Manon: So since the exit from the EU, the UK has been losing relative export strength and that's because of delays in processing orders and also the extra paperwork and that's frustrated, importers and exporters.

[00:03:37] Raj Manon: Now also staying with the UK, there's also been a surprise increase in GDP growth in May, and that was of a half a percent improvement and that was mainly due to a large increase in health services and that offset the fall in the amount being spent in shops.

[00:03:53] Sheldon MacDonald: Thanks Raj. So circling back to the currency moves, we've noted this before that the weakening Sterling is actually a good thing for UK PLC with so many of the FTSE 100's revenues being generated overseas, translating those back at a weaker Sterling rate is positive for those companies. The weaker Sterling, it's not really a Sterling story because we've also got a weaker Yen.

[00:04:17] Sheldon MacDonald: Again, similar to the UK that's benefiting Japan and also a weaker Euro. That was big news last week that the Euro fell below the parity level with the dollar.

[00:04:26] Sheldon MacDonald: So the Euro similar to Sterling has been falling all year. So really this is a dollar strength story. But interesting for the Euro though, it throws into sharp relief, the decision that the ECB needs to make, the ECB meeting this week, finally going to raise rates it seems.

[00:04:43] Sheldon MacDonald: All indications are that they will raise rates, but remember they've lagged so far behind haven't yet really achieved lift off on rates.

[00:04:51] Sheldon MacDonald: Elsewhere on the week ahead, well, we've got earnings, we are into the earning season again and interestingly this week we've got both Tesla and Twitter reporting.

[00:05:00] Sheldon MacDonald: So perhaps some scope for some drama there and all eyes though, starting to look towards the Fed. That's not this week, that's next week the Fed is meeting, but some fears that we might get a 100 basis point increase in rates there. So interesting to watch as always fascinating times in the market. We hope you'll listen again next week.

[00:05:20] Sheldon MacDonald: Thank you.