Monday Espresso Podcast - 18th September 2023

[00:00:00] Sheldon MacDonald: It's the 18th of September today. Good morning Nathan. We had a pretty gloomy week on the economic front last week. We've got US inflation trending up again. We had the oil price bouncing up. Growth in the UK is negative. Recession looming in Europe. Another rate hike out of the ECB. We've previously been speaking about the soft landing narrative, but all of this data is pointing the other direction.

[00:00:24] Sheldon MacDonald: What's going on?

[00:00:25] Nathan Sweeney: Yeah. Morning Sheldon. I think, if you look at all of that information, you'd be thinking that's got to be bad for equities, that sounds like a slowdown to me, potential recession. But interestingly, equity markets liked that news.

[00:00:39] Nathan Sweeney: So if we look at the FTSE, it was up close to 3% last week. Euro stocks was up over a percent. Japan was up close to 3%. So why is that? Because ultimately, if we do have some bad news out there, what that means is central banks will have to react to try and stimulate the economy and the way they're going to do that is through rate cuts. So we know that this actually probably fast tracks those rate cuts which people were expecting to happen at some point next year.

[00:01:06] Sheldon MacDonald: Part of the reason for the strength in the FTSE was conversely weakness in sterling. Now we've spoken about this before. A weaker sterling is good for UK investors. Number one, it translates the returns that you've earned in your offshore holdings back at a weaker currency rate so you get a higher value of your holdings. But also the UK companies that are doing business offshore, they get to translate their earnings back at that weaker rate, translates into higher sterling returns.

[00:01:36] Sheldon MacDonald: Now, as you know, over 70 percent of the FTSE's revenues are determined overseas so that is a positive for the UK.

[00:01:44] Sheldon MacDonald: Now, something to point out, the VIX, the VIX is called the fear index. It's a measure of volatility, the price of insuring your portfolio against negative returns. That's at a post pandemic low, and it's almost one standard deviation below the average. Now again, this is a curious reading to have, because there is plenty to be fearful of at the moment.

[00:02:06] Sheldon MacDonald: As I said earlier, oil price rising, inflation bouncing up perhaps, the lagged effect of rate rises, are we going to see rates higher for longer, valuations are high. Against all of that though, the market is saying that there is a fundamentally strong earnings picture. Rate hikes at least in the US and probably elsewhere are probably done or at least pretty close to done and the market really still seeing no recession again, at least in the US.

[00:02:32] Sheldon MacDonald: So, market participants keeping that price of insurance at a fairly low level because of a fundamentally positive picture.

[00:02:40] Sheldon MacDonald: Now, moving on, there are some positives elsewhere. We did see some further stimulus in China and there is a cyclical rebound on the go there as well. Now, we've touched on oil a couple of times, the oil price hit $90, and that's 14 percent up in the last three weeks, and that's just pushing up that inflation figure.

[00:02:59] Sheldon MacDonald: The US inflation figure, 3. 7 percent coming out last month versus 3. 2 percent expected. Now that may seem quite negative, on the other hand, the core inflation in the US did continue to decline, and that's important that we see that continued decline there.

[00:03:16] Nathan Sweeney: Another thing which we had last week was the ECB were out raising interest rates.

[00:03:21] Nathan Sweeney: So what we've seen is that the ECB raised interest rates by 0.25 percent or a quarter of a percent. This was the 10th consecutive rate rise that we've had from the ECB. They're obviously clearly looking to tackle inflation.

[00:03:35] Nathan Sweeney: That brings interest rates in Europe to four and a half percent. But interestingly, this looks like it might be the last rate rise because of what the central bankers said following the meeting. So they believe that they have done enough to get inflation down. So we'll watch that quite closely. But really what we're starting to see around the globe now is all of these developed market central banks getting closer, if not to the end of the rate rising cycle.

[00:04:04] Sheldon MacDonald: We have two further big central bank meetings this week. We've got the Bank of England meeting. They are expected to raise rates by another 0.25% and we've also got the US Fed meeting. There we're expecting things unchanged. We've also got inflation data out of the UK this week. That'll be interesting to watch, particularly in the light of what we saw in the US last week with the oil price rising.

[00:04:29] Sheldon MacDonald: Now something that's looming on the horizon, we spoke about this a couple of months ago. There is another potential government shutdown in the US as they approach their debt ceiling. Now again, this always becomes political, becomes a bit of an arm wrestle between the ruling parties to see what political concessions each party can draw out of the other party as the shutdown looms.

[00:04:50] Sheldon MacDonald: There is also strike action happening in the US. It's the United Auto Workers Unions targeting the three major US car companies. Now it's the first time all three have been targeted at once and could this spiral into something bigger, more widespread across different unions and different industries?

[00:05:08] Sheldon MacDonald: That remains to be seen, also the impact on the US economy itself remains to be seen. The auto sector being a pretty big sector there. So lots to speak about at the moment, lots going on, and we look forward to speaking to you again next week.