Monday Espresso Podcast - 21 March 2022

[00:00:00] Sheldon MacDonald: It is the 21st of March today. Good morning Nathan.

[00:00:02] We saw a pretty strong week across the board last week and a return in some cases to pre Ukraine invasion levels.

[00:00:09] Nathan Sweeney: It was an extremely strong week for equities, so we had some stellar returns.

[00:00:14] So if we look at the S&P it was up 5.52%, that's 5.52% in Sterling to terms, it was up over 6% in US dollar terms, but Europe specifically is worth highlighting.

[00:00:26] So when Russia invaded Ukraine, the European stock market retraced about 11%, so it fell 11%.

[00:00:34] We have now seen the European stock market recoup all of those losses in the last two weeks. So we're seeing some big, big moves in markets over the last couple of weeks.

[00:00:42] Sheldon MacDonald: So strong moves really on the basis of the fact that markets are beginning to price in potentially some kind of resolution to the conflict?

[00:00:50] Nathan Sweeney: Yeah, so that's definitely it. There were a couple of key reasons the market went up last week. I think that's the main one. So what you've seen is a continuation of negotiations.

[00:00:59] We're talking about a 15 point plan and therefore market's taking a lot of positivity from that, and that's why you're seeing that kind of surge in equity prices over the last two weeks.

[00:01:08] Sheldon MacDonald: In the meantime though, we had some news on the Central Bank side, almost an afterthought overshadowed by moves in the Ukraine, but both the Fed in the us and the BoE raising rates 25 basis points.

[00:01:21] Now, I guess this was already largely priced in by markets?

[00:01:25] Nathan Sweeney: Yeah, so if you think about some of the big concerns that markets had coming into this year, year, one of the big ones was definitely interest rate rises, and specifically the Fed.

[00:01:33] People have been talking about this for a number of months. Finally it's happened.

[00:01:36] The fed has raised interest rates by 0.25% and the market largely shrugged it off and rallied quite strongly as a result. So I think, you know, the market is just seeing, they have some clarity, interest rates, rose, nothing broke, and therefore the market is kind of getting over or that psychological barrier.

[00:01:53] Sheldon MacDonald: one positive aspect that investors took from the Central Bank meetings came out in the press conferences that they gave afterwards, the dovish tone of the bankers.

[00:02:02] Nathan Sweeney: Yeah, so for central bankers, there's a lot of uncertainty around the invasion of Ukraine by Russia, so it just means that, that has the potential to impact growth, to impact inflation and therefore central bankers are likely to increase interest rates at a slower pace and the market will generally like that approach.

[00:02:20] Sheldon MacDonald: Certainly equity markets will like that approach, however, inflation does still remain the biggest risk out there. I don't think we've yet seen all of the knock on effects of the war.

[00:02:30] We haven't seen food prices rise all the way yet, on the other hand, yes, we have seen oil coming down, but there are still factors that could lead to inflation staying higher for longer.

[00:02:41] We've seen wage rises come through, that will keep pressure on inflation. We're seeing lockdowns again, there's apparently a new variant of COVID out there and certainly in Asia and China in particular, seeing some further lockdowns. So could this take us back to a period of supply chain disruptions that could keep pressure on inflation.

[00:03:00] So definitely still inflation a risk out there, and we're seeing more and more commentators speaking about the risk of stagflation that is stagnant growth and higher inflation. And particularly in Europe, we do have a risk of recession the longer this conflict continues.

[00:03:16] Nathan Sweeney: Yeah and interestingly, just on the point around lockdowns China, there's obviously concerns about the impact that would have on the Chinese economy.

[00:03:24] So if you think of Chinese equities, they've obviously taken a bit of a beating over the last couple of weeks. And that's around concerns about regulation within China, supply chain disruption, lockdowns de-listing of ADR's, so American depository receipts. So in the US, they're looking to have full transparency on auditing on Chinese companies, which are listed through ADR's into the US.

[00:03:50] And the Chinese regulators have come out and said, actually, we're gonna work with the US on this, we're gonna provide support for the property market. So there was a lot of positive news outta China, and you saw a real strong reversal in Chinese equities. So it was quite a positive week, all around last week.

[00:04:05] Sheldon MacDonald: What about ESG? That's all kind of been pushed onto the back burner in the light of the Ukraine conflict.

[00:04:11] Have we seen any particular moves on the ESG front recently?

[00:04:15] Nathan Sweeney: Actually, we did see the ECB published a new report and it's a supervisory assessment of institutions on climate related and environmental risk disclosures.

[00:04:25] So what does all that mean? So basically it's just how banks report on climate issues and what the ECB wants to see there is, more information coming out of the banks on that side.

[00:04:35] So generally this would be seen as a positive from an ESG perspective.

[00:04:38] Sheldon MacDonald: Thanks very much. Well wrapping up then for the week, looking at the week ahead, not really much expected in the way of data or Central Bank moves.

[00:04:47] I guess the focus for this week will still just be on how things progress in Ukraine. Certainly we like everybody else hope for a swift resolution to conflict.

[00:04:56] Thank you very much and we'll speak to you next week.

[00:04:58] Nathan Sweeney: Thank you.