Monday Espresso Podcast 25th July 2022

[00:00:00] Nathan Sweeney: Good morning everybody, it's the 25th of July and today I'm joined by Gurjit Soggi, portfolio manager and our lead analyst on Europe. Before we speak with Gurjit, I'll give a quick market recap and explain the drivers behind last week's market moves.

[00:00:16] Nathan Sweeney: It was a good week for equities with all major markets up, Europe gained 5%.

[00:00:21] Nathan Sweeney: The US was up 2.5%, adding to a run that put the S&P 500 up 9% over the last month.

[00:00:30] Nathan Sweeney: Bonds were also positive for the week. Drivers for the market moves last week, included concerns about inflation receding as commodity prices, weakened and investors questioning whether they are being too pessimistic.

[00:00:45] Nathan Sweeney: So why do markets think we are all being too pessimistic?

[00:00:49] Nathan Sweeney: Well, the bank of America released its monthly fund manager survey, just to point out this data is compiled by surveying 293 fund managers with $722 billion of assets under management. The survey showed cash levels had reached their highest level since 9/11, while equity exposures were at their lowest level since the global financial crisis of 2007.

[00:01:20] Nathan Sweeney: This news sparked a wave of short covering as investors betting that stocks would go down, closed out those positions.

[00:01:27] Nathan Sweeney: So why did they do that? Simply put people are fearful. We have war, we have supply chain, disruption, we have inflation, we have interest rate rises, bear markets, falling profits, and recessions.

[00:01:40] Nathan Sweeney: So who in their right mind thinks it's a good time to invest? The answer is very few people and that in itself caused investors to think about snapping up some bargains. Hence why all of those short sellers were closing out those positions as a result of that, Europe was one of the best performing markets for the week.

[00:02:01] Nathan Sweeney: So let's turn our attention to Europe. So Gurjit, what's the latest from Europe and are they finally going to try and tackle inflation?

[00:02:10] Gurjit Soggi: Thank you, Nathan.

[00:02:11] Gurjit Soggi: Well, in a surprise move the European Central Bank raised its key interest rate by 50 basis points last week and this was the first increase in more than a decade and was in response to record high inflation.

[00:02:25] Gurjit Soggi: This was higher than the widely anticipated quarter of a percent increase. The central bank also unveiled initial details of the transmission protection instrument, the new tool, which is designed to prevent the new Eurozone debt crisis. Basically, this prevents bonds of weaker countries in Europe from getting too expensive.

[00:02:46] Nathan Sweeney: So should we expect anything else from the ECB?

[00:02:49] Gurjit Soggi: Yes. It's highly likely that following the initial move, that the ECB will follow with 50 basis point hikes in both September and October. But this is before slowing back to 25 basis point pace in December, but many now expect the 1.75% peak in interest rates to be reached by March, 2023.

[00:03:13] Gurjit Soggi: The move was similar to that, of the Fed, the higher than anticipated hikes are designed to front-load increases and this is in order to prevent the higher peak rate further down the line.

[00:03:24] Nathan Sweeney: Yeah. So Europe definitely slow out of the blocks to tackle inflation, but it looks like they're plowing ahead now. So is there anything else on your radar?

[00:03:32] Gurjit Soggi: Yes. Following Mario Draghi's resignation, Italy will hold elections on the 25th of September. President Sergio Mattarella officially called the vote on Thursday with the center, right coalition currently leading the polls.

[00:03:48] Gurjit Soggi: Furthermore, politics are likely to remain front and center in investors' minds with the UK leadership battle ongoing and let's not forget the US midterm elections.

[00:03:59] Nathan Sweeney: Okay. Thank you for that Gurjit. So looking a little bit closer to home, we did have inflation data in the UK, so what's the latest, Gurjit, on the inflation data.

[00:04:08] Gurjit Soggi: Yep. In the UK, we had inflation accelerating to 9.4% in June. This is versus an anticipated rise of 9.3%.

[00:04:19] Gurjit Soggi: And this is the highest rate since 1982. The highest price increases were seen in motor fuel and then food, while prices increased for secondhand cars. For the month, consumer prices increased 0.8% versus 0.7%, which was expected.

[00:04:37] Nathan Sweeney: Okay, so thank you for that. So finally, let's take a look at the week ahead. It is going to be quite a busy week in the US this week. We do have the US central bank meeting. So expectation that they're going to raise rates, will it be 75 basis points or 1%.

[00:04:52] Nathan Sweeney: We also have Q2 GDP growth figures being released. So is the US in recession or is it not.

[00:04:59] Nathan Sweeney: We'll continue to have companies reporting their earnings. So more than one third of S&P 500 companies will be releasing their earnings this week. So that could be a key driver of markets depending on what those companies say.

[00:05:11] Nathan Sweeney: But also looking outside of the US, we do have a number of countries in Europe, including Germany, France, Italy, and Spain. They'll all be publishing key reports on growth and inflation. So plenty to focus on this week. Have a great week everybody and thank you for joining us today.