Monday Espresso Podcast 31st October 2022

[00:00:00] Sheldon MacDonald: It is the 31st of October today, happy Halloween. Traditionally seen as a, a scary month, but actually Spooktober this year turned out to be pretty strong. What we've seen though is that the strength of the sterling in this, this past week or two, has taken some of the shine off those better numbers.

[00:00:18] Sheldon MacDonald: Case in point, the US last week up around about 4% on the S&P 500, but in sterling terms, pretty much flat. Now that strength in the US came despite some pretty shocking earnings figures from some of the big heavyweights.

[00:00:33] Nathan Sweeney: Yeah, so we're in the middle of reporting season within the US, about 52% of companies have reported thus far, and if you look at the average earnings growth, we have earnings up 2.2%, but a lot of that is masked by the energy sector because energy companies are making great profits because the oil price has been rising and if you take out those energy companies, actually earnings are down 5.1%.

[00:00:58] Nathan Sweeney: Now the real focus last week was obviously the big tech companies, so we had a lot of the big-name reporting companies like Apple, Alphabet, Facebook. Now, the reality is a lot of these companies generate earnings from advertising.

[00:01:13] Nathan Sweeney: Now, if we look at advertising revenues, they're all down because companies are pulling back on their spending. So this hit companies like Alphabet who saw weaker than expected earnings and then Facebook obviously saw much weaker than expected earnings, and their share price was off about 20% last week, so poor returns there.

[00:01:31] Sheldon MacDonald: Just a sound bite on that. Mark Zuckerberg losing over a hundred billion dollars worth on his value of his holdings. The biggest single loss by an individual in history apparently.

[00:01:42] Nathan Sweeney: Yeah, so you can see the extent of the impact it's obviously had on Facebook's share price and obviously Mark's wealth as Sheldon mentioned.

[00:01:50] Nathan Sweeney: But also if we think about Apple, Big Bellwether company, biggest stock in the US stock market, so they're reporting that iPhone sales are a little bit weaker than expected, but actually the numbers weren't as bad as the market was expecting, and the stock was up about 7% on Friday.

[00:02:07] Nathan Sweeney: So some mixed earnings results there.

[00:02:09] Sheldon MacDonald: And as I mentioned at the start, despite those mixed results, a pretty strong performance elsewhere and really perhaps stocks starting to anticipate the end of the interest rate cycle.

[00:02:20] Nathan Sweeney: Yes, this is interesting, so what we've had now is two key central banks, so the Bank of Australia and the Bank of Canada have raised interest rates less than expected.

[00:02:31] Nathan Sweeney: So we had the Bank of Canada last week raising interest rates less than expected. So now the market is thinking will more central banks follow suit, and that's what they're latching onto at the moment.

[00:02:41] Nathan Sweeney: So this idea of central banks pivoting towards lower interest rates or stopping rising interest rates altogether, and the market likes that idea, and that's why you're seeing strength coming through in equity market.

[00:02:54] Sheldon MacDonald: So despite what you're saying, we're probably not expecting to see a change this week with some of the bigger central banks reporting this week. We did see the ECB last week raise rates by 75 basis points.

[00:03:05] Sheldon MacDonald: We've got the Bank of England and the Fed this week, both expected to raise rates by another 75 basis points each, but perhaps market anticipating slower moves thereafter, as you say, pivoting to a, to a slower trend and perhaps topping out at a lower level than previously expected.

[00:03:23] Nathan Sweeney: Yeah and it's always important to remember that markets are always looking six months out and in six months time, market is anticipating that we have all of those interest rate rises done and that's why you're seeing the rallies, the moves coming in today.

[00:03:37] Sheldon MacDonald: Now having said all that, we are seeing some pretty scary inflation numbers, especially out of Europe.

[00:03:43] Sheldon MacDonald: We saw a 10.4% print out of Germany, and we will see the Europe wide inflation number this week. And perhaps some fears on that front on food price inflation. We just saw the announcement over the weekend that Russia is suspending a grain export deal that allowed Ukraine to export grains through Russian ports.

[00:04:03] Sheldon MacDonald: So some nervousness on that front, and we'll see how markets react.

[00:04:07] Sheldon MacDonald: Now, last week we spoke about China, the moves in the Congress, President Xi, getting a third term in office and building his cabinet around him of yes men. Now market reaction to that has been pretty negative and we've seen China fall quite strongly over the week, and that's despite a higher than expected GDP number and a liquidity injection by the central bank there.

[00:04:30] Sheldon MacDonald: China falling around about five, six, 7% over the week.

[00:04:35] Sheldon MacDonald: The week ahead though, Nathan, what are we looking at?

[00:04:37] Nathan Sweeney: Yeah, so for the week ahead, it's actually quite busy. We're gonna continue to see companies reporting their earning. So we've got some big companies, we've got Exon Mobile, Berkshire Hathaway, Uber, PayPal, Starbucks, and a raft of other companies.

[00:04:50] Nathan Sweeney: We've also got those interest rate rises that we mentioned. So the Fed is expected to increase interest rates by three quarters of a percent, which will bring rates to 4% in the US. Similarly, you have got the Bank of England expected to raise rates by an amount of 75 basis points, or three quarters of a percent to 3%, and then we also have growth figures in Europe and inflation figures in Europe and in China we've got manufacturing and service data. So a big week in terms of data. Lots of data continuing to come out.

[00:05:19] Sheldon MacDonald: As always, lots going on and we look forward to speaking to you again next week.