Logic Monday Espresso Podcast

Monday Espresso Podcast - 2nd October 2023

[00:00:00] Sheldon MacDonald: It's the 2nd of October today. We had a pretty gloomy week last week in markets, equities and bonds struggling and that capped off a rather gloomy month and a weak quarter, Q3 down around three or four percent if you look at US markets. September the S&P was down about five percent and last week also negative.

[00:00:21] Sheldon MacDonald: Slightly more positively though the FTSE outperforming, so UK stocks outperforming last week and they were up two and a half percent for September. So some positive news there. The gloominess though, really driven by the news, the language that we're hearing out of the Fed and out of the other central banks, the higher for longer rhetoric that we're hearing.

[00:00:42] Nathan Sweeney: Yeah. So, what's going on here? Let's start with actually the FTSE first. So why is the FTSE up and other markets down? If we look at the FTSE, you have about 15 percent exposure to energy companies and the oil price is up and that's helping the FTSE. Now, let's take a look at tech stocks or the US as an example for why they underperformed over the course of the last week and month.

[00:01:04] Nathan Sweeney: This is due to interest rates going up and obviously bond yields then going up as well. And we have all of these central bankers out talking about the fact that bonds are going to be higher for longer or interest rates are going to be higher for longer and ultimately, this will impact companies profits.

[00:01:24] Nathan Sweeney: So share price is coming off a bit to take into consideration or factor in those higher interest rates for longer but interestingly, if we zoom out a bit, we'll see that we had really strong performance in Q1, really strong performance in Q2, bit of a pullback in Q3 and we're seeing the market now, hopefully gearing up for Q4.

[00:01:47] Nathan Sweeney: I'm just going to give you one interesting statistic. So since 1990, you've had 11 years where in the third quarter, the S&P has fallen.

[00:01:58] Nathan Sweeney: Now, what we're seeing in the fourth quarter in nine of those years. In the fourth quarter, on average, the market has returned to 10.6%. So, what I want to highlight here is that usually one of the big catalysts for markets in the fourth quarter is company earnings, and tech companies particularly love to surprise in the final quarter of the year, and that's one of the things that we'll be looking out for as we move into the end of the year.

[00:02:22] Sheldon MacDonald: You mentioned oil there right at the start, and that's a key part of this higher for longer rhetoric or fears at least of higher inflation. Now, oil at $91 at the moment, that's up 12 percent for September, up 29 percent for Q3, and those rises driven really by tighter supply and rising demand. That rising demand driven by economies that are actually doing pretty well.

[00:02:48] Sheldon MacDonald: We do have an OPEC plus meeting this week and we'll see if there's any further developments on that front in terms of tightening supply even further. But that higher for longer message that we've, we've heard from the Fed, from other central banks, that will probably be with us for a while until there's confidence that the inflation demon has been put to bed.

[00:03:08] Nathan Sweeney: Interestingly, on the oil price, you know, the key concern here is that that higher oil price will lead to inflation down the road. But if we remember last year, it wasn't really the oil price, the oil price did impact obviously inflation, but the key thing that was driving inflation was gas prices. So as we move into year end, that's the thing we should be focused on, but we haven't seen rises to the same extent.

[00:03:31] Nathan Sweeney: We've seen movement in the oil price. So that will be something that we focus on to see actually will inflation come back with the same kind of vengeance as it did last year. We don't think so. Central banks don't think so. So it's not the base case. And if you look at inflation data out of Europe last week, it fell further and inflation data out of the US last week, it fell further too.

[00:03:53] Sheldon MacDonald: Now turning to shorter term measures, other things that the markets are talking about, we had the government shutdown fears. That peaked last week. Thankfully, the two parties have reached a deal. At least a stop gap deal. That should tide us over till mid-November.

[00:04:08] Sheldon MacDonald: Now mid-November, that's only six weeks away so this is going to be something that comes back again, the uncertainty that comes with it. The reason why it's a worry, is that for every week that the government is shut down, assuming that happens, that knocks off something like 20 basis points of GDP growth per week. So any form of extended shutdown could really start to impact economic growth.

[00:04:34] Sheldon MacDonald: Let's look at the week ahead, what's there to focus on this week, Nathan?

[00:04:37] Nathan Sweeney: Yeah, so the UK, the focus will be on house prices. We've got the Nationwide and Halifax house price index.

[00:04:43] Nathan Sweeney: Then in Europe, we've got retail sales. So obviously the retail is quite important. So is the retailer remaining robust in this environment of slower economic growth and thus far people have been willing to go out and spend. So we'll keep an eye on that.

[00:04:58] Nathan Sweeney: And in the US we've got unemployment figures. So if we're going to have a weak economy, it means we're going to have a pickup in unemployment. But actually the unemployment figures in the US are expected to fall.

[00:05:10] Nathan Sweeney: So more people working. So it's currently 3.8%, it's expected to fall to 3.7%. So we'll keep an eye on that too. So as always, there's, plenty to watch out for in markets.

[00:05:21] Sheldon MacDonald: As you said, plenty to watch for and we look forward to telling you about it all next week.