Logic Monday Espresso Podcast

Monday Espresso Podcast - 4th March 2024

[00:00:00] Sheldon MacDonald: It's the 4th of March today. We had another strong week for equities around most of the world. Starting in the East, we had China and Japan both up pretty strongly. Moving to the West, we had the S&P up strongly, up almost 1%, hitting another record high for the year. Well, record all time high, indeed.

[00:00:19] Sheldon MacDonald: Here, closer to home, we had the FTSE slightly negative, but what we did see is that last week was a good market for growth and for tech. So I mentioned the S&P, that was up around 1%, but the NASDAQ, the tech heavy NASDAQ, up 1.7%. Here locally in the UK, the FTSE down minus 0.1%, but the FTSE 250, that's the mid cap stocks, up almost 1%.

[00:00:43] Sheldon MacDonald: So some positive readings there for the smaller and the mid cap stocks indicating confidence in the market. Just to finish up, let's take a slightly longer term view, the S&P now, that was up 5% in February, and up 6.8% for the year to date. So very strong equity markets, and as I say, really just reflecting that confidence that we're seeing in markets.

[00:01:08] Sheldon MacDonald: I'm joined by Raj today. Raj, reflections on that?

[00:01:12] Raj Manon: Yes, in the US we did see a very strong February and what's interesting is that we're now coming towards the end of earnings season with 90 percent of S&P 500 companies having now reported their earnings.

[00:01:26] Raj Manon: And what we've seen is that revenue has been growing at a healthy 3.8% and earnings growth has been a solid seven and a half percent. Now much of this has been driven by the mega cap tech sector, but results have surprised positively across the board. So rising earnings have been supportive of the gains in stocks that we have been seeing over the past few months and what's also encouraging is that in February, we saw an outperformance of growth sensitive small cap stocks and that shows that investors are starting to get more confident about the sustainability of the economic expansion.

[00:02:07] Sheldon MacDonald: Yes, very important that we do see those earnings coming through. There have been some concerns emerging around bubble style valuations, that companies share prices are getting too expensive relative to the underlying earnings. So very positive that we do see those positive earnings coming through.

[00:02:23] Sheldon MacDonald: Where we've also seen some confidence is in credit spreads. So the additional yields that you need to be paid for company debt to reward you for the risk that you're taking with those companies. Those spreads, that extra yield that's being demanded, is coming down, again, indicating confidence that those companies will be able to deliver the cash flows that they need to be able to pay the coupons and to repay that debt. So that's a positive.

[00:02:51] Sheldon MacDonald: Staying on the bond side, we did see bond yields come down last week, so positive performance in the bond market. That was the result of some economic data that came out showing a slight weakening of the economy and that led to investors thinking that perhaps there is a greater expectation for rate cuts coming sooner rather than later.

[00:03:11] Sheldon MacDonald: For the moment, we've still got the Fed projecting three rate cuts this year, but futures are pricing in four rate cuts for the year in the US, with the first of those coming in June.

[00:03:22] Sheldon MacDonald: Now turning to the week ahead, we've got the ECB meeting this week. Expectations there are that rates will be unchanged, but all eyes will be on that. What central banks are struggling with is the risk of reflation. They don't want to let the inflation cat out of the bag again. They need to talk tough. They need to make sure that inflation is well and truly sorted before they cut rates.

[00:03:46] Sheldon MacDonald: On the other hand though, if they keep rates too high for too long, they risk crashing the economy. They are worried about sticky inflation. We have seen some re emergence of supply chain concerns just in recent weeks, especially with what's going on in the Middle East.

[00:04:02] Sheldon MacDonald: Let's turn to the week ahead. There's a lot going on. First and foremost in the minds here in UK is the budget this week.

[00:04:10] Raj Manon: So yes, we have the budget this week and the Chancellor would certainly love to give us plenty of cuts but he's restricted in what he can provide to the market, part of that restriction is due to the Office for Budget Responsibilities recent report.

[00:04:25] Raj Manon: They revised their growth forecast for the UK lower and upped inflation predictions and against that backdrop the Chancellor is certainly restricted in what he can provide for the market.

[00:04:38] Sheldon MacDonald: Certainly walking a tightrope, clearly the Conservative government would love to be able to get the political boost that they might get from providing tax cuts, but clearly needing to be responsible on the economic front as well.

[00:04:49] Sheldon MacDonald: Staying with policymakers, China sees the National People's Congress meet this week. That's the big annual policy setting meeting that they have. This is where they set their growth targets for the year and we're also expecting to see possibly new stimulus measures to support those ambitious growth targets that they're likely to set.

[00:05:07] Sheldon MacDonald: And then in the U.S., a raft of economic data out this week, but in particular, the jobs report is out. That's one that's keenly watched by the Fed and by market participants alike. But of course, as I say, closer to home, all eyes will be on the budget. We look forward to bringing you all this news again next week. Thank you.