Logic Monday Espresso Podcast

Monday Espresso Podcast - 4th November 2024

[00:00:00] Sheldon MacDonald: It's the 4th of November today. Fireworks this week? Well, we'll see and we'll get on to that a little bit later. Let's first obviously speak about the budget here in the UK.

[00:00:10] Sheldon MacDonald: In the wake of the budget, on the day itself, we put out a recording and things have changed since then. Equity is not so much, but more on the bond side.

[00:00:19] Sheldon MacDonald: So first of all, let's recap, so £40bn of new taxes, economics 101 will tell you that raising taxes is a growth headwind and that would suggest that that would be positive for bonds, and initially in the wake of the budget on budget day itself, bonds did react positively. But then as markets got their head around some of the implications, they also realised that the higher borrowing required, there'd be more bond issuance, and again, Economics 101 tells you more supply equals lower prices.

[00:00:51] Sheldon MacDonald: Really what markets are saying is that the additional spending and the financing that will be required for that, as well as the inflationary impacts and the growth impacts on spending, might mean that we have fewer rate cuts ahead of us. That really is the general view at the moment from the bond market.

[00:01:10] Sheldon MacDonald: As I said, on the equity side, generally, okay, the FTSE 100 not really moved, but the budget has been seen as positive for domestic stocks. The AIM market definitely saw it as positive, AIM market up about 3 percent relative to other markets during the course of last week.

[00:01:28] Sheldon MacDonald: Back to the bond market, we do have a Bank of England meeting this week, and I think generally we're still expecting 25 basis points of rate cuts this week.

[00:01:37] Sheldon MacDonald: Nathan, you've been away for a week, so maybe you've been able to step away from it. What's your perspective?

[00:01:43] Nathan Sweeney: Yeah, I think if you think of Harold Wilson, he once said that a week is a long time in politics, I think for Rachel Reeves, it was definitely a long week last week.

[00:01:53] Nathan Sweeney: If we look at the reaction in markets, obviously equities were okay, we had kind of a slight pullback there, but nothing meaningful, we did have more movements on the bond side.

[00:02:03] Nathan Sweeney: So from my perspective, I think, you know, this is just a warning sign from the bond market, or from bond vigilantes.

[00:02:08] Nathan Sweeney: Let's call it a shot across the bow, ultimately saying, look, if you're going to take on additional debt, it's going to cost you more to finance that, and therefore we want a higher level of interest to compensate us for you taking that additional risk of that additional borrowing. We saw about a 20 basis point move there, not really that significant in the grander scheme of things.

[00:02:30] Nathan Sweeney: And as you mentioned, those rate cuts are still coming through, so I think once we get past this, it'll be business as usual.

[00:02:39] Sheldon MacDonald: Speaking of business as usual, let's turn our attention to the US, last week anyway, slightly weaker midweek.

[00:02:45] Sheldon MacDonald: We saw weaker earnings from Meta, the Facebook platform and from Microsoft, but then a slight rebound from Amazon earnings on Friday.

[00:02:54] Sheldon MacDonald: But certainly not business as usual in the week ahead, of course, we've got the election.

[00:02:59] Nathan Sweeney: Yeah, and as I mentioned, a week is a long time in politics, this is going to be a long week.

[00:03:04] Nathan Sweeney: And the other thing which we said at the beginning of the year that, you know, this was dubbed the election year and everything has been gearing up to this election, it is the biggest election.

[00:03:14] Nathan Sweeney: So investors across the globe will all be focused on this and the outcome of because it impacts so many different countries, so many different trading relationships, so many different companies. It definitely is the big one so I think there's a lot to focus on this week.

[00:03:31] Sheldon MacDonald: So let's try and boil it down to the two different options.

[00:03:34] Nathan Sweeney: Yeah, so we think about it, obviously we've got Trump on one side, we've got Harris on the other. So what do they stand for?

[00:03:40] Nathan Sweeney: So if you look at Trump, he will be seen as pro economy. So, looking to implement tax cuts as an example, looking to implement tariffs as an example, and looking to deregulate oil companies.

[00:03:56] Nathan Sweeney: So, that'll be good for oil producing states like Texas and companies within those states. It'll be good for companies or corporates with those lower tax cuts coming through. It'll be good for financial companies because of deregulation.

[00:04:12] Nathan Sweeney: But the big question is on tariffs, so if tariffs come through, what ultimately will that mean for inflation? Because if you're importing lots of stuff from overseas and suddenly that stuff is more expensive, will that bring in additional costs?

[00:04:26] Nathan Sweeney: But some people are saying this is just a negotiation tactic, so we might not get those tariffs at those high levels, but it's something that we need to watch out for.

[00:04:35] Nathan Sweeney: And then in the other hand we've got Harris. Now, largely it will be business as usual because a lot of the policies are already in place from the Democrats, but ultimately some of the things she's trying to implement, I would say, are more socialist.

[00:04:48] Nathan Sweeney: So, one of the big things is childcare, so if you do see universal childcare coming through, you should see more people coming back into the labor market and that's actually pro growth as well.

[00:04:59] Nathan Sweeney: So, on balance both pro growth but ultimately you should expect to see higher government spending irrespective of who gets in.

[00:05:07] Sheldon MacDonald: And of course there's the added complication of what happens in congress.

[00:05:12] Nathan Sweeney: Yes, and you know, so will it be split? Will they have a clean sweep? Ultimately, if you find that we're in a situation where you have a split Congress, that tends to mean that less of the policies they want to get through get through, so you'll see more executive orders in that case.

[00:05:27] Nathan Sweeney: Generally, what you tend to find is that when you have a split Congress, it's actually better for markets because it just means that no one party can run away with the policies they want to implement, so it keeps those balances and checks in place.

[00:05:40] Sheldon MacDonald: Well, lots of uncertainty, of course, that's the other thing about a Trump presidency is the, the unknown nature of it and the potential for uncertainty.

[00:05:49] Sheldon MacDonald: Certainly with the uncertainty that markets are seeing, we have seen gold reacting. Gold has been moving to record highs throughout the year, perhaps being seen as, as a safe haven ahead of those elections.

[00:06:01] Sheldon MacDonald: Of course, in this big week, in the middle of that, we also have a Fed meeting. The Fed's still also expected to cut by 25 basis points this week.

[00:06:09] Sheldon MacDonald: We do have inflation that remains under control, the oil price was actually down last week. It's down just below $70 a barrel. No pressure on inflation from that, despite what's going on on the geopolitical front in the Middle East.

[00:06:23] Sheldon MacDonald: Really, as I said, markets, bond markets anyway, still expecting that 25 basis points cut this week.

[00:06:29] Sheldon MacDonald: Apart from all that, anything else we have to look forward to this week, Nathan?

[00:06:33] Nathan Sweeney: I just think it's important to remind people that our focus is being drawn away from what's really happening in the economy at a corporate level, at a central bank level, and ultimately, inflation continues to trend down.

[00:06:44] Nathan Sweeney: Central banks are continuing to cut interest rates. Corporate profits are coming through in line with expectations. And, you know, this week, I think one of the big things which probably won't draw a lot of attention is that there is a committee meeting within China and there's expectations that they will obviously widen their spending to support the economy.

[00:07:04] Nathan Sweeney: So I'll be watching out for that because that will fly under the radar, and then, as you mentioned, we've got those interest rate cuts from the UK and the US this week.

[00:07:12] Sheldon MacDonald: Lots going on and we look forward to telling you all about that next week.