Logic Monday Espresso Podcast

Monday Espresso Podcast - 7th October 2024

[00:00:00] Nathan Sweeney: Good morning, everybody. It is Monday, the 4th of October. Today, I'm joined by Sarah Todino, our European analyst and assistant portfolio manager on our funds. Good morning, Sarah.

[00:00:10] Sarah Todino: Good morning, Nathan.

[00:00:11] Nathan Sweeney: Okay. We're going to start this morning with a kick through of what was happening in markets last week. So Sarah, what was happening last week?

[00:00:19] Sarah Todino: So the start of the week saw a China stimulus rally, then we saw a sell off as geopolitical tensions in the Middle East took hold, and the China stimulus rally started to fade, which saw equity markets lower over the week.

[00:00:32] Sarah Todino: Oil and gold had seen gains this week, and that was on the back of the Middle East tension, so the Brent crude price jumped by 5% on Tuesday alone.

[00:00:42] Nathan Sweeney: Okay, so big move in the oil price.

[00:00:44] Nathan Sweeney: We did have a question from a client and they were asking about the likely impact of escalating tensions in the Middle East and what does that mean for markets, we'll actually cover that towards the end, but let's go through some of the key data points we had during the week.

[00:00:56] Nathan Sweeney: So Sarah, what was on the table this week? .

[00:00:59] Sarah Todino: So we had Eurozone inflation figures, so we know that inflation's fallen a lot since its peak in October, 2022. In September, Eurozone inflation fell to 1.8%, so that was ahead of forecast of 1.9%, so inflation is now below the ECB target of 2% for the first time in three years.

[00:01:20] Sarah Todino: But it may be short lived as we're expecting to see a small uptick in inflation before the end of the year due to the sharp falls in energy prices coming out of the rates.

[00:01:30] Sarah Todino: That said, it's important to remember that the longer term trend has been downwards for inflation and September's print was another fall and ahead of expectations.

[00:01:39] Nathan Sweeney: Yeah, so I think, you know, ultimately we have inflation really trending down now, pretty close to Central Bank's targets, opening up the door for rate cuts.

[00:01:49] Nathan Sweeney: So speaking of which, do we still expect to see rate cuts coming through from the Eurozone?

[00:01:54] Sarah Todino: So the ECB were the first to cut interest rates in June. We saw a further cut in September and inflation figures this week have seen markets anticipating a cut in interest rates in October, but we need to remember Christine Lagarde is taking a meeting by meeting approach and remains data dependent, but this latest reading is supportive of that.

[00:02:14] Nathan Sweeney: Yeah, so the market's kind of taking that data and saying, look, it's likely we get rate cuts sooner than expected. So it's good to see the expectation of those rate cuts coming through because generally markets like those rate cuts because it helps the profitability of companies who rely on financing.

[00:02:31] Nathan Sweeney: Was there anything else of note during the week?

[00:02:33] Sarah Todino: So in other news in Europe, the unemployment rate held steady at 6.4% in August, this was in line with market expectations and it does remain the lowest unemployment rate on record for Europe.

[00:02:46] Sarah Todino: We also had unemployment rate in Japan that declined to 2.5% in August, that was down from 2.7% in July, which is an 11 month high as well.

[00:02:58] Nathan Sweeney: Okay, so I'm just going to cover off the question we got from a client and they were just asking what's the likely impact of escalating tensions within the Middle East on markets?

[00:03:08] Nathan Sweeney: So, it is obvious that markets like to put price tags on geopolitics and ultimately when you get rising tensions in the Middle East, traders eyes intrinsically turn to the oil market.

[00:03:21] Nathan Sweeney: Because ultimately, if you get a impact on a key oil producing region, it can create shockwaves and ripples across the global economy.

[00:03:31] Nathan Sweeney: So if we think about it from a historical perspective, historically, when you see conflict in regions in the Middle East, it tends to lead to a spike in the oil price.

[00:03:43] Nathan Sweeney: So in 1973, we had the Yom Kippur War. In 1990, we had the Gulf War. In 2003, we had the Iraq War, and they all triggered significant or notable jumps in the oil price, which were then followed by recessions.

[00:04:00] Nathan Sweeney: So, why does this happen? And ultimately, if we think about the oil price, it does act like a stealth tax. So it pushes up the cost of everything from transport to heating and ultimately that takes money out of consumers pockets leading the economy to slow down.

[00:04:15] Nathan Sweeney: So for us, the key thing that we want to focus on is the oil price, now Sarah mentioned there's been a 5% jump in the oil price this week.

[00:04:23] Nathan Sweeney: However, oil still remains low and the price of oil is pretty much where it was at the beginning of the year. We would need to see oil hitting a price of over $100 a barrel for a sustained period for it to have a material impact on inflation to then bring back concerns that central banks would have to raise interest rates to stave off inflation, and that is not the case today.

[00:04:48] Nathan Sweeney: So in answer to the question, we think that the thing to watch is the oil price, but looking at the oil price today, we don't see any reason to be concerned.

[00:04:58] Nathan Sweeney: Okay. So I'm just going to move back across to Sarah just to give us a quick review of what to expect for the week ahead.

[00:05:06] Sarah Todino: So looking ahead to next week, we've got inflation and jobs data in the US. We've also got the release of the FOMC meeting minutes, there's also ECB monetary policy meeting minutes, and we've got retail sales figures from UK and Europe.

[00:05:22] Nathan Sweeney: Yeah, so the big news item next week is that unemployment report out of the US.

[00:05:26] Nathan Sweeney: The market will be focused on unemployment data to see if there's any tick up, any sign of a recession, but the key point is we're really not seeing that today, we're looking at a strong economy with a strong jobs market within the US.

[00:05:38] Nathan Sweeney: So hopefully you found today's review insightful, if you have any questions, please do send them in, we would be really happy to bring them up on the podcast.

[00:05:46] Nathan Sweeney: Have a great week, everybody.