Logic Monday Espresso Podcast

Monday Espresso Podcast - 13 November 2023

[00:00:00] Sheldon MacDonald: It's the 13th of November. We had a mixed week in markets last week after the strength from the previous week. This week in equities we had US markets up a bit, Japan was up, Asia down a bit, and the UK down a bit. Let's start off in the US where markets were stronger. We've got the tail end of earnings season, Nathan.

[00:00:19] Nathan Sweeney: Yeah. So company earnings in the US have definitely been a lot better than expected actually at all time highs. So people might not even think that, but companies have been delivering earnings, which have been far in advance of what we expected. And ultimately the reason behind that is because companies have been managing their costs a lot more effectively.

[00:00:37] Nathan Sweeney: And last week specifically, we had some tech companies out with their earnings, which were better than expected and that really drove the US stock market. So you've seen a real turnaround in the US stock market over the last two weeks and we've seen some quite really quite strong moves to the upside as a result.
[00:00:54] Sheldon MacDonald: Yeah sentiment definitely back to risk on. A couple of surveys came out last week different surveys measuring the sentiment of investment managers, of the retail buyer, of Advisors. All of those showing big improvements to the sentiment and back into risk on mode. On the UK side though UK markets were down slightly. Now, first of all, there was some positive news, that we had GDP reports, so economic growth in the UK, marginally better than expected.

[00:01:23] Sheldon MacDonald: Now, not particularly anything to write home about, the strength, but, as I say, better than expected, and that was a good outturn, and that's driving the, the soft landing narrative. This narrative that we'll be able to avoid a recession. That was boosting sentiment here in the UK as well. But having said that, equities in the UK were down last week.

[00:01:43] Sheldon MacDonald: Why that turnaround, Nathan?

[00:01:44] Nathan Sweeney: Yeah, so if we look at the UK market, clearly there's less tech in there, but actually we've got a lot more energy companies and if we look at the oil price, you can see the oil price has been down for about three weeks in a row now.

[00:01:55] Nathan Sweeney: And again, this is probably despite people's expectation, we do have conflict in the Middle East and the belief there was that oil would rise as a result of that conflict, but it hasn't. It's fallen. The reason it's falling is down to the fact that we're seeing less consumption coming from the US and from China. They're obviously big consumers of oil, two of the biggest economies in the world and because of that reduction in consumption, it's putting downward pressure on the oil price.

[00:02:23] Nathan Sweeney: But that's good news because ultimately that does feed through to lower inflation.

[00:02:28] Sheldon MacDonald: Also good news because that decline in the oil price reflects a belief that the conflict in the Middle East isn't likely to expand into a bigger, larger regional conflict. So good news on that front. Also though, putting a little bit of pressure on markets were some, some slightly mixed messages from central bankers.

[00:02:46] Sheldon MacDonald: So, on the one hand, the Bank of England's chief economist came out saying, it wouldn't be unreasonable to think about rate cuts next year. But then Andrew Bailey, almost countermanding that, saying it's too early to think about rate cuts in the near term.

[00:03:02] Sheldon MacDonald: And also a hawkish tone from the Fed. Jerome Powell saying that the Fed won't hesitate to tighten rates. And really the message is that the central banks need to make sure that they've got a lid on inflation completely.

[00:03:16] Sheldon MacDonald: This reminds me of a cartoon I saw a couple of weeks ago. It's a picture of a, a gentleman watching the news and the news readers saying, on Wall Street today, news of lower interest rates sent the stock market up, but then the expectation that these rates would be inflationary sent the market down.

[00:03:31] Sheldon MacDonald: Until the realisation that lower rates might stimulate the sluggish economy pushed the market up, before it ultimately went down on fears that an overheated economy would lead to a re-imposition of higher interest rates. So this up and down is clearly capturing the market's attention. The point about this cartoon though is that it's from 1981.

[00:03:48] Sheldon MacDonald: So really this, this tug of war between inflation and growth and rates isn't really anything new. It's with us, has been with us for a long time and probably will be with us for, for a while to come. Speaking of that, let's look at the week ahead. Nathan, a big week for the UK on the data front.

[00:04:04] Nathan Sweeney: Yeah, so there's a lot of data coming out of the UK this week.

[00:04:07] Nathan Sweeney: So the big news will definitely be inflation data. So if we look at the UK, inflation is currently 6.7%. So it's a lot higher than it is in Europe. The reason behind that is these energy price caps, which we had last year, which increased all of our gas bills. Ultimately we're expecting those numbers to roll out at this week's print.

[00:04:30] Nathan Sweeney: So we're expecting a reading of 4. 8%. Now if we get something around that, the market is going to be pretty happy if it's higher, clearly it won't. But we're expecting to see a big shift down in inflation. Not only do we have inflation data, we've also got unemployment and retail sales. And in the US, we've also got inflation data, although it's much lower in the US.

[00:04:51] Nathan Sweeney: But we've got a couple of company earnings coming out this week too, particularly retail focused. So the likes of Home Depot, Target, Walmart, and that'll give us a nice indication of how the retailer is feeling as we move in towards Christmas.

[00:05:07] Sheldon MacDonald: Absolutely. We'll keep an eye on that and bring you all of that next week.

[00:05:10] Sheldon MacDonald: We look forward to speaking to you then.