Logic Monday Espresso Podcast

Monday Espresso Podcast - 16th October 2023

[00:00:00] Sheldon MacDonald: It's the 16th of October today. We had a pretty volatile week last week in markets, unsurprising given the geopolitical issues that have arisen in the last couple of days or weeks. Now as you would expect, that led to some uncertainty, and in uncertainty, markets would tend actually generally to go down.

[00:00:17] Sheldon MacDonald: But surprisingly, we had markets up, most equity markets and bond markets surprisingly up. Let's go back to that geopolitics though. The first impact, and the one that you would expect, given the region, is the impact on the oil price and we did see oil going up last week, it's now at around $87, it was up 5%.

[00:00:36] Sheldon MacDonald: Importantly, though, still below the recent peak. So a couple of months ago, a couple of weeks ago even, we had oil up well above $90, $93 or so, we think. So oil has increased in price, but as we say, not overly concerning just yet. Of course, though, that will raise the stakes on what's happening on the inflation front.

[00:00:57] Nathan Sweeney: Yeah and speaking of inflation, we did have inflation data out in the US last week and inflation came in at 3.7 percent for September. This is versus 3.6 percent expected, so broadly in line with expectations. What the market really liked here was that we didn't see a resurgence in inflation. So inflation picking up because of the higher oil price that we've had recently.

[00:01:23] Nathan Sweeney: So markets actually like that and we did see some positive returns coming through for equities and actually bonds as well last week.

[00:01:30] Sheldon MacDonald: Yeah, speaking of bonds, so bonds stronger in the week, perhaps that's a result of a flight to safety, people's risk appetites falling, but perhaps a positive boost from some changing rhetoric from the Fed.

[00:01:43] Nathan Sweeney: Yeah, so I think this is quite important. So what we've had is a bond bear market over the course of the last few years. So bonds really not performing well. We know the reason why, because of rising interest rates to tackle all of that inflation we've had. But as we've mentioned, inflation is coming down and central banks have paused at the last interest rate meeting.

[00:02:06] Nathan Sweeney: So the question is, are we going to see a continued pause? And the answer to that looks likely because central bankers came out and said last week that actually the fact that bond yields are quite high is restricting financial conditions. So if you've got bond yields at a high level, it costs more to take out your mortgage, etc.

[00:02:27] Nathan Sweeney: And therefore, that kind of does the job for central bankers. So they don't feel as if they need to increase interest rates anymore and actually, as a result of that, that draws a line under this bear bond market. And you saw some good performance from long bonds last week. As an example, 15 year yields was up 1.74 percent last week.

[00:02:50] Sheldon MacDonald: Yes. So that's slight nuanced change in the rhetoric from the central banks, perhaps creating that positive boost there as always, though they always sign off by saying they will be data dependent. So of course we, we need to watch out for the data in the weeks ahead. So let's turn to equities.

[00:03:05] Sheldon MacDonald: Equities stronger in the week. Again, given the uncertainty, the geopolitical turmoil. Why is that? Why, why have equities done so well?

[00:03:13] Nathan Sweeney: Yeah. So if we look at UK equities, we had a strong week there, the UK market was up over 1%. And if we think about the UK specifically, you've got a lot of oil and gas companies there, the oil price up over 5%, that definitely will have helped.

[00:03:27] Nathan Sweeney: But then secondly, that point about central banks saying, we think all the interest rates are done. That's good for companies because ultimately that means the next move is down and that increases their share prices because their financing costs reduce at some point in the future. So, equities like that news too, so a good week for equities as well.

[00:03:48] Sheldon MacDonald: And perhaps also a bit of a boost, especially on the US side, where we saw the start of the Q3 earnings season. So, always the, the first reporters are some of the banks, and those were giving earnings figures better than expected.

[00:04:02] Nathan Sweeney: Yeah, so we did see the banks coming out, delivering earnings higher than people expected and we've got lots of companies to report from here but the interesting anecdote to take away from company earnings this quarter is that they are expected to be positive.

[00:04:17] Nathan Sweeney: So, we've had the last couple of quarters, earnings have been negative, are we turning the corner? That's the question. So, we'll be watching that quite closely over the course of the next couple of weeks.

[00:04:26] Sheldon MacDonald: Speaking of things to watch, what other data is due out this week?
[00:04:29] Nathan Sweeney: Yeah. So, for the UK, the big one is inflation data. So, inflation is expected to come in at. 6.5%. We also have company earnings in the US. We've got the likes of Tesla, Bank of America, Netflix reporting.

[00:04:42] Nathan Sweeney: We also have some central banks coming out and speaking so people will be looking to see what they have to say about interest rate rises. And we have retail sales in both the US and the UK. So lots of data there to keep the market interested this week.

[00:04:55] Sheldon MacDonald: Yep. Lots to think about as always, and we look forward to speaking to you again next week.