Logic Monday Espresso Podcast

Monday Espresso Podcast - 23rd October 2023

[00:00:00] Sheldon MacDonald: It's the 23rd of October today. Plenty to speak about this week, lots going on in markets, really was a pretty weak picture all around last week. Most of that driven by the geopolitical story, the concerns about what's going on in the Middle East, saw markets turn into risk off mode.

[00:00:17] Sheldon MacDonald: The only asset really that did go up was Gold, that was up a good couple of percent last week. The oil price, almost unchanged, $88. I think last week it was probably about $87, so almost unchanged, not really a lot of movement there. Really where things were playing out was in the bond market and equities as well, we'll come to those in a minute.

[00:00:38] Sheldon MacDonald: But in the bond market we saw US treasury spiking higher. We had the 10 year Treasury yield breaking above 5 percent for the first time in 16 years. So a lot of concerns around what's going on there. And here we've got the higher for longer mantra playing out, but really getting some mixed messages from, from the Fed last week, Nathan?

[00:01:00] Nathan Sweeney: Yeah. So basically what tends to happen is you have representatives of that committee.

[00:01:05] Nathan Sweeney: They may be speaking at a conference and they may say something and then the market latches onto that. So we did have an example of that last week. So Jerome Powell. He was speaking at a conference last week, and he talked about the fact that the economy is looking good.

[00:01:20] Nathan Sweeney: So then the market reads into that and says, well, what does that mean? What does he mean by that statement? And if he's saying the economy is strong, then that likely means that interest rates will remain higher for longer. And as a result of that, you get a reaction in bond markets.

[00:01:35] Nathan Sweeney: So, you know, at the moment, obviously markets on edge about the potential for inflation and higher rates at some point, if at all, and therefore just reacting to that. But, you know, everything we see at the moment suggests that that's not the case.

[00:01:48] Sheldon MacDonald: Yeah, as I said, some mixed messages, with almost the next breath, the Fed officials also saying that the higher bond yields that we've got at the moment imply that there's actually no need for further rate hikes, those bond yields are doing the job of the Fed for them.

[00:02:02] Sheldon MacDonald: So mixed messages and uncertainty, as we know, leads to weaker markets. Now we also were weaker on the equity side last week. Equity's down around two, two and a half percent in the Western world, down three to four percent over in China. China, interesting picture though, we had their GDP report out last week, 4.9% the annualized level for the last quarter, that was ahead of expectations.

[00:02:28] Sheldon MacDonald: And also we had some pollution readings, now this is an interesting one, just a different way of getting some data looking at pollution readings rising, that implies higher economic activity going on and really the higher pollution readings, people starting to think that maybe that's a sign of a reacceleration of the Chinese economy.

[00:02:48] Nathan Sweeney: Yeah. So the interesting point there is that a lot of people think that this could be a bottoming out as in a stabilization in the Chinese economy. So a lot of investors will be watching this to see if that's the case because it has underperformed and there's the potential for outperformance there.

[00:03:02] Sheldon MacDonald: So back to equities in the Western world, weaker, partly on the geopolitical uncertainty, but also reacting to those higher yields.

[00:03:10] Nathan Sweeney: Yeah, so there's a, there's a number of reasons why obviously markets are reacting to the potential for higher yields and if we think about it, ultimately, economic growth has been really robust. So quite strong. We actually get GDP figures this week, and it looks like you're going to see economic growth of about 4% in Q3.

[00:03:30] Nathan Sweeney: So that's implying that, obviously, everything looks healthy from an economic perspective. Then you also have this case where the US government is issuing lots of debt. So they're paying for specific measures, trying to stimulate their economy, funding obviously the efforts in Ukraine. As a result of that, they have to issue more government bonds, and this is also pushing up the cost of their government bonds because they're obviously creating more supply and if there's more supply of something, then it becomes cheaper and in this case, it means that bonds sell-off.

[00:04:03] Sheldon MacDonald: The other reason perhaps for some weakness in markets in the US in particular was the earnings. We are in earning season at the moment.

[00:04:12] Sheldon MacDonald: We've had only 17% of the S&P 500 reporting so far and so far, 73% of those companies have given figures that are ahead of expectations. But that really is pretty much in par with expectations. So no real news on that front. We do have a big earnings report coming out this week.

[00:04:34] Nathan Sweeney: Yeah, so if we think about earnings, obviously people have high expectations, they want to see those companies delivering and showing signs that actually the market can move forward from here.

[00:04:43] Nathan Sweeney: Last week, just to highlight, Tesla reported their earnings. It's really a consumer stock, not a tech stock but you know, they've struggled because people are buying less cars and that's actually a sign that you're likely to see inflation continuing to fall because the consumer is not going out and buying those big ticket items.

[00:05:03] Nathan Sweeney: But on the flip side of that, we do have big tech companies reporting this week. So we've got some notable companies and these are, you know, some of the magnificent seven. So we've got Google reporting, Microsoft reporting, Amazon reporting, so big heavy hitters. So the market will be keenly anticipating their earnings and let's hope they don't disappoint.

[00:05:24] Sheldon MacDonald: Other figures out this week will be the first take on the US GDP. Now the expectation there is for an annualized rate of 4.1%. Now that's actually pretty strong. Now that strength means there's less likelihood of rate cuts but at the moment markets actually still pricing in the first cuts coming in the first half of next year.

[00:05:47] Sheldon MacDonald: Also next week we've got news on the UK jobs front. Now this will be an interesting one because this week we had UK inflation coming out at 6.7%, unchanged, but the wages growth figure was 7. 8%. Now wages higher than inflation implies people feeling richer, so that will improve consumer confidence, retail spending, consumption.

[00:06:11] Sheldon MacDonald: On the other hand though, there are some signs of the jobs market weakening, so that jobs figure will be watched this week. What else have we got this week?

[00:06:19] Nathan Sweeney: I suppose the other thing that markets will be looking at for this week is the ECB meeting. So we have a meeting from the European Central Bank. So the expectation is that they don't do anything on interest rates, but the market will be looking for confirmation of that.

[00:06:33] Sheldon MacDonald: Yeah, picture there, subdued growth and falling inflation. So probably nothing to expect there, but you never know, there could be some surprises. We look forward to speaking to you about that and everything else that's going on next week.