Logic Monday Espresso Podcast

Monday Espresso Podcast - 29th January 2024

[00:00:00] Nathan Sweeney: It is Monday, the 29th of January. Today, I'm joined by Scott Truter, our US analyst and Assistant Portfolio Manager. Good morning, Scott.
[00:00:09] Scott Truter: Good morning, Nathan.

[00:00:10] Nathan Sweeney: We'll get some insight from Scott in a second. Firstly, let's quickly recap on what was driving markets last week. As always, there's quite a lot to unpack, so let's dive straight in.

[00:00:21] Nathan Sweeney: Equity markets actually delivered quite good performance last week in pretty much every region. If we look at UK equities, they were up over 2%. They were helped by the rise in the oil price, which was up about 7% for the week.

[00:00:33] Nathan Sweeney: European stocks added over 3%. Some of their benchmarks were up close to 4%, that was due to good company earnings and news of stimulus in China because Europe is a big export market to China, it's likely to benefit from an improvement in the Chinese economy, which is why European stocks were up so much.

[00:00:53] Nathan Sweeney: We also saw U.S. stocks up about a percent, that was led by technology stocks. The reason behind that, we do have a lot of big tech companies reporting their earnings this week. So the market is trying to get into those shares in advance of those earnings.

[00:01:08] Nathan Sweeney: Now let's come back to actually Chinese stimulus. So we did see some big moves on Chinese stimulus. A lot of people have been questioning China. Is it investable? So Scott, what's happening over there?

[00:01:19] Scott Truter: Yeah, so last week we saw Beijing step in with some forceful measures to support the economy.

[00:01:25] Nathan Sweeney: Okay, that's quite interesting. So what kind of measures were they implementing?

[00:01:29] Scott Truter: So the People's Bank of China, the PBOC, said it would cut its reserve ratio requirement by 50 basis points for most banks from February the 5th and that's the first cut that they've made this year and then the governor also announced that the central bank will lower interest rates by 25 basis points for refinancing.

[00:01:48] Scott Truter: So it's going to support small businesses and agriculture, so make sure there's more money available.

[00:01:54] Nathan Sweeney: Okay. So by cutting the reserve requirements, ultimately that means that those banks can lend more money.

[00:02:00] Nathan Sweeney: So really trying to stimulate the economy. They use the word forceful I saw when they talked about these measures, so it sounds like they're planning a lot. So was there anything else actually coming out there?

[00:02:10] Scott Truter: Yeah. So they've also announced a halt to lending on certain shares for short selling, so short selling is where you borrow shares to sell them because you think the price will fall and then you buy it back at a later point to be able to give it back to lender. So if you can't do this, it should mean there's less downward pressure on share prices.

[00:02:27] Scott Truter: And I think there was another thing that's probably good for the younger generation that Chinese regulators removed the draft rules imposed on online video games in late December. That's to curb spending online by video gamers.

[00:02:39] Scott Truter: So the regulations wiped off nearly $80 billion US dollars equivalent in market value from some of China's largest gaming companies when it was first announced and investors grew concerned about the possibility of another crackdown. So the fact that they're removing some of these rules should be seen as quite market friendly.

[00:02:56] Nathan Sweeney: Yeah, that'll be good news for the younger generation, definitely and good news for markets because as we know, if China's economy is revived, that'll be quite good for the global economy. So is there more stimulus to come, do you think, from China?

[00:03:10] Scott Truter: Definitely, I think we're just getting started. I mean, you have to remember that the MSCI China Index has almost lost 60 percent of its value since its peak in February 2021.

[00:03:20] Scott Truter: So the central banks are going to want to continue to roll out these pro growth measures. to revive consumer confidence that has been hit by the property downturn and deflationary pressure. So they will want to start getting things moving.

[00:03:33] Nathan Sweeney: Okay. So it's good to see them trying to really kickstart that economy.

[00:03:37] Nathan Sweeney: Now that's likely to drive growth, speaking of growth, we did have growth figures out on the other side of the world. So a lot of people have been concerned about a US recession. Are we seeing that?

[00:03:47] Scott Truter: Yeah, so the growth data from the U.S. expanded by 3.3% in the fourth quarter of 2023. And it was better than the 2% expected reading.

[00:03:57] Scott Truter: This follows a 4.9% reading in the third quarter of 2023. So this latest reading, there's a little bit of a slowdown from consumer spending but consumption of services increased. So year on year, US GDP growth was up 2.5%. You think that compared to 2022, when it was up 1.9%. So at the moment, we're not seeing those signs of a recession yet, or particularly in the near term.

[00:04:23] Nathan Sweeney: So does that mean we need to be vigilant about inflation if growth is still quite strong in the US?

[00:04:29] Scott Truter: A strong economy does not automatically mean inflation. The US Federal Reserve prefer a different gauge for tracking inflation and that posted a modest 0.2% month on month increase in December.

[00:04:42] Scott Truter: So it was up because there was a slight decline, but 0.1% in November, but it still means that it's still quite low and we saw the personal consumption expenditures price index rise an annual rate of 2.9% in 2023 and that excludes that volatile food and energy prices and you can see that's far below 2022's level.

[00:05:03] Nathan Sweeney: Yeah, so definitely an awful lot happening in markets last week. Some great snippets there. Thank you, Scott, for that. So finally, let's take a quick look at the week ahead. So in the UK, we've got the Bank of England. They've got their meeting this week. They're expected to keep interest rates on hold. So at that 15 year high of 5.25%, but the big thing people will be looking for, do they give any kind of hint as to when we get that relaxation in borrowing costs? As in when are those interest rate cuts coming? We expect that to happen at the mid year point this year, but it would be nice to see the central bank confirming that action.

[00:05:38] Nathan Sweeney: On the U.S. side, there is a lot of data out this week and some big meetings. We have the Federal Reserve, so that's the U.S. central bank meeting this week. We also have the jobs report in the U.S. so what does unemployment look like? But importantly, we've got a lot of company earnings this week and some real heavyweights, like I mentioned at the beginning. In the tech space, we've got Apple, Amazon, Alphabet, Microsoft, Meta.

[00:06:03] Nathan Sweeney: So some of the big tech heavyweights, as I mentioned, but we also have Exxon Mobile, MasterCard, Nova Nordisk and Starbucks. So the market's going to be focusing on how these companies are doing in the current environment and what they expect to happen going forward. So I'll just close out by saying, have a great week everybody.