Monday Espresso Podcast - 29th July 2024

[00:00:00] Nathan Sweeney: It is Monday, the 29th of July. Today, I'm joined by Scott Truter, our US analyst and assistant portfolio manager. Good morning, Scott.

[00:00:08] Scott Truter: Morning, Nathan.

[00:00:08] Nathan Sweeney: We'll get some insight from Scott straight away, actually, because he's going to cover off the market recap this week. There's a lot happening, so let's dive straight in.

[00:00:18] Scott Truter: Yeah. So, equities were broadly negative over the last week, though a bit more positive for the UK, that ended relatively flat. Fixed income, it's been a bit challenging there as well. I think what you're seeing there is markets have had a strong run year to date. And we've just seen a little bit of pullback over the last couple of weeks.

[00:00:35] Scott Truter: There's probably some concern around earnings and some of the data points. And there will be people taking profit before going away on their summer holidays. We'll cover those things in more detail, but firstly it's probably a good place to start on elections because there's a lot happening in the last week in the US.

[00:00:51] Nathan Sweeney: Yeah, they say a week is a long time in politics and indeed it is. So, Biden out, Harris in, ultimately. So, as we all know, Joe Biden has dropped out of the presidential campaign. Harris, the vice president has stepped up and actually she has got the backing of the party. So, we'll be the candidate that's being put forward for that election in November.

[00:01:12] Nathan Sweeney: I suppose the key question then from here is, and for investors is, what could that mean for, you know, markets? Because ultimately, if we look at polls today, it's pretty evenly split. So, either one of these candidates could win. So, what happens if Trump wins or what happens if Harris wins? What does that mean for markets, Scott?

[00:01:31] Scott Truter: Yeah. The expectation of a Trump win is that you'll see more tariffs on goods that are imported from outside of the US so it's more protective of US business. Also, likely some corporation tax cuts as well. So again, more pro-business for the US and I think if Harris wins, probably good for green energy initiatives and electric vehicles and some defence spending as well they're getting increased.

[00:01:55] Scott Truter: So probably good there, but you've probably got to take a step back because when you look overall through history, political change tends to have less impact on stock markets and it's normally this focus on interest rates, but also corporate earnings And I think speaking of earnings we're in getting too thick of it with the company earnings in the US. So, Nathan, is there any key takeaways that we can look at from there?

[00:02:19] Nathan Sweeney: Yeah. Okay. So quite an important point there So we are in the middle of corporate earning season, so companies coming out and telling us how they're getting on and a lot of investors listening to those calls. So those update calls that those companies provide, and they actually look to see what those companies are saying.

[00:02:38] Nathan Sweeney: So, interestingly, there's a lot of words which tend to come up repeatedly in some of those earnings calls. So here are some examples which you'll all recognise. Geopolitics tends to be named a lot. And actually, if we look at the instances of geopolitics being mentioned, it's decreasing. So, it seems to be less of a concern for companies.

[00:02:58] Nathan Sweeney: Supply chain shortages, which was a big problem coming out of COVID, less of an issue today, so less mentions of that on earnings calls. Energy costs as well, less mentions of that. Now over the course of the last couple of quarters it's all been about AI. So, all of this kind of AI theme coming through and actually you're seeing less mentions of AI too.

[00:03:22] Nathan Sweeney: The one thing that's actually on the trending up and is being mentioned earlier than it normally is when you look at previous cycles is The US election, because companies tend to talk about that right before the election and now. They're talking about it well in advance because of all of this change.

[00:03:38] Nathan Sweeney: So, it's creating uncertainty and if companies are uncertain, they tend to hold back on spending. So that's one thing to watch out for. The other two key themes that are coming up firstly, if we look at some of the big tech companies to saying, yes, we're investing in AI, but you're going to have to wait a bit to see the fruits of that investment.

[00:03:56] Nathan Sweeney: So, we are seeing a bit of cooling in the AI space and a bit of pullback in tech as a result. And I suppose the other thing that companies are focused on at the moment is around the consumer. So, if we look at consumer names, they're currently saying that actually they're seeing a bit of a retrenchment for the consumer.

[00:04:16] Nathan Sweeney: So that's one thing to watch out for and the implications of that. So, Scott, what are the implications of that?

[00:04:22] Scott Truter: Yeah, it's interesting you mentioned the consumer because in the US we had the GDP data out. As well. And it was slightly better than expected. And we could, you got the annualised rate for the second quarter that went up to 2.8%. So, remember it was 1.4%last quarter and in the forecast was 2%. So, a bit of a surprise on the upside. One thing they mentioned there was personal spending was up more than anticipated. So that spending is important to remember that these data points are backward looking. And obviously what the companies are referencing when they're talking about the consumers is a bit more forward looking of what they're actually seeing on the ground now.

[00:05:00] Scott Truter: So, it probably paints this picture that we saw with the inflation print, where that's falling down, that consumers are starting to change their spending habits and slowing down their spending a bit more. Which potentially should be good for inflation and also interest rate cuts.

[00:05:15] Nathan Sweeney: Okay, so what's going on around the globe?

[00:05:18] Nathan Sweeney: Is there anything else in vogue?

[00:05:20] Scott Truter: Yeah, so if you look at the UK, the retail sales data was out and that fell more than expected as well. So they'd expected a month on month decrease of 0.4%, but that decrease was actually 1.2%, so a bit sharper slowdown than had been anticipated. We've also got, you know, we had the inflation printout, and when you take out some of the volatile parts of that services inflation, that was the surprise on the upside, Actually, things don't look as, you know, more surprising to the upside as maybe they had expected.

[00:05:50] Scott Truter: So, it still opens that door for the Bank of England to potentially cut when they have their decision later this week. And so, we think there's still about a 50 50 chance is what markets are pricing in for that cut at the moment.

[00:06:02] Nathan Sweeney: So that'd definitely be a nice surprise if the Bank of England came out and cut interest rates because we've had radio silence.

[00:06:09] Nathan Sweeney: from the Bank of England, so possibly they're looking to surprise, but if they don't do it in August, it's likely that it's September, and you know, we're more about the direction of travel here, and the direction of travel for rates is down, speaking of which, we had some action in China.

[00:06:22] Scott Truter: Yes, so China cut some of their loan rates a bit unexpectedly, so their 1- and 5-year prime rates, they cut them by 10 basis points each.

[00:06:31] Scott Truter: The biggest surprise was the medium-term lending rate that they have, they cut that 20 basis points. I think there's been a lot of concern that we've not seen that rebound in the market, that GDP growth has still been a little bit slower than expected. So, you know, the government and central bank really want to stimulate and boost and gain that momentum.

[00:06:49] Scott Truter: So, I think it's really important we want to get that through.

[00:06:51] Nathan Sweeney: Okay, and then week ahead, what have we got?

[00:06:54] Scott Truter: Yeah, so as we've already mentioned, Bank of England rate decision will probably be the big one that markets will be focused on there. We also get some data out of Europe, so second quarter GDP data and inflation.

[00:07:05] Scott Truter: So really wanted to see, is that trend for inflation still moving down? And what's that doing to the economy overall? And also, then going to the US, we've got non-farm payroll and unemployment data. So again, just trying to see, is there a pattern in the data emerging?

[00:07:20] Nathan Sweeney: Okay. Thank you, Scott. Some great insight there.

[00:07:22] Nathan Sweeney: Everybody have a great week. And yeah, if you've got any questions you'd like us to bring up on the podcast, please do send them in. Take care and bye bye.