One Knightsbridge Capital Monday Espresso Podcast

Monday Espresso Podcast - 15th April 2024

[00:00:00] Nathan Sweeney: It is Monday, the 15th of April. Today, I'm joined by Scott Truter. Scott is a assistant portfolio manager here at the Marlborough multi asset team and Scott covers US equity funds. Good morning, Scott.

[00:00:13] Scott Truter: Morning, Nathan.

[00:00:14] Nathan Sweeney: Now, before we talk to Scott and get some insight on what was happening last week, let's do a recap of markets, but I'm also going to cover off the geopolitical tensions we had in the Middle East over the weekend, because clearly we want to understand what is the likely impact on markets of those events.

[00:00:31] Nathan Sweeney: So we'll cover that in today's session. So firstly, looking at markets, if we look at equity markets, they were mixed. We did have lots of major central banks out last week, so we're going to cover off some of that. What does that mean for interest rate cuts? Will they be cutting interest rates at the same time or will we see divergence in interest rate cuts?

[00:00:50] Nathan Sweeney: So it's really kind of important question. So we'll talk about that. If we look at Japanese equities, we had some real strong performance last week. So Japanese equities were up over 2% for the week. One of the reasons behind that is you saw the currency weakening and that's really good for Japan's exporting companies, so the large companies in Japan who export lots of stuff around the world and that's why those share prices went up because of that weakness in the currency. But firstly, Scott, let's talk about the big news last week in terms of data points we had US inflation data.

[00:01:24] Scott Truter: Yes, so the annual rate in March increased to 3.5%. So that was slightly higher than expected, but also the highest reading since September. So energy cost was one of the big driver for that reading. But even the core inflation, which strips out that food and energy that can be a bit more volatile, still rose 0.4% on a monthly basis, so just a bit higher than expected there.

[00:01:47] Nathan Sweeney: And I suppose the real question is, what does that mean for the Fed? Because Everybody's been talking about when do we get those rate cuts and people were expecting those rate cuts to happen quite early this year. So what does it mean for those rate cuts?

[00:02:02] Scott Truter: Yeah, we're seeing those expectations that it'll be pushed out a bit further this year.

[00:02:07] Scott Truter: So I think when we came in at the start of the year, everyone was expecting the Fed would cut in March. And we saw that move from March to June. Now there's only a 20% probability of a rate cut in June. There's a 50% rate cut for July, but it could even be a bit further out and maybe even September before we start to see those rate cuts coming through.

[00:02:25] Nathan Sweeney: That's fascinating because we've had a lot of people talking about the fact that they expect the Fed to lead major central banks with interest rate cuts. And so a lot of people questioning could we see the ECB or the Bank of England cut interest rates before the Fed? So what do you think about that likely scenario?

[00:02:46] Scott Truter: Yeah, I think that's increasingly more likely. So ECB voted to keep their rates unchanged for a fifth consecutive meeting. So their rate's at 4% but the comments from Christine Lagarde, the ECB president, suggested that if they continue to see the price pressures stabilise that they may still cut in June.

[00:03:05] Scott Truter: And it's just highlighting this that initially, people were saying the Fed always cut first and then the UK and Europe follow, but everyone is being data dependent and looking at what's coming out. So yeah, if things look like inflation is cooling a bit quicker in Europe, then we may see those cuts first there.

[00:03:21] Nathan Sweeney: Okay.

[00:03:22] Nathan Sweeney: So now moving on to the events we had over the weekend, we saw a massive overnight Iranian drone and missile attack, which was basically 300 projectiles targeting Israel. Now a lot of those projectiles were obviously knocked out of the sky by Israel and some of its allies, but now we're waiting to see what is the likely aftermath of that.

[00:03:47] Nathan Sweeney: So we did have the Israeli war cabinet, they did meet on Sunday afternoon, and so the question is the what next piece? So we do have the US and the United Nations calling for restraint. Because this is a retaliation to a suspected Israeli attack on a embassy in Damascus. So we're just going to have to wait and see how this plays out but I suppose the first initial question is, what was the reaction in markets?

[00:04:15] Scott Truter: The oil price hasn't moved as much as maybe you might anticipate. So oil price closed $86 a barrel, down 1% for the week. We have seen that slight increase over the last couple of weeks because of the sort of tensions and sort of speculation.

[00:04:30] Scott Truter: But yeah, not a significant move so far. What we did see was the US dollar strengthen, which is often seen as quite a safe haven sort of asset. And people use that in times of uncertainty, but continue to see what moves come through.

[00:04:45] Nathan Sweeney: Okay, so two great points there. So if we think about the oil price, now, if we think about the Middle East specifically, we do have lots of geopolitical tensions in that region, and we've had geopolitical tensions for decades.

[00:04:59] Nathan Sweeney: And the way that that ultimately impacts markets is through the oil price. So the key thing that people will be watching is the oil price, because if you were to see the oil price spike and move up to say $125 a barrel, that would create a recession in some major economies, notably the US. So we are in an election year, so there is a lot of political will to keep the oil price low as we move towards that election.

[00:05:29] Nathan Sweeney: So the US will call for restraint in terms of that retaliation because they will want to ensure that we don't get that spike in the oil price. And you do get a lot of consumption in petrol over the summer months too, because a lot of people drive when they go on holiday in the US so again, a lot of White House officials will know this and they will be really concerned that we don't see a pickup in the oil price.

[00:05:55] Nathan Sweeney: Now, good point that Scott mentioned is that we're not seeing any material move on that side. But then the other thing to watch is the US dollar. So a lot of people are concerned at the moment about the level of debt we have in the US and ultimately, if the US then has to fund and support a larger scale war in Israel, then people will be concerned about what does that mean for the US dollar. Now, interestingly, as Scott mentioned, we saw a strengthening in the dollar because you have to remember the US dollar is still the reserve currency of choice. So from our perspective, there are the two key things that we will be watching for this week. Now, hopefully you found some of those points insightful, but let's go on and talk about what we're expecting for the week ahead.

[00:06:45] Nathan Sweeney: So this week, we have a lot of companies reporting their earnings in the US. So we've started off earning season last Friday, we had a couple of banks reporting, but we're going to get a lot more this week. So we've got Goldman Sachs bank of America, Morgan Stanley, got Taiwan semiconductors, Netflix. So people will be focusing on company earnings as well as the events in the middle East.

[00:07:06] Nathan Sweeney: We also have GDP figures coming out of China, we're expecting to see growth there of around 5%. And then lastly, I think we've got some data in the UK, we've got inflation data, unemployment and resale sales. So thank you all for listening in this morning. And if you have any questions at all, please do fire them in because we'd love to cover them on the podcast, but have a great week and thank you, Scott.