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Sheldon Macdonald and Nathan Sweeney talk about the topics driving the markets in their weekly Monday update.
Monday Espresso Podcast - 10th June 2024
[00:00:00] Nathan Sweeney: It is Monday, the 10th of June. Today, I'm joined by Sarah Todino, our European Analyst and Assistant Portfolio Manager. Good morning, Sarah.
[00:00:08] Sarah Todino: Good morning, Nathan.
[00:00:10] Nathan Sweeney: We'll get some insight from Sarah 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.
[00:00:20] Nathan Sweeney: Looking at stock markets, they were broadly positive for the week. We had some good showing from the US. So there's a lot of technology leading the way there. Artificial intelligence, optimism. So NVIDIA is one of the big companies in the AI space within the US. And the big news there was that that company surpassed three trillion in market cap, helping to push stock markets higher.
[00:00:44] Nathan Sweeney: I'm going to discuss that a little bit later in the show. I suppose, Sarah, we need to really talk about the big topic of the week, which was the European Central Bank. So what's your take on that topic?
[00:00:54] Sarah Todino: Yes. So, the European Central Bank cut interest rates this week. They've got three main policy rates and all were lowered by 25 basis points.
[00:01:03] Sarah Todino: And that's after nine months on hold. This was the first cut by the ECB in almost five years. And it's good news for borrowers. But bad news for savers as the interest that they receive will now decrease over time. So this rate cut was widely anticipated by the market. So all eyes were on Christine Lagarde for any clues on the direction of interest rates from here.
[00:01:25] Nathan Sweeney: And what is likely to be the direction of interest rates from here? I think that's what the listeners will be really looking forward to what next on the rate front.
[00:01:33] Sarah Todino: Well, Christine Lagarde was keen to highlight the importance of data dependence. The ECB know the path they're taking, but they also know that there'll be bumps along the road, so rate cuts are likely to be at a much slower pace.
[00:01:47] Sarah Todino: Inflation has come down a lot since its peak, but wage growth remains elevated. We're now at the last mile and stubborn inflation is likely to keep the central bank from a rapid easing cycle.
[00:01:59] Nathan Sweeney: Okay, so I suppose, you know, broadly, this is quite good news, because if you reflect back, we've had central banks have had interest rates at really, really low levels for a long, long period of time, so over a decade, you know, interest rates in around that 1% level, we reached an all time high last September in Europe of 4%, and after nine months on hold, interest rates are now coming down.
[00:02:21] Nathan Sweeney: I suppose the big question is, you know, how did markets react to that news?
[00:02:24] Sarah Todino: So, a lower interest rate typically leads to a weaker currency. Europe is a key export market. So, a rate cut could make goods and services more competitive. Smaller companies can benefit from rate cuts, but the trajectory of rate cuts will also have an impact.
[00:02:41] Sarah Todino: So, in this case, it's more likely to be at a slower rate. But the fact that a recession is now unlikely will be a positive. In terms of equities and bonds, we saw equities perform well relative to bonds in the run up to rate cuts. It could now be the time for bonds to shine.
[00:02:59] Nathan Sweeney: Yeah, and I think it's also important to consider, you know, underneath the hood, within the equity market, you're likely to get some rotation.
[00:03:07] Nathan Sweeney: As an example, we did see the banking sector doing quite well as a result of the rate cuts. And if you think about it, if mortgages cheapen or those mortgage rates come down a bit, you're going to see some more demand coming through there and banks obviously benefiting from that. So was there anything else on the radar this week?
[00:03:25] Sarah Todino: So, a patent is beginning to develop as we also saw the Bank of Canada cut its key interest rate by 25 basis points to 4. 75 percent this week. So along with Canada, we've had the ECB rate cut. This is a major milestone in global monetary policy. So, all eyes will now be on the Bank of England and the Fed for when they make their first move.
[00:03:48] Sarah Todino: We could see the Bank of England over the summer and the Fed to follow shortly after.
[00:03:53] Nathan Sweeney: Yeah, so if we look at some data which did come out towards the back end of last week, we had the US unemployment rate and you know, so one of the figures that people look at is this non farm payrolls and ultimately it just looks at, you know, jobs which were added to the economy.
[00:04:10] Nathan Sweeney: So, we had 276, 000 jobs added to the economy in May. So, it shows that there's no real sign of a softening in the economy. Lots of jobs still being created. So, it just reduces the chance of a interest rate cut in the US in July and means that it's more likely to be September. But it's all data dependent.
[00:04:30] Nathan Sweeney: But actually, that's good news. Economy's still strong. Good for companies. The big news on the week was clearly NVIDIA. So, you know, NVIDIA is now the second most valuable company in the world. So, it's market cap breached the 3 trillion level, and it's just now slightly behind Microsoft which is just about 3.1 trillion in value. And it just goes to show that there is a lot of demand for the chips that they make, which are used in computing large sets of data. So, this is all artificial intelligence. So, it just really underscores that companies are investing in this space. Hence, there's a lot of, a lot of movements within the share price of NVIDIA there.
[00:05:12] Nathan Sweeney: So, let's take a quick look at the week ahead. So, looking at next week, we do have the unemployment rate in the UK. It is expected to remain the same. So, at 4. 3%, we do have inflation data, which is expected to come out in the US and also that figure is expected to remain around the same levels. We do have an interest rate decision from the Fed.
[00:05:34] Nathan Sweeney: So, the Federal Reserve or the US central bank. And we don't expect them to change their view on interest rates because the economy is still chugging along nicely there. And we also have a central bank meeting in Japan. And again, there's no expectation of any change. So hopefully you enjoyed the podcast this morning.
[00:05:51] Nathan Sweeney: And I would like to remind you, if you do have any questions, please do send them in as we'd love to bring them up in the show. Thank you, Sarah, for accompanying me on the call this morning and have a great week, everybody.