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Sheldon Macdonald and Nathan Sweeney talk about the topics driving the markets in their weekly Monday update.
Monday Espresso Podcast - 2nd September 2024
[00:00:00] Nathan Sweeney: It is Monday, the 2nd of September. Today, I'm joined by Scott Truter, our US analyst and assistant portfolio manager on our funds. Good morning, Scott.
[00:00:09] Scott Truter: Morning, Nathan.
[00:00:10] Nathan Sweeney: We'll get some insight from Scott on what was driving markets last week, and we'll delve into some of the other key news items across the week.
[00:00:18] Nathan Sweeney: So Scott, over to you. How did markets fare?
[00:00:21] Scott Truter: Both equity and fixed income markets were mixed for the week. Definitely a bit more subdued. Europe was one of the better performing equity regions and emerging markets lagged largely due to the performance of the Latin American part of the index. The US was broadly flat as well, but the NASDAQ, which is that more tech focused index was down a bit more after the much anticipated Nvidia earnings announcement.
[00:00:44] Scott Truter: So Nathan, what did they say?
[00:00:46] Nathan Sweeney: Yeah, so Nvidia is at the forefront of AI, so artificial intelligence, it's become one of the biggest companies in the world. And there's a lot of focus on this company today because it has delivered blockbuster earnings over the course of last year. So very hotly anticipated earnings coming out this week and they delivered third quarter revenues of $32.5 billion, which is a big, big number in line with expectations. But the market was slightly disappointed about what to expect from here because the guidance, even though it's still good, the market was expecting so much more from this company because it's been rising so rapidly. So you actually saw a little bit of a fall in the share price as a result of that slight disappointment, but still you have to really hand it to them.
[00:01:33] Nathan Sweeney: Great earnings.
[00:01:35] Scott Truter: Yeah and I think when we think about markets and performance, I think when we started August, maybe everyone was quite pessimistic and negative because of the volatility. I suppose when you look at the month and think about it, it's not probably been as bad as people expected.
[00:01:48] Nathan Sweeney: Yeah, I think that's a fair point because when we started at the beginning of August, people were greeted with the fact that the Japanese stock market fell 10%.
[00:01:56] Nathan Sweeney: It was actually 12% in a single day, which was the worst single day's performance in 37 years for the Japanese stock market, but only to rebound by 10% the following day and you know, this sell off was driven by a thing called the carry trade. So ultimately the carry trade is when you decide that you want to borrow in an environment where interest rates are really low, and then invest that somewhere where interest rates are really high.
[00:02:22] Nathan Sweeney: So in Japan, interest rates have been pretty much 0% for the best part of 25 years. So you're seeing a lot of investors, companies, pension funds, taking Japanese yen, translating it into, another currency like the US dollar and investing it there. And if you do that in the US, you can gain 5.5% because interest rates are 5.5%.
[00:02:45] Nathan Sweeney: But why the sell off? What happened? And really, what happened was that the US central bank was talking about cutting interest rates. At the same time is the Japanese stock market talking about raising interest rates and ultimately this can impact your currency. So the currency fell a lot in Japan and that impacted the returns on your carry trade by a significant amount.
[00:03:05] Nathan Sweeney: So people started to unwind those positions quite quickly and then also investors became cautious about what was happening in Japan. So their stock market sold off. Only for people to realise, actually, the US isn't going to reduce interest rates that quickly because the economy is okay and you saw that strong market rebound the following day.
[00:03:27] Nathan Sweeney: So the key takeaway for me there is that often you will have instances where the market can fall substantially and rebound quite quickly soon after, and in this case, the next day. So quite a good lesson there.
[00:03:39] Scott Truter: I think we've talked about this before as there's always ebb and flows of data and that impacts markets but try when we're thinking about investing we think about that over the long term.
[00:03:48] Nathan Sweeney: Okay, so I suppose what other data releases did we have out for the week?
[00:03:52] Scott Truter: So if we stay with the US for now the second quarter GDP growth rate was announced and it was slightly ahead of expectations. So the annualised rate, it was expected to be 2.8% based on the first estimate, but it actually was 3%. So If you think back to the first quarter, the increase in GDP was 1.4%. So seeing a bit of growth from there.
[00:04:13] Scott Truter: And some of that upward revision has come around from consumer spending. So for those three months, we're still seeing a bit of life in the consumer, bit of spending there, but we know that might be changing a bit because of some of the earnings calls from those companies that are saying they've seen a change in some of those spending habits.
[00:04:30] Nathan Sweeney: Okay. And then anything outside of the US coming through?
[00:04:34] Scott Truter: Yeah, so in Europe, there was some inflation data from Germany that was lower than expected and also some manufacturing data that fell short of expectations. But the big data point was the Eurozone inflation rate, and that came in at 2.2%.
[00:04:48] Scott Truter: So last month it was 2.6. It's the lowest reading since July, 2021. And it probably reaffirms the ECB's decision. So that's the European central bank, they made in June, to cut interest rates. And it shows that inflation is moving towards their 2% target as well.
[00:05:04] Scott Truter: And then probably just one other area to highlight is in Japan. It's been maybe some more signs the economy's slowing there. So the unemployment rate slightly higher than expected, and then retail sales lower than expected. And we're just seeing that continuing signs of slowness there.
[00:05:19] Nathan Sweeney: Okay, so good signs there on the European front. Obviously inflation coming down means rate cuts coming through. I suppose we're kind of pretty much through earnings season now. So what do we have to look forward to next week?
[00:05:31] Scott Truter: Yep. So the U S initial jobless claims data and some manufacturing data out. So again, just trying to see if there's a trend or a theme coming through there for the world's largest economy in Europe, we've got GDP growth rate estimates for the second quarter, 2024. So I'd say we've seen inflation falling, but how is growth holding up?
[00:05:49] Scott Truter: So we'll look for that data and GDP in Japan as well. And then in China, there's some manufacturing data being released too.
[00:05:56] Nathan Sweeney: Okay. Thank you, Scott. Very insightful as always and have a great week, everybody. And thank you for listening in this morning.