Episode Transcript
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(00:00):
Hello and welcome back to the show.
And there's been a really big move in markets overnight, which
we will attempt to unpack. And that is the oil prices
soared 13% overnight. And so we'll look at some of
those headlines in regards to Israel having carried out a wave
of strikes against Iran. And there's already been some
(00:21):
retaliation from that. But we're not here to talk about
politics. We're here to talk about how the
markets reacted. And there's a couple of things
here that we could definitely look to explain.
And then also USCPI came in lower earlier this week.
However, is that going to remainthe case?
Yet to be seen, the Fed meeting obviously looming.
(00:42):
So we'll try and connect the dots and whether or not this
emerging geopolitical situation might play into this as well.
And then of course, we've had USand China talking in London
earlier this week. Where are we at?
Why potentially on that event alone was the market reaction
quite muted? And then finally, U KG DP, we
(01:04):
had a pretty heavy contraction in April.
The economy shrunk 0.3% and there's been lots of negative
media headlines if you live in the UK in regards to potential
tax rises to fill the gap, so tospeak, in the government's
coffers. But FTSE is tapping on a record
high. So go figure.
(01:25):
And we'll we'll also explain probably why that is happening.
So yeah, perhaps to start with, Piers, we had this big move in
oil overnight. Israel has carried out a wave of
strikes against Iran. Fears obviously always within
that region about contagion effects and it being so
(01:46):
significant for oil prices, given it's a the epicenter of
where the main flow of crude comes from in the Persian Gulf.
You've got situated there Saudi Arabia, over the water Iran, but
then also to the north the likesof Iraq, Kuwait and these
comprised of pretty much the bigfour of, of, of OPEC.
(02:09):
So, yeah, what, what's your, your initial take when you you
see this sort of news flow? Yeah, we were.
We, I mean we touched on this, Ithink was it last week or the
week before in the pod where you, you were asking me that
question about geopolitical riskbeing a trader, because oil at
that point was trending lower and lower and lower.
(02:30):
It's been trending lower all year.
It broke below when you look at like WTI crude, it broke below
60 bucks for the first time since like 2021.
And you know, it was all one waytraffic to the downside.
And you asked the question, you know, how'd you how'd you deal
with a downward trending market but operating in a world where
(02:50):
geopolitical risk is ever present And well, this is what's
happened. And so, yeah, big, big, big
spike to the upside, you know, as a result of what is now
supply risk that has spiked as aresult of this geopolitical
situation. Yeah, on that supply risk side,
(03:12):
I'm going to ask you to explain some terminology that people are
probably reading in the news this morning and that's about
backwardation and then the opposite of that contango.
But before we explain those, maybe I could just explain how
the news came out last night because I think it's, you know,
there's it's interesting, namelybecause my job for those who are
(03:34):
new to the channel was for for adecade I worked in real time
market surveillance, so to speak.
Put simply, my job was me and myteam had headsets like this and
we would sit there every second of every waking hour bar
Saturday when global markets arekind of shut.
And our job was to relay lookingat lots of different Information
(03:56):
Services. So these could be major news
terminals, but different feeds you can plug into.
The idea being to have your finger right on the pulse of
when things are emerging storiesor data is breaking.
So in this case, what I'm looking at in front of me here
is a chart and I've kind of put some some markups on here of how
(04:18):
the news came out last night. And you'll see there's a first
little blip in price that came. I think it was 44 minutes past
midnight London time. There's a little move there of
about $0.25 where it where it touched the the kind of closing
high on the pre previous day. And what happened was the FT
(04:42):
sources. So people familiar with the
situation reported that Israel strike could come as soon as
Friday. Now when it comes to sources,
you've got to ask yourself, well, what's the quality?
What, what's the origination of this source?
If the FT is reporting it, according to people familiar
with the matter, well that vetting process has been done
(05:04):
for you. So in this instance, when I was
kind of monitoring this information, I'd get rumours
from all sorts. You know, you'd have even have
traders trying to get out of a position, call up the desk and
say oh, this is happening. And I'd be like, really?
So my point being is that, you know, if it's the FT, if it's
the journal, these sorts of sources, they've done that due
(05:26):
diligence. Otherwise they themselves will
land in a lot of trouble. So you can take that immediately
as actionable information almostthat it's legit .1 whether you
trade or not would be the traders discretion.
And then what happened was I think it was about maybe 18
minutes later. And this is how the news breaks
(05:47):
because when you read about it in the morning, you kind of
think, all right, this is the situation.
There's been this, there's been this attack and they've
retaliated. But actually it comes in much
more piece meal when you're following this overnight.
And the first reports are of in Tehran of sirens going off and
then explode, then reports of explosions.
(06:07):
And at this point, you're like, I don't know who's fired what.
I don't know if it's an electrical fault on the on the
grid system in Tehran. I don't know whether they've
been attacked. So this is when you get those
first little you'll see on the chart as I'm showing, it starts
to just edge up ever so slightly.
And actually the move that went from 6850 to a high of 7250,
(06:31):
it's a pretty big move, $4.00 move happened over about 1520
minutes as it just went higher and higher and higher.
And one thing to say is that this happened UK time overnight
US mark, US traders aren't at their screens at this point.
And that's the dissemination of news is radically different in
(06:52):
an overnight AIPAC session than it would be during the middle of
a major US trading day. The the kind of acceleration of
that bid that came into oil would look like a direct
straight line up if this was themiddle of AUS session.
So this gives great kind of timeopportunity if you have sat at
(07:13):
the screen at that point in timeand then you have these other
headlines that come. But one thing maybe I could ask
you, I mean this entire move that was just, I've just spoken
about the initial breaking headlines.
The entire move was 13%. We went from 6850 to basically
78, which is a big, big move, somewhat exacerbated by the
(07:33):
illiquid nature of the the type of volumes that are traded
overnight because prices are paired back almost 2/3 of that
move going into the European open.
But one thing to ask you, Piers,on this is you can see here the
market looks like it kind of goes in waves of momentum where
it goes quite aggressively bid as the news breaks and then
(07:53):
comes off almost 2/3, then it rallies again, comes off again,
then it rallies again and comes off again.
So tactically, how do you managethat situation when you're in it
real time? With huge difficulty, I'd say
you wake up the following morning.
Ah, oil up 13%. Ah yeah, right.
(08:16):
Obviously just bang went straight lined through the roof.
But it's so noisy and the, if you like the amplitude of that
noise that those kind of wave pads is monstrous.
And the pullback you just mentioned, yeah, you can get
multi dollar pullbacks even though it's going $13 up.
(08:39):
That's the end point. You're getting multi dollar
pullbacks along the way and timings everything.
If you want to trade a move of this enormity, then timing of
entry is really key. Often if you're, if you've
missed it, so to speak, where you see it surge and spike up
(09:00):
and you're not in, then this is where the emotions kick in
because you're like, oh damn it,I missed it.
And then you kind of that FOMO. So the fear of missing out,
you've seen it go and you're like, oh, damn it, I wish I was
in sort of I'm going to get in. And you, you inevitably kind of
get in at the top of these surges because you think that
(09:22):
that surge is the it's the one that's going to go $10 in a
straight line, right? So you kind of get in, but
you're late and then you just get killed on the pullback, but
you're then long as the multi dollar pullback begins and then
you get really chopped up. And so ironically, I guess when
(09:43):
the market rallies 13%, you could be not, you could be doing
nothing but going long and you could lose a huge amount of
money. So it, it really is super
difficult. And this is where you got to be
super skilled. And as you're saying, it's about
that those early new, that FT report of sources.
You know, that's where you that's where you want to be
(10:04):
getting long, right, right at the very beginning of the sort
of the, the news kind of narrative.
And even if it's, even if it ends up not being what EFT is
reporting, you know, you just got, it's like buying a lottery
ticket, right? You've got to be in it to win
it. So if you get those sources,
you're like, right, I'm in, I'm in.
(10:24):
Because now there's potential. And often that potential doesn't
come through. But every now and then it does.
And you're positioned well readyfor the launch.
And back to the quality of the source, we'll give you that
level of conviction on that, taking that higher risk strategy
or not. One of the things that my
(10:46):
colleague Emery sat to the side of me, he asked me when I came
in was like, OK, So what would you look for next?
So again, just sticking with thevery intraday news cycle base
because I think some good lessons to learn here.
So what I was saying was, OK, soyou come in now and Europe
starts to wake up. So at six O clock, you're seeing
this for the first time. So sometimes you can see a bit
(11:08):
of a sort of secondary reaction as this gets digested.
But then it's about OK, trying to think about like a chess
board. Well, what who are the players
within this game? Who are the potential people who
I need to monitor who could say something that could move the
dial again, IE Israel, they've kind of said their piece, Iran
(11:33):
have, but what about other neighboring players in the
region? What about the US more
specifically, just given their military presence and
relationships within the situation?
And then start to think about, OK, so geographically, well,
things like key strategic choke points of the passage of crude
(11:53):
oil, whereas Iran potentially could be hugely disruptive in
terms of, you mentioned supply. Well, if you look at coming out
of that Persian Gulf, that Straits of Hormuz, so there
you'd be watching now on your systems like a hawk because if
they were going to cause any real severe issues, that could
(12:14):
be a key place to do so. So you kind of start trying to
think ahead of time. OK, So what could create then
the next the next thing And obviously within your feeds
you'd be plugged in watching like a lots of the Iranian
information, lots of Iranian, Israeli information and trying
to gauge accordingly. But going back to into a take
(12:35):
away on the learning .1 thing that the FT were talking about
was this concept of backwardation.
And I would assume that a lot ofpeople listening probably have
not heard of that. So I wonder if you could just
give me like a really simple wayof thinking about this.
Sure. And actually this is a like we
talk about backwardation. The opposite is contango and
(12:58):
right we talk about this with regards to commodity prices
mainly not just oil, right. And this is just thinking about
what is the price if I what, what we call the spot price.
That's the price. Let's just talk oil.
What's the spot price of oil? That is the price I would pay
today for one physical barrel ofoil.
OK, that's the current price if you like.
(13:21):
But like many users of energy, well, you know, and given the
volatility, particularly of the price of oil, we let's say I
don't know. And a good example would be an
airline. If you're running a massive,
you're British Airways or whatever, you're running a big
airline. 1 your other than your people costs, your, your biggest
(13:41):
cost is fuel right now. Jet fuel is a is a component
part of crude oil. So the cost of jet fuel
obviously is a function and correlated to the price of crude
oil. But if crude oil is super
volatile, how do you run a business if your biggest cost
could go swinging up and down twenty, 3040% in any moment?
(14:01):
So this is where companies will use a strategy of locking in
future purchases of oil and locking in the price today so
that they can be certain of whattheir outgoings are going to be
and they can operate their business, right.
And this is where they're using derivatives and they're using
futures contracts to buy oil in one month's time or to buy to
(14:24):
buy oil and take delivery in twomonths time or three months time
or six months or 12 months, right.
And this is what we call the futures curve.
It's, it's what is the price of one month oil today?
What's the price of two months? What's the price of 12 months,
right? And there's a difference between
the spot price if I'm taking delivery today and the futures
(14:45):
price, right. And backwardation is the
situation when the price of spottoday is more expensive than the
price of future oil. And this is theoretically very
unusual. Theoretically it doesn't make
sense because if you're buying oil today, but you're taking
(15:09):
delivery in one month, well, theperson you're buying it off,
that person has to store that oil for a whole month.
They may have to have costs like, I don't know, insurance on
their warehouses for storing this stuff, right?
So normally you get a contango situation where future prices
are more expensive because of that storage costs and insurance
(15:30):
costs and so on. So backwardation is
theoretically unusual and it'll happen when there's either a a
sudden short term supply risk like right now, OK, this
situation overnight has led to people being really concerned
about Iranian crude supply. So if you suddenly get a chronic
supply risk, people are start they're they're prepared to pay
(15:53):
a premium, an unusual premium for the spot price today because
they're worried there won't be as much oil in the future.
OK. You can also get backwardation
for a sudden demand spike as well, which is, you know, less
normal demands pretty steady, right?
So it's, it's normally a supply situation that leads to this.
So backwardation is that theoretically unusual situation
(16:17):
where the spot price is higher. I keep saying theoretically
unusual because for the last five years, or four years at
least, oil has been basically inbackwardation.
So this isn't new, even though the FT have jumped on it here
this morning. It's basically been in
backwardation for four years. But yeah, that explains the
situation. And for four years being what?
(16:41):
Russia, Ukraine because of. That's right.
So really it kicked into backwardation when the when
Russia invaded Ukraine. And obviously then there's been
significant ramp up in tensions in the Middle East with Israel,
Gaza, now obviously Iran. So this heightened what you
described as heightened geopolitical situation triggered
(17:03):
from the Russia invasion of Ukraine has really set this
backwardation situation in the market for the last four years.
OK. And to conclude then, something
to look out for this weekend. The US and Iran had been
scheduled to hold a sixth round of nuclear talks in Oman on
Sunday. And the US last night have
already said they weren't involved with the attacks
(17:24):
because one of the things would be a lot of tension between the
US and Iran and whether US was giving any sort of backing to
Israel. They're distancing from that, as
you would expect. So, yeah, whether those talks go
ahead, who knows at this point. So one to watch, but it.
Looks like not It looks like not.
I heard this morning that is Iran have said they're not
going. Which is so, I think,
(17:44):
unsurprising. Indeed.
So let's talk CPI. That was before this happened.
That was probably one of the bigger data points.
So what happened there? Yeah.
So US inflation data reported yesterday.
And look, these stories are linked, of course, because one
of the key components of that inflation bucket is energy
costs. And one thing that's been
(18:08):
helping inflation kind of head alittle bit lower.
And actually we've, I think thisreport is the fourth in a row
where we've had inflation announced lower than expected.
And part of that story has been oil moving down, right?
So now you're looking ahead and the data we got yesterday was
for the month of May, right? But now people are going, wow,
(18:29):
all right, well, what's June going to look like if oil prices
remain elevated as a result of this?
So anyway, that's for the future.
This May report, again, as I said, fourth month in a row
lower than expected, exactly what we need.
When you're looking at the headline reading, it did go up
though, compared to April. So April was 2.3%, which was a
(18:50):
fantastic report. That April reading was the
lowest we've had since like 2021, basically, right?
So 2.3 in April, and it rose to 2.4 in May.
We had expected an increase to 2.5, right?
That's on the headline. For core, it remained at 2.8%.
(19:11):
So we've had three months in a row of 2.8% now and again, that
2.8% is the lowest reading since2021.
So great news and and more importantly, great news because
yet again, here we are. We're kind of two months into
the, you might say, the tariff post liberation day, right?
(19:31):
So the second of April was Trump's tariff day.
So we're two months in now, and still there's absolutely no sign
of inflationary pressures because of Trump's tariff risk.
OK, he said. Absolutely no sign.
One thing, one thing I saw was so the way of which the the Fed
is broken up, I'm assuming this is one of their more regional
(19:54):
based survey data points. So there's, there's 12 reserve
districts that would sit within the US districts because US is
so expansive that different geographies within the country
are quite different in terms of the composition of their micro
economies, if you like. And one of the things there was
there was a survey of economic activity.
(20:15):
Last week that showed prices advanced at a moderate pace
across the US in recent weeks, with some regions expecting
future increases to be strong, significant or substantial.
So is this the other thing that that I've also read is really 22
points 1 this? If I was talking in Steven or
(20:37):
other kind of sister podcast show, he would say margin
compressions or something like that, Like businesses letting
their margins shrink in hope that import duties might come
back down or the build up of into infantry in advance of
tariff hikes just might be contributing to a bit of a
delayed pass through effect intoactually onto consumers.
(21:00):
What do you think? Well, this is the problem
because it's impossible to know.Yeah, So either like if you're
optimist glass fast fall, come on Fed, let's cut rates next
week. Then you're thinking that this
is clear evidence that tariff policy is not inflationary.
(21:22):
And who's who's the ultimate glass half full guy?
Well, you know, I like my I likemy vessel to be half full and
Donald Trump, I think as well. You're probably complying, but
so look, that's one side. But as you quite rightly say, I
I don't know, look, companies, right.
So it could be working through pre tariff inventories.
(21:45):
So we've seen this. We're going to talk about U KG
DP in a minute. We've seen this with kind of
things like US import export data, China import export data.
We know that in February and March businesses loaded up, All
right? They, they bought stuff and they
packed their warehouses knowing and worrying that prices would
(22:06):
increase in April and May, right?
So, yeah, their warehouses are packed with stuff that they
bought pre tariffs. And so it could be they're
selling that stuff at the same price.
Now I, you know how businesses work, you know, come on, if
there's a little bit of extra margin there to juice, then
you're going to take it, right? Wouldn't you increase your price
(22:27):
a little bit, just ecat a littlebit more profit because you can
play on that tariff inflation story and blame tariffs?
Yeah, sorry, customers, look, we've had to increase prices.
Tariffs are really, you know, squeezing our margins.
No, they're not. You bought stuff before tariffs.
You're just eking out a bit moreprofit a lot.
I think you'd see evidence of that.
(22:48):
Now, one thing in the basket, that was the kit.
There were three surprises whereinflation prices didn't go up.
Apparel, so clothing actually declined .4%.
I'd say you'd start to see some inflationary pressures there if
it was happening, right? New and used car prices fell and
that's even though car makers have been saying they've had
(23:11):
increased prices. Smartphone prices are also down.
So look, it could be the other thing, which is they're
sacrificing margin to maintain and hold market share.
I think there's more likelihood of that story, but again, it's
impossible to know unless you literally went and knocked on
the door of every single business and asked them straight
(23:31):
out. And even then, would they own up
and tell you? So it's impossible to know.
So unfortunately, we're going tohave to wait and we're going to
have to wait until we get June inflation and July inflation.
And anyway, in the meantime, what's going to actually happen
with tariffs and, and obviously the China discussions and the
European discussions with Trump are, are key in amongst that.
(23:52):
So in the meantime, we can step back and we can say that look
for now, you can chalk it up as another win.
You know, we have may inflation data that shows no inflationary
pressures. So you're kind of so far so good
mindset, but just thinking that tariffs could come through, it
could be a delayed effect. And then throw on the top oils
(24:14):
just spiked 13% so. So is this why then we'll go on
and talk about US and China in depth in the moment, but is this
why Trump needs a win here in order to the CPI data, the
inflation metrics that you're mentioning are all kind of
backward looking. What he needs to manage, given
(24:36):
the composition being largely surface driven in the US, he
just needs to keep the consumer spending and keep the consumer
confident enough that despite all the negativity that they
read about tariff, the potentialimpact and economic slowdown as
long as they keep going. Yeah.
And for there's also. Yeah, absolutely.
(24:59):
There's one other really big piece of the jigsaw in Trump's
mind, which is trying to lower his debt interest costs.
They're going to have to refinance a trillion bucks it
basically in the next 12 months.And interest rates are really
high. So he wants interest rates down,
Right. But that requires inflation to
(25:22):
come down, which means, you know, if you're XI Jingping, you
know this. Yeah.
Yeah. So you know, when you're around
that negotiating table, actually, XI Jingping's got some
decent leverage, I would say, because he knows Trump's
desperate. And actually the Fed a meeting
next week and obviously Trump's been super vocal about in his
(25:44):
criticism for Powell on social media.
And it's a lot, a lot. You know, it's hilarious in one
respect and just quite mind blowingly ridiculous in the
other one. But like yesterday, he tweeted
that Jerome Powell is a quote numbskull for refusing to cut
rates is what he said. And he suggests he suggests that
(26:08):
he may have to force something that was Trump's comment.
And there's been talk about again replacing Powell early.
Powell's term ends next year. But there's been every few weeks
Trump comes through with right, let's look at some new
candidates and threatening to remove Powell.
(26:28):
I think that's Trump thinks he'sgot leverage over Powell by a,
criticizing limb very vocally inon social media and B, starting
to threaten to remove him from office.
I think Powell's immune to all of this.
Trump's calling for a 100 basis point cut next week, right?
And if that were to happen, you know the US would save hundreds
(26:52):
of billions of dollars, like in annual debt servicing costs,
right? So if all you looked at were
debt, interest costs, of course you'd cut rates aggressively.
But the problem is you've got inflation, which is a bigger
beast. And ultimately if you cut rates
just to save yourself some cash on interest costs, but the side
(27:14):
effect is inflation goes back upand gets out of control, well
then that that that inflation beast will be an overriding
larger negative. So, you know, Powell's going to
just continue to ignore Trump and, and, you know, likelihood
they'll stay on hold and won't cut next week.
But yeah, from a an inflationarypoint of view, Trump's desperate
(27:34):
for this stuff to come down. Yeah, and another Achilles heel
is probably that the midterms aren't, you know, not that far
away and I guess thinking about his political credibility as
well. So yeah, it's interesting then.
So let's let's convert this to what was happening in London
between the US and China then. So, you know, they spoke for a
(27:56):
number of days. China pledged to speed up
shipments of rare earth metals critical to US auto defense
firms. Washington with ease, some of
his own export controls, allowing Chinese students back
into US colleges, universities, things of that nature.
But on those headlines earlier in the week, the first half of
the week alone, the market was pretty uninterested actually,
(28:20):
despite the fact that they were talking, it seemed like fairly
pragmatic sounding like as you were describing that Trump kind
of needs to be like that. It's kind of the the art of the
deal in in fact it's I guess we've gone out of the escalation
phase into the negotiation phase.
Right. And that exactly, Yeah, markets
(28:42):
hardly moved off the back of this news.
And you're right, because we're we've started the negotiation
phase, keyword started. And you know this 90 day grace
period that that fetches us up in the middle of August, right.
So we've got, we've got a coupleof months here to go.
And obviously the, the deal isn't just to concede everything
(29:03):
on the first day of the negotiations.
So this is like the very first step of what's going to be
several rounds of negotiation and what they want to try and
do. And certainly both camps are
incentivized to at least show they're making progress, Right.
And I think what you had here with those announcements on rare
(29:25):
earths and then, OK, Chinese students, you can go to America.
Yeah, that's like a little couple of small, little
concessions, like the lowest hanging fruit, you might say, in
this negotiation. And so markets like, yeah, fine.
You know, that's not more than what I was expecting.
And so bit of a non event from akind of market perspective and
(29:47):
it's more about right, when are the next negotiated negotiation
dates set and right looking towards that.
And obviously comments between now and then, you know,
dialogue's going to be going carrying on in the background
throughout of course. So, yeah, well, we move on to
the next phase of negotiation, phase one basically.
I, I think phase one's tackled without any problems.
(30:11):
I think the risk here was markets were going to sell off
sharply if they came out of the meeting and it was, you know,
really kind of acrimonious then fine, markets would dump, but it
wasn't. So markets maintain what is.
Don't forget, certainly looking at stocks, incredibly elevated
levels, right, the S and PS backto its high almost.
(30:32):
So, you know, there's the the vulnerable, but the risk is to
the downside here for stock markets.
All the good stuff's priced in. OK.
So the short term that discussion that they had hasn't
really moved markets. But has there been any pricing
in of what to expect for the Fed, namely we haven't talked
about the dollar yet and we spoke about that last week in
(30:54):
terms of its its weakness. So what's the situation there?
Well, the dollar is has continued to weaken except for
actually last night off the backof this Israel attack on Iran.
The dollar did strengthen a touch.
There's a little bit of safe haven stuff in there, but it had
the dollar's eked out a small extra bit of weakness.
(31:17):
But we move into next week, I would say without a rate cut
being expected. But what we've seen in the
options market is actually that you might say bearish
positioning. So that's where traders are
using options like put options, for example, to profit from the
(31:38):
dollar's value falling. So positioning, bearish
positioning has reduced and actually it's reduced to the,
it's actually now a 2 month low like translated people.
The, the bearishness on the dollar has peaked.
People are now less bearish. Obviously as the dollar moves
(32:00):
lower and lower and lower and lower, obviously you're going to
start to get people saying, well, OK, I'm not bearish
anymore because the downward move that I expected has now
happened, right? So in the options market, you're
definitely seeing a shift in positioning back towards neutral
people thinking, all right, maybe the dollar's fair valued
here. So I think that's something to
(32:20):
think about obviously, right. What's Powell going to say next
week, you know, in terms of expect, you know, what guidance
is he going to give us about maybe cutting rates end of July
or September, for example? I think we're still currently
priced for a September cut, aren't we?
So, so yeah, that it was interesting in the options
market just to see that swing back to a bit more of a neutral
(32:42):
general positioning. OK, cool.
Well, look, perhaps we can close.
It's a quick word on the the UK and they need because GDP
dropped 0.3% in April after whatwere some some pretty good
numbers we've been talking aboutin the last few weeks.
In the prior two months. April's figure was the 1st
(33:03):
monthly contraction for a bit ofcontext in six months and the
largest since Labour won a landslide election victory last
summer. This is you've probably read if
you, if you're based in the UK, Rachel Reeves has been put under
quite a bit of pressure here because weaker growth obviously
(33:23):
is a headache when it comes to making money as a country, IE
the government. And they might need to support
their sizable spending plans by just looking to increase taxes.
And what people are looking ahead to is post summer when we
have the the autumn budget. But all of that sounds
incredibly negative, Piers. But the FTSE shots I know looks
(33:48):
the complete opposite of that. So what's going on?
New all time highs, baby. That's what's going on.
The footsie's just broken the March, the start of March peak.
It closed last night or yesterday afternoon, 8884,
making it officially the highestin its history.
Now there's a few weird things going on.
(34:09):
Firstly, as you said, hang on, GDP worse than expected
contraction in April. So firstly, hang on, that
doesn't make sense does it? If the economy is losing
momentum, why would the stock market be up?
Well we knew it would be negative because the GDP figures
for the preceding 2 months, February and March were really
strong. Why Trump tariffs and you know,
(34:32):
stocking up. So we know that the ex UK
exporters to the US had a great couple of months, February and
March. So obviously then there's just a
drop off, I mean activity in April.
So you've really got to look at,you've got to look at February,
March and April and I'd say May all in one and kind of average
(34:52):
it all out, right. So it wasn't a surprise.
You can really discount that negative GDP print entirely,
right? But there's something else weird
going on because the pound has been strengthening.
Now that really is unusual. Normally the FTSE 100 likes a
weakening pound. Why?
Because it's packed full of global international companies
(35:15):
that generate revenues from all over the planet.
In which case if your domestic currency, the pound is weak,
well then let's say revenue you're generating in dollars in
the US Well, when you repatriatethat money, your, your dollar
buys you more pounds, right? So actually exporters benefit
from a weak domestic currency, but the domestic currency has
(35:36):
been really strong, like really strong.
And yet the FTSE 100 has gone and made a new all time high,
which makes this rally all the more impressive.
It's it's it's the whole kind of, you know, rotating out of
the US into Europe play is definitely helping.
And also you've got to think about the the FTSE is really
(35:57):
cheap on APE ratio perspective. So the PE ratio, even though
it's made at a new all time high, it's still only 16.7 times
earnings price to earnings ratio.
The S&P is 26 times for context.But the makeup of the index is
very different and you'll often see people describe the FTSE 100
(36:19):
as an inflation resilient index.So obviously, as inflation
remains elevated, preventing thecentral banks from cutting
rates, actually the FTSE is a good place to be because
financials is the biggest sector. 23% of the FTSE 100 is
financials. And actually financials benefit
from that, that kind of interestrate spread being wide, that
(36:42):
means their loan books can generate more, more, more
revenues, right? So and then the next biggest
sector in the index is consumer staples, 17%.
And then the next one's healthcare 11%.
So you'd say they're all quite or certainly consumer staples
and healthcare are quite defensive.
So in this mood where we've got tariff risk and uncertainty and
(37:04):
maybe global growth slowing, then the FTSE is a good place.
And then the 4th 1 is energy. So energy's just spiked, which
obviously has now helped the FTSE.
So you got, you got the, it's aninteresting, a fairly unusual
index because tech, there's hardly any tech in the FTSE 100,
(37:24):
which is so rare for a kind of major sort of national index.
Like in the S&P 500, tech is thebiggest sector at 30%.
So they're your big differences.But yeah, FTSE all time high
despite a really strong pound sterling is incredibly unusual.
But maybe, yeah, there's a couple of reasons why.
(37:45):
It sounds like the perfect circumstances for the first seat
to thrive but long term not having any technology exposure.
Is this why so? This is the principle of
diversification right? From a geography perspective,
sector exposure. I think if you've been massively
overweight tech for the last, ifyou've been massively overweight
(38:10):
US tech for the last 15 years, well, well done you.
It's been phenomenal, right? But if you think that US tech or
the US exceptionalism story is is over and you want to now
diversify your portfolio and youwant to diversify it
geographically and from a sort of sector weighting perspective.
And the FTSE one hundreds your perfect destination because you
(38:34):
get a slice of Europe, you get amuch different sector mix.
And yeah, that's why I think you've seen.
But look, the DAX made a new alltime high last week as well,
right? It's not just the FTSE here in
Europe. That's that's.
Breaking down, I was listening to a show this morning and they
(38:54):
were talking about the spread between in Europe, what's seen
as the benchmark, the 10 year German yield and the spread
against other what were peripheral pig nations, the
Portugal's, Greece. And actually some of them are
the most tightest levels. I think the Greece 1 is like
0.7% which is actually the most narrow that spreads been
(39:18):
basically I think since the bailout.
That's right. And that is because those
peripheral economies having gonethrough like desperately harsh
austerity measures through the 20 tens, right, for a decade,
really, their economies are now in fantastic shape post COVID,
(39:41):
right? Their debt levels were much
lower because they were forced to reduce debt in the decade
preceding COVID. So actually, they're in better
shape now when their economies are performing really, really
strongly. You go and check out Spain's
economies. Awesome at the moment.
And so for those reasons, yeah, you're seeing that kind of that
(40:02):
old, what feels like old school,sort of.
You know, government debt risk for peripheral nations, it's
just kind of a thing of the pasthere.
And those, that's why those, andyou should also add, Germany is
about to significantly step up fiscal spending.
So Germany's about to load up its debt.
And so actually you've got to think the German yields are
(40:24):
rising as well as that, that that convergence of yields is a
2 two way thing. There's two sides to that story,
both forcing that convergence. Cool.
All right. Well, look, we'll we all wrap it
up there. So Piers, thank you.
As ever, wish everyone a great weekend ahead and we'll see you
next week. Have a great weekend.