This podcast is originally produced by BFM 89.9 and published in https://www.bfm.my/podcast/morning-run/market-watch/fed-markets-economy-interest-rates-dollar-fitch
In this podcast, the hosts discuss the performance of global markets and provide insights from Tony Nash, CEO of Complete Intelligence.
The US and Asian markets experienced declines, with concerns arising over potential downgrades of US banks. Nash believes the stock market has reached its highs for the year and advises caution in investment choices.
The conversation then shifts to the challenges facing the Chinese property sector, highlighting the impact on property developers and risks to China’s economy. The Eurozone’s GDP numbers show stagnation or decline, with Ireland’s outperformance driven by foreign companies. JPMorgan downgrades its forecast for Chinese GDP growth. The discussion also covers Target’s missed sales expectations and Cisco’s weaker outlook for its 2024 fiscal year.
The podcast also mentions the expectation of a slowdown in capital spending by cloud and telecom consumers in 2024, despite the dominance of cloud services offered by companies like Amazon and Microsoft. Stock details are provided, including the consensus target price and the number of buys, holds, and sales.
01:21 Fed Meeting Minutes
02:11 Concerns about US Banks
03:15 Performance of Major Indices
04:45 Outlook for Market Direction
05:46 Investing in Stable Assets
06:04 China’s Property Sector Challenges
07:49 Eurozone GDP and Employment Figures
09:45 Consumer Stocks and US Retailers’ Performance
12:38 Cloud and telecom spending expectations
For some thoughts on what’s moving international markets, we have on the line with us, Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Thanks, as always, for joining us. Let’s start off with the latest Fed meeting minutes that were just released for July. How much of Fed chairman Powell’s Davish tone was shared by the other Fed policymakers?
Yes, some, but to be honest, not a lot. The Fed officials really see no recession for the rest of 2023. They’re saying spending is strong, real activity is stronger than anticipated. They really don’t see a recession at all. There’s really no reason for dovishness there. They still see inflation risks and they still see a potential need for higher rates. They’re also saying that quantitative tightening, meaning the shrinking of the money supply, will continue once interest rates stop because they’ve got a bunch of these items on their balance sheet that they’ll continue to let expire. So that will continue to put upward pressure on the dollar as well as higher interest rates.
Now, there are mountain concerns that Fitch could continue to downgrade US banks, including tier-one names like JPMorgan. So how do we get from a stable situation for US financial institutions a year ago to this current state of affairs?
Yeah, I think for the tier ones, this is really late. It doesn’t make a whole lot of sense. The tier ones are effectively US government institutions. And when they were buying the regional banks back in March, them taking on some extra risk probably made a lot of sense. But even those regional banks, for the most part, have gotten much stronger. Their balance sheets have gotten stronger. Their net interest margin and other things have gotten stronger over that time. This seems to be 4-5 months late. Unless these guys are expecting a massive real estate wipe out or some massive market event or something like that, this just doesn’t make a whole lot of sense because it should have already been done some time ago if it were going to happen.
Okay, can we talk about markets? Because if I look at the performance of the major indices, look at NASDAQ. It’s only up 28 % on a year to date basis. S&P.
Only, only. Yes, I love to use the word only. And S&P 500, 14 % up. So there has been some retracement. Do you expect further retracement? Because results season pretty much over about 80 % done. Where are markets going from here?
Yeah, I think we’ve seen the highs for the year. I don’t think we’re going much higher. It’s either sideways or marginally down from here. I think you’re going to see a lot of people say, Oh, gosh, we’re just getting started. There’s a GDP now in the US right now. The estimate on this quarter’s GDP is over 5 % or something right now, and people are saying, “We haven’t even gotten started on equity markets,” that sort of thing. And there are people who still believe we’re going into a massive recession. And it’s possible that we line up somewhere in the middle, which is what the Fed’s been trying to do. And it’s possible that things are volatile, but not necessarily directionally up or directionally down. I think generally for the rest of the year, that’s probably where we’re going to be. But we’re going to have days that look really good and we’re going to have days that look really bad. And there will be commentators that will extrapolate that out to either fantastic or dire.
Okay, so while markets trade sideways, where should we park our money?
Well, I think you have to look at what’s happening with, say, interest rates. I mean, it depends on how aggressive you are, but you really have to look at what’s stable. You have to look at what’s continuing to give value. I’d be careful of things that don’t give strong signals because with interest rates staying higher for longer, valuations are likely going to be compressed a bit. I’m not saying valuations are going to crash, but there’s likely going to be some valuation compression, and margins for companies are likely to continue to be compressed. So it just makes things difficult for companies that are just doing okay. So I would be really careful and I would look for some of those characteristics.
Let’s turn our attention over to China because we do know that China is facing mounting headwinds in the property sector. How are you viewing this? Is this a storm in a teacup? Or are there signs that it could spill over to markets outside the mainland, especially in Hong Kong? What does that mean for investability in that region?
It’s a big problem. Real estate demand in China is very poor. We just had a report, I think it was out this morning in Asia, among 70 cities in China, 49 saw new home prices fall month over month from July. That was a previous month we saw prices fall in 38 cities. Real estate prices are falling. Of course, this is a major source of wealth for people in China. Property developers don’t have money because prices are falling, and so the amount coming in is falling and the value of the houses they have are falling. They can’t service their debt, they can’t service their existing properties, and it’s just a very difficult situation. When you look at the debt from Country Garden and Evergrande, their combined liabilities are approximately the size of the PBOC’s official non-performing loans for all of China. Okay, so those two companies on their own, they’re effectively equivalent to the debt that the PBOC claims for the rest of China. So it’s pretty bad. And today or sorry, yesterday, Asia time, Country Garden is warning of onshore bond default. So it’s not just an offshore phenomenon. Early on in this, this was an offshore phenomenon.
They had taken USD debt or something like that, and they were going to default on that. And that’s fine. That’s for rent, lenders. But defaulting onshore is something that’s relatively new.
Well, obviously not very good news for China, but now let’s switch our attention to Europe, where preliminary second quarter GDP from the Eurozone came out last night along with employment figures. What do the numbers tell you about the state of play in Europe and would they dodge a hard lending?
Yeah, it’s great for Ireland, really not great for the rest of Europe. So Ireland way outperformed pretty much everywhere else underperformed economic growth. So the EU generally, again, outside of Ireland, is either stagnating or declining. And a lot of the Ireland performance is based on foreign companies that have their headquarters in Ireland. So they’re reporting in Ireland, and it counts for economic growth there. So the underlying growth was weaker, of course, well, probably weaker than the GDP growth that was stated. So it was 0.3 % quarter-on-quarter. But again, like I said, given the 3.3 % jump with Irish GDP, it doesn’t really look good for the rest of the EU. Employment was up, which is great. But things, I guess, on the top line look stable. But if you take out Ireland’s performance, things really don’t look good. We now have a few countries in recession. Estonia, Hungary, and the Netherlands are in recession, which obviously is very difficult. We have industrial production. Industrial production was up the most in Ireland, which is great, but it’s also up in Denmark and Lithuania. So this isn’t a broad based economic success story. You have places like Germany and France, huge economies that are really struggling.
And you have powerhouse economies that punch above their weight, trading economies like the Netherlands, which are in a recession. So it’s a tough place for Europe right now.
Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. Commenting on a range of economies there. We’ve got the US, China, and ending with the Eurozone in the mix.
And not very good news for China as well. And JPMorgan, which at one time was very bullish on the Chinese GDP growth, predicting 6.4 % this year, has actually downgraded and lowered its full year forecast down to 4.8 %. I think this is one of the first few banks that come out to say GDP is going to be below 5 %. And for next year, they’re predicting it will only be a 4.2 % growth rate for China.
All right. Well, meanwhile, if we take a look at what’s happening over in the US, I think, as Tony mentioned, recession is less and less likely, it seems, over there. But at the same time, we are seeing consumer stocks taking a hit due to softening consumption. We see Target missed its sales expectations even as it beat estimates for earnings in the second quarter. Revenue came in at $24.8 billion. This was a 5% drop from the previous year, while net income was $835 million, up from 183 million in the same period.
Last year. The retailer also cut both its full year’s sales and profit expectations because it’s struggling to convince customers to spend more than just necessities. This merchandise mix, which includes many fun and impulse-driven items, has become a liability as consumers focus on needs rather than wants.