Discussing the major fireworks set off this year and how the theme of independence is taking shape around the globe today are Joseph Dore, head of EMEA Consultant Relations, and Brian Jacobsen, senior investment strategist, with Allspring Global Investments.


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Joseph Dore: Hi, I’m Joseph Dore, head of EMEA Consultant Relations at Allspring, and you’re listening to On the Trading Desk®.

So today we have a July 4th–themed market discussion where we will be discussing the major market fireworks, which have already been set off this year. And we will debate whether investors should expect more market fireworks in the back half of 2022. So given the timing of today’s podcast, so close to Independence Day, we’ll also talk about how the theme of independence is taking shape around the globe today. So, joining us today for this discussion is Brian Jacobson, Allspring senior investment strategist. Welcome to the show, Brian.

Brian Jacobsen: Oh, thanks for having me. I’m really happy to be here.

Joseph: Brian, why is it important for global investors to focus on global and economic market fireworks?

Brian: Sure, because the market reacts to those fireworks, maybe it has anticipated the fireworks so it can kind of, you know, brace itself for those. But sometimes these fireworks, they can really catch the market by surprise and create some major dislocations, which can also then create some major opportunities.

Joseph: So, on that theme, and to kick things off, I’ll ask you this question: How do you see the theme of independence taking shape across the global market spectrum today?

Brian: I think that there are four really clear examples of this theme.

First is Ukraine, obviously. You can’t turn on the television or go online without seeing updates about the tragedy that is happening there and people fighting for their independence.

We also have the idea of independence and China as far as the COVID-19 lockdowns and now people being able to maybe go back out into society a little bit more as some of these lockdowns lift.

You also have the United Kingdom. Remember Brexit? Haven’t heard much about that, at least here in the United States, in quite a while. But there’s that issue about their independence from the European Union and the consequences of that.

And then deglobalization, right? The idea that maybe countries want to be a little bit more energy independent, have independence with their supply chains, maybe some independence with food supplies.

So, I think that those are maybe the four clearest examples of this theme that we have so far this year.

Joseph: So, when we collectively think about the holidays, one of the first associations that comes to mind are the firework displays. So, can you put these fireworks into a market context for us, Brian, and help illuminate for us some of the biggest and most significant market fireworks which we’ve already witnessed?

Brian: Yeah, there have been quite a few of them, and some of them have been quite large.

Inflation has been fueled by not only too much demand coming from past fiscal and monetary stimulus, but also from supply chain problems from China’s COVID-related shutdowns, and then the effect on food and fuel from Russia’s invasion of Ukraine.

We also have fireworks with the Fed (Federal Reserve). They have responded by pivoting to hiking rates and shrinking its balance sheet. Other central banks have made that similar pivot, too. So now we not only have higher food and fuel prices, we also have higher financing costs from higher rates and relatively less credit availability. And we’re already seeing signs that those interest-rate-sensitive parts of the economy in the United States are beginning to cool. Home sales are way down, even though prices are still high. Consumer items that need to be financed like autos and electronics and appliances, those are also down. It’s really no wonder the market is pricing in a heightened recession risk.

So maybe the next firework to really be on the lookout for is whether or not there is a recession. In the United Kingdom, the Bank of England has already said that you should pretty much plan on a recession happening at the end of this year. I think it would also be reasonable to assume that you could see a recession in the European Union. A lot of that is stemming from the high food and fuel costs because of their heavy dependence upon Russia for their gas and oil. But then also with Ukraine being the breadbasket of quite a bit of the world over there that’s having an effect on consumer spending and input costs and profit margins.

So, plenty of fireworks already and who knows? Maybe a few to come.

Joseph: So, you brought up the Russian-Ukraine war. It is, of course, a real example of a country and its people fighting for their independence. So, what is your team at Allspring currently monitoring, Brian, as that conflict continues to develop?

Brian: What we’re trying to do is be as adaptable and informed as possible when it comes to navigating what does happen. But it does look like there are plans to help get grain out of Ukraine and back onto world markets. That could help with the food insecurity being experienced by many people, especially in emerging markets.

Russia seems to be using oil and gas as a bit of a foil against Europe, given Europe’s dependence on Russian oil and gas. And this could lead to a dramatic slowing of growth, especially in, say, like Germany, whose industry relies very heavily on cheap Russian natural gas.

The people of Ukraine have been fighting valiantly and they’re being supported by the rest of the civilized world. But it looks like it’s becoming a war of attrition to see who can outlast whom. And is this becoming a bit of a quagmire for Russia where they keep attacking without making many, if any, real gains? And then it becomes very costly and further undermines their ability to produce food and fuel. But new supplies are slowly coming online to fill the gap. So maybe the big contribution to inflation from these high prices could fade as the year goes on.

Joseph: So, shifting gears a little bit further east over to Asia, if I may, that would be the Chinese zero-COVID policy. So how big an impact has that quite different global COVID policy from China, relative to the rest of the world, had on the global economy, Brian?

Brian: Yeah, it has really been profound. It seems like all supply chains had a link in China. And then that became the weakest link.

The Fed was betting in 2021 that China would reopen as the rest of the world did, helping to heal supply chains and then bringing inflation down. But instead, China kept with their zero-COVID policy. In October of 2021, the Fed pivoted to being more hawkish when they kind of threw in the towel of waiting for China to resume normal operations.

But maybe now China is beginning to reopen. It’s summer. COVID numbers are beginning to come down in some of the major areas, though you are seeing this kind of wave pattern where it’s popping up in other areas. But a lot of the major cities are reopening. President Qi has promised a lot of stimulus to hit their growth numbers. And honestly, I think that as far as when it comes to looking at a country’s ability to hit their growth numbers, China is like number one in terms of their ability to do it because they can very quickly marshal the resources to go exactly where they want it to. Now, I wouldn’t be surprised if we actually see a boom in consumer spending in China and a very rapid return to full operations. That could be almost a beneficial shock to supply chains, unlike the negative shocks that we had coming from China. And now maybe we could get a couple of positive surprises.

Joseph: I’m going to keep you on your toes. I’m going to move swiftly across the globe once more. And I’m going to turn close to home, at least for myself, right here in the UK.

Brian: It does appear as though the market has mostly moved on from Brexit. There’s been a lot of research published on the effects of Brexit on the UK economy. And so even though the vote was six years ago, and I think that the transition agreement as far as the “free trade agreement” between the UK and the EU is only about a year old or so, there has been some economic analysis about the effects of that on the UK economy, and it looks like the effects are maybe directionally negative, but not of a really major magnitude.

It looks like trade hasn’t recovered as strongly as it otherwise would have. Because while you can have a free trade agreement in terms of goods, the trade agreement in terms of services really isn’t there. Also, even as it relates to goods, there hasn’t been this harmonization or this reciprocity, recognizing quality or safety or health standards. So, these are all things that I think need to be navigated.

It looks like a lot of the bigger businesses have been able to navigate this pretty well, whereas most of the more negative effects have been on the smaller businesses, which are from an investor’s perspective, maybe we have to think about it in those terms that those companies that are publicly listed, they were already in a position to have like a little bit more diverse supply chain end markets. They had the legal staff to help navigate this, whereas more the mom-and-pop shops that are perhaps going to suffer a little bit more as a result of this agreement and some of the lingering uncertainty.

We also see that business investment has been slightly weaker than what it otherwise would have been. Maybe redirecting investment for U.S. firms that want to operate in the EU instead of being based in the UK. They want to locate in France or in Germany or somewhere else. We also have effects on the labor market, as far as the labor force with immigration policies affecting growth. These are all things that kind of affect growth on the margin.

We’re looking at things as far as the market reaction to it is that the market probably has already reasonably priced in a lot of the effects of Brexit. Not to say that there can’t be any shocks, right? I mean, maybe, let’s say with Prime Minister Johnson barely surviving a no-confidence vote. Granted, that was mostly due to his behavior during COVID and not due to Brexit, per se, but Brexit is on the minds of voters. I think that there were some regional or local elections that just took place and Johnson’s Conservative Party did experience some setbacks there. So, what does this mean for the future ruling coalitions to help govern the United Kingdom in the years ahead? So, it could be a year or a couple of years of maybe some anti-incumbency movements and these types of changes can be market-moving and are important to follow.

Joseph: OK, so ending on our last region, and we’ve left a big significant one to last. Can you bring us home, Brian, with the latest news from the U.S. markets and finish with this? Do you expect more market fireworks in the U.S. in the back half of 2022, or will we start to see the smoke in the U.S. finally clear?

Brian: There are, I think, three really key things to watch here in the United States. First is earnings season, the second is the Fed, and the third are the midterm elections.

So, earnings season, prices have fallen, as far as stock market prices. And so, does that precede an earnings decline? We do think it’s possible. I mean, that’s why in our mid-year outlook, we’ve indicated that we prefer companies that exhibit quality earnings drivers that can often cut through some of these cyclical headwinds that the economy might be facing.

About the Fed, does the Fed flinch, right? The Fed has a triple mandate, though a lot of people only talk about two—price stability and full employment—but they also have a third about stable medium-term interest rates. Right now, the Fed is fixated on inflation. But if we see the labor market weaken or too much market volatility, especially in the fixed income market, then those other parts of their mandate could demand some more attention. And that could give them reason to throttle back their pace of hiking.

And the final one, midterms. There’s actually quite a bit of time between now and November for things to change, as far as inflation, the pain at the pump, what happens to interest rates, all sorts of other issues, social issues, as well. So, the outcome isn’t predetermined. And that’s why we actually have the elections. And so that could be perhaps another cause or source of fireworks as we navigate our way through the second half of this year.

Joseph: And so just to close from my perspective, I just want to thank you, Brian, for being with us today and sharing your insights and thoughts. Happy Fourth of July to all our U.S. listeners. We’re waving our red, white, and blue flags in the studio right now, that’s for sure. So that was Brian Jacobson, senior investment strategist for Allspring Global Investments. Thank you for being here today, Brian.

Brian: It was really a pleasure. Thank you so much.

Joseph: That wraps up this episode of On the Trading Desk. And if you’d like to read more market insights and investment perspectives from Allspring Global Investments, you can find them at our firm’s website, allspringglobal.com.

And to stay connected to On the Trading Desk and listen to past and future episodes of the program, you can subscribe to the podcast on Apple Podcasts, Spotify, Google Podcasts, or whatever for podcast subscription that you use. So, until next time, I’m Joseph Dore. You’ve been On the Trading Desk. Thanks for listening.

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