The U.S. Federal Reserve held a policy meeting from the 15th to the 16th of June which resulted in surprisingly hawkish outcomes. The Fed Chairman, Jerome Powell, said policymakers have started talking about tapering bond buying and that they would eventually start the process of slowing the purchases. This would be the Fed’s first step towards tightening monetary policy. The Fed further surprised markets by announcing that it will most probably hike rates twice in 2023 after previously predicting no hikes until 2024.
Following the Fed’s announcements, a visible repositioning in global financial markets occurred, as investors reacted to the likelihood of a less accommodative environment. The value orientated reflation trade came under pressure as investors fled shares tied to economic growth (cyclical companies and commodities). As a result, growth stocks outperformed value stocks over the week. This outperformance was strengthened after comments were made by the St. Louis Fed President James Bullard which suggested that the Fed’s first rate hike may occur earlier than anticipated, in late 2022.
The G7 Summit conducted last weekend resulted in the formation of significant global agreements. Leaders of the G7 countries said they will back a western rival to the China’s Belt and Road Initiative, with a plan to deploy billions of dollars to help developing countries tackle climate change. Joe Biden, the U.S. president, also highlighted the importance of offering poor countries a new source of infrastructure finance. In an effort to improve the global vaccination movement, the G7 leaders offered further help for emerging markets by promising to deliver at least 1 billion extra doses of vaccines over the next year.
The UK delayed fully reopening the country, which was due on June 21, by another four weeks due to the significant rise in Covid-19 cases linked to the delta variant. The UK, on Thursday, recorded the most coronavirus cases in one day since mid-February, highlighting the severity of the new delta variant and its high degree of transmissibility. On the global trade front, the UK and Australia announced a free trade agreement between the two nations, the first since the UK quit the European Union.
China has been aggressively increasing measures to control risks to its financial system. State firms have been ordered to limit their overseas commodities exposure, domestic banks have been forced to hold more foreign currencies, a cap on thermal coal prices has been contemplated by authorities, searches for crypto exchanges have been censored and brokers were banned from reporting bullish equity-index targets.
For the week, global equity markets mostly finished in the red. In the U.S., the Dow Jones (-3.45%) suffered its worst week since October, while the S&P 500 (-1.91%) and Nasdaq (-0.28%) also ended lower. Similarly, the Euro Stoxx 50 (-1.05%), FTSE 100 (-1.63%) and Shanghai Composite Index (-1.80%) all ended the week down. The outlier that managed to end the week in the green was the Nikkei 225 (0.05%). Gold (-6.12%) suffered its worst week since the 2020 Covid-19 outbreak while brent crude (0.83%) managed a slight gain.
Market Moves of the Week
In South Africa, President Cyril Ramaphosa is finally delivering on his promises to enact policy reforms, providing glimmers of hope while suggesting that change may be coming for the struggling economy. The ruling ANC party suspended its main rival and secretary general Ace Magashule last month, which cemented Ramaphosa’s control of the party, giving him more leeway to take tough decisions. Since then, his administration has sold a majority stake in SAA (the state airline) and taken a crucial step to tackle ongoing energy shortages. The government also managed to reduce its debt exposure of Eskom (the state power utility) and a fund that compensates road-accident victims – the government’s two biggest contingent liabilities.
The country has now moved to virus alert level 3 from level 2 to contain the surge in Covid-19 cases. Offsite alcohol sales are only permitted Monday to Thursday from 10am to 6pm. Gatherings are restricted to 50 people indoors, 100 outdoors. While curfew hours are now from 10pm to 4am.
The JSE All Share Index ended the week down by 3.08% as commodities sold-off following the Fed’s comments during the week. The rand weakened to end the week at R14.35 to the U.S. Dollar.
Chart of the Week
The June ‘dot plot’ revealed Federal Reserve members, on average, now expect two rate hikes before the end of 2023. Each horizontal line represents a 25-basis-point increment. Dots on the lowest level indicate that interest rates will be between 0% and 0.25% by the end of 2023 etc.. From this we can see that there is little agreement in the committee on where rates will be 30 months from now but the strong consensus that they would remain negligible until then has decisively broken.