This past week saw about a third of the S&P 500 companies report results and earnings, making it the busiest week of the second-quarter earnings season. Companies topped estimates at record levels with 87% of the S&P500 companies having exceeded estimates by an average of 18%. The majority of these surprises were driven by a strong rebound in demand and high profitability levels. Amazon, Apple, Google, Microsoft and Facebook, which together make up 22.5% of the S&P 500, on average doubled their earnings from last year. As a result of this outperformance, forward earnings expectations have risen at a fast pace, setting a high bar for future performance reports.
The Fed held their July meeting this past week, the outcome of which resulted in them keeping interest rates in a target range near zero. This was expected as the Fed continues to hold steady, amidst a still-recovering U.S. economy, with Chairman Jerome Powell cautioning that the Fed still has a way to go before adjusting policy rates or its asset-purchase program. On Thursday the Commerce Department published its estimate that Gross Domestic Product rose by an annualized rate of 6.5% in Q2, which surprised to the downside relative to consensuses estimates of 8.5%. This drag on growth came from numerous factors, including a decline in government spending and a wider trade deficit, with imports rising more than exports. Despite the miss, it was still the second-fastest pace of growth since 2003 - as consumers continue to increase spending - which has left the U.S. economy even larger than at its pre-pandemic peak.
China unveiled a regulatory overhaul of its private education sector on July 24 last week, providing reasons for the move such as greater domestic competitiveness. The overhaul looks to ban school tutoring companies from being run for profit or going public. This crackdown, coupled with investors’ concerns over future Chinese regulatory measures, caused Mainland China stocks to slump and sell off during the week. By the end of the week, Beijing stepped up measures to calm investor fears with their central bank pumping RMB 30 billion into the financial system. Their top securities regulator also privately told global financial institutions that Beijing will consider the impact on markets when it introduces new policies in the future.
In Covid-19 related news, President Joe Biden will require federal workers to prove they’ve been vaccinated or wear masks and submit to frequent testing. Japan was forced to extend its state of emergency to the end of August following a record virus surge. The state of emergency was also expanded to areas surrounding Tokyo, despite this, the Olympics continue to take place. In the U.K., businesses say there are signs that the number of workers who are being told to self-isolate is starting to ease as infection rates fell from a week earlier.
For the week, global stocks were down as Big Tech's slowing growth and risks from China’s regulatory crackdown weighed on sentiment. In the U.S., all three major indices ended the week in the red with the DOW (-0.36%), S&P500 (-0.37%) and NASDAQ (-1.11%) all of their recent highs. Similarly, the Euro Stoxx 50 (-0.48%) and Nikkei 225 (-0.96%) were down moderately with the Shanghai Composite Index down sharply (-4.31%) for the week following the equity selloff. The FTSE 100 (0.07%) just managed to end positively. Brent crude rebounded strongly from the previous week (4.12%) while Gold (0.58%) managed a slight gain.
Market Moves of the Week
In South Africa, Finance minister Tito Mboweni elaborated this week, on the new fiscal support measures President Ramaphosa announced last weekend. The new measures imply a total fiscal cost of R36 billion, or roughly 0.7% of GDP, and are focused on short-term relief measures such as social grants (through to March 2022). On a related matter, the public-sector trade unions accepted the government’s one-year offer for public wages, which included a 1.5% salary increase and a cash allowance for the year. The amount of the cash allowance will differ depending on pay grade, backdated to April 2021. The deal will result in an incremental fiscal cost of R18 billion (0.4% of GDP) of what was budgeted.
The new fiscal support measures will be financed out of recent revenue outperformance (relative to the February budget) and the wage bill’s excess costs will be financed through spending reprioritisation (details of which will be provided in the Medium-Term Budget Policy Statement). Mboweni said in an interview on Wednesday that despite opposition to spending constraints, “We are not going to go to a sovereign debt crisis for now, at least not under my watch. There is no such thing as a popular minister of finance - it doesn’t exist, it’s a contradiction in terms. You have to be unpopular.”
Second Quarter exports rose sharply, well above pre-Covid levels on account of positive export price dynamics, while imports rebounded more modestly according to recent monthly trade data published by SARS, causing the goods trade surplus to rise from 9.0% of GDP in Q1 to an estimated 10.8% of GDP in Q2 2021. This surplus likely provided support for the Rand over Q2 and is expected to continue this support into Q3. The Rand strengthened over the past week to end the week at 14.57/$, while the JSE All Share managed a meaningful gain of 1.33% driven by rising earnings optimism.
Chart of the Week
Global commodity prices have crept back up to a 10-year high, emboldening those calling for a new super-cycle. The Bloomberg Commodity Spot Index is trading at its highest since 2011, boosted in part by a surge in soft commodities with oil and copper still below recent peaks. Extreme weather across the globe has also pushed the likes of coffee and sugar prices to multi-year highs.