The chair of the Federal Reserve, Jerome Powell, made it seem nearly certain that the Fed will lower interest rates at its meeting at the end of July, highlighting jitters over the global economic slowdown and the trade war with China. Futures markets are fully pricing in a 25-basis point rate cut and a 41% probability of a 50-basis point cut on 31 July.With the US Federal Reserve and European Central Bank expected to cut rates in the coming weeks, the Bank of Korea surprised markets on Thursday by cutting its repo rate for the first time in three years. Central banks in Indonesia and South Africa cut rates as well amid declines in economic growth.
Bank earnings kicked off the second-quarter earnings season in the U.S. While results were mixed, solid loan growth and low credit losses indicate a healthy consumer, which bodes well for the economy. Of the companies that have reported to date, Bank of America, Citi, Goldman Sachs, Johnson & Johnson, JP Morgan beat expectations while CSX and Wells Fargo disappointed.
Earlier in the week China released its second quarter GDP. The Chinese economy grew at a 6.2% annual pace in the second quarter, the slowest in 27 years and down from the 6.4% pace posted in the first quarter. Chinese economic data was a little more encouraging with fixed-asset investment, industrial-production and retail-sales components of growth all came in above consensus.
Britain’s foreign secretary, Jeremy Hunt said Iranian authorities seized two vessels Friday in the Strait of Hormuz, actions signalling intensifying tensions in the strategic waterway that has become a flashpoint between Tehran and the West. The seizing of the British tanker marked perhaps the most significant escalation since tensions between Iran and the West began rising in May. Britain’s new prime minister is expected to be announced on July 23, Mr. Hunt and Mr. Johnson have been in a month-long face-off to succeed Theresa May.
In Europe, the European Parliament narrowly approved former German Defence Minister Ursula von der Leyen as president of the European Commission this week.
Geopolitical tensions, ongoing U.S.-China trade uncertainties, looming Brexit uncertainties, weak global growth, shifting Fed policy and slowing global manufacturing activity are among the headwinds being faced by financial markets.
Market Moves of the Week
The South African Reserve Bank (SARB) cut rates by 25 basis points to 6.5% in a unanimous decision on Thursday, although it struck a cautious tone suggesting future reductions to borrowing costs were not a foregone conclusion despite benign inflation. The GDP growth forecast was revised down for 2019 from 1.0% to 0.6%, (at the start of 2019 the bank had forecast SA GDP to growth at 1.7% in 2019). The forecast for 2020 and 2021 is unchanged at 1.8% and 2.0% respectively.
President Cyril Ramaphosa said on Friday the anti-corruption watchdog’s finding that he deliberately misled parliament about donations to his party election campaign was “unfortunate” and “deficient both factually and in law”. The ruling released by the Public Protector on Friday said Ramaphosa had effectively lied to parliament about a R500,000 donation he received for his 2017 election campaign.
In corporate news Pioneer Foods share price surged on an offer to buy it out made by New York-based food and beverages giant PepsiCo. PepsiCo said the deal would add meaningfully to the growth of the SA economy. The offer amounts to $1.7bn (about R24bn).
In other corporate news South African e-commerce giant Naspers said on Friday the delayed multi-billion euro listing of its international internet assets, including its over 30% stake in China’s Tencent, will go ahead on Sept. 11. Prosus’ listing is critical for Napsers as it seeks to close a significant discount between its value and that of its stake in Tencent.
The all-share index ended the week 1.7% higher at 58,248.7 points with the resource sector adding 2.18%.
Chart of the Week
Federal Reserve Chairman Jerome Powell recent signals that the Fed is preparing to lower borrowing costs for the first time in a decade is supportive of higher-yielding currencies, which in turn allows monetary authorities in developing markets to ease policy without triggering an exodus of capital.
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