GDP released on Friday, showed that the U.S. grew by 2.1% (annualised) in the 2nd quarter. Whilst this was slower than the 3.1% gain in the 1st quarter, it was ahead of expectations of a 1.9% increase. Importantly, details of the report show that parts of the economy were stronger in the 2nd quarter, especially consumer spending, which accounts for more than two-thirds of the U.S. economy. Yet a loss of momentum among businesses, especially exporters and manufacturers, suggests that the economy could expand more slowly in the second half of the year. The Federal Reserve’s interest rate decision next week will be closely watched by the market.
Top Trump administration officials will travel to China next week for the first high-level, in-person trade negotiating session since talks collapsed in May. The White House’s press release stated that “discussions will cover a range of issues, including intellectual property, forced technology transfer, non-tariff barriers, agriculture, services, the trade deficit, and enforcement”.
The big news out of the U.K. this week was that Boris Johnson defeated rival, Jeremy Hunt to replace Theresa May as Britain's Prime Minister. Johnson has been quick to throw down the gauntlet to Brussels in his first speech, as he vowed to take the U.K. out of the EU on 31 October “no ifs, no buts”. He has equally sacked more than half of Theresa May’s cabinet, replacing them with “Vote Leave” veterans.
In Europe, the ECB left interest rates unchanged at its latest monetary policy meeting. Further, the central bank indicated that it might loosen monetary policy at future meetings, stating that rates will remain at their “present or lower levels” at least throughout the 1H20. Additionally, ECB President, Mario Draghi stated that the risk of a recession in the eurozone was “pretty low” and that the policymakers did not discuss rate cuts at the meeting. Traders had priced in a 38.7% chance of a rate cut.
Meanwhile, the EU almost doubled (to $39 billion) the amount of U.S. goods it would hit with retaliatory tariffs should Trump follow through on a threat to impose duties on EU cars and auto parts.
The Shanghai Stock Exchange Science and Technology Innovation Board (STAR Market) began trading on Monday with 25 listed companies. These stocks ended the opening day with huge gains ranging from 84% to 400%. Despite volatile swings throughout the week, by market close on Friday, the market cap of the new STAR boarded had more than doubled. The exchange has been created as a new market to showcase some of China's most promising tech companies, all with the goal of catching up to America's Nasdaq.
Finally, the Turkish central bank bowed to President Erdogan’s instructions, slashing its key rate by a more-than-expected 425 basis points to 19.75%, citing weaker economic activity. It was the biggest rate cut since 2002.
For the week, global equity market performances were positive. In the U.S., the Dow Jones (+0.14%), S&P 500 (+1.64%) and Nasdaq (+2.26%) indices were all in the green. In Europe, the Euro Stoxx 50 (+1.27%) and FTSE 100 (+0.54%) indices ended the week positively, with Asian markets also stronger: Nikkei 225 Index (+0.89%) and the Shanghai Composite Index (+0.70%).
Market Moves of the Week
Locally, details of Eskom’s bailout package dominated the headlines this week. Eskom will get a bailout of R59-billion from government over the next two years, with R26-billion of the money this financial year and R33-billion in 2020-21.
Ratings agency Moody’s was quick to respond, stating that the additional support without an accompanying plan to make the company more sustainable is “credit negative”. The rating company is the only one of the big three to assess South African debt as investment grade, at Baa3, outlook stable. Meanwhile, ratings agency Fitch affirmed South Africa’s credit rating at ‘BB+’, in sub-investment grade, but downgraded the outlook from stable to negative, citing a widening budget deficit and spending on supporting struggling state firms.
South Africa’s annual inflation rate was unchanged at 4.5% in June, higher than market expectations for a rise of 4.4%.
The JSE All Share Index ended the week down -1.16%. Industrials benefitted from a weaker rand, ending the week up +0.74% whilst resources (-2.31%) and financials (-3.93%) were both weaker. The rand weakened by 2.58% to the U.S. Dollar.
Chart of the Week
U.S. GDP, the broadest measure of goods and services produced in an economy, rose at a 2.1% annual rate in the second quarter, according to data released on Friday. This represents a significant deceleration from the 3.1% growth rate in the first quarter. However, big swings in the quarterly data are almost certainly exaggerated. The trend shows that the economy has cooled since last year, when tax cuts and government spending gave growth a temporary jolt. But the strong job market and robust consumer spending are keeping the expansion on track, even as trade tensions and a slowing global economy are threatening to knock it off course.
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