U.S. indexes ended the week mixed, as fears of a recession weighed on investor sentiment. Investors interpreted weak U.S. economic data as bad news for equities, rather than a sign that the FED could turn more dovish. Treasuries posted positive returns as the yield on the 10-year benchmark note fell to its lowest intraday level in four months, before increasing slightly to end the week. The Dow Jones Industrial Average gave back a portion of its strong two-week performance, performing the worst of the major indexes. The tech-heavy Nasdaq Composite recorded modest gains, as softening inflation fears boosted growth stock outperformance. U.S. markets had a shortened trading week, as Martin Luther King Jr. holiday was observed on Monday.
On Thursday, the United States announced that it would send hundreds of armoured vehicles, missiles, and artillery shells to Ukraine, as part of a military assistance package worth $2.5 billion. The support comes as fears increase over the possibility that Russian forces could re-group and launch an aggressive attack over the winter. Since the beginning of the invasion in February 2022, the U.S. has committed $27.4 billion in security support and weaponry.
The U.K released mixed data this week, monthly GDP expanded by 0.1% mom in November, above expectations of a 0.3% mom contraction. The December inflation print showed a moderation in headline inflation, CPI slipped to 10.5% from November’s 10.7%, while core inflation was unchanged at 6.3%. The key driver was lower gasoline prices. The November labour market report reflected that labour market tightness and wage pressure may have past their peaks, while wage growth continued to surprise to the upside. The unemployment rate still closed at record lows in the three months to November. Bank of England (BoE) Governor Andrew Bailey said that he still expects a “long, but shallow” recession in the UK this year.
In Europe, equity markets weakened after the European Central Bank (ECB) policymakers signalled their intention to continue an aggressive interest rate hiking cycle, reigniting fears of a prolonged economic slowdown. ECB President Christine Lagarde dismissed speculation that lower energy prices would moderate the pace of monetary policy tightening. Lagarde reiterated the ECB’s intentions of bringing inflation back to 2% in a timely manner in her speech at the World Economic Forum in Davos.
Nationwide protests commenced in France this week, as workers and unions took to the street to show their discontent with the proposed changes to the retirement age (increase from 62 to 64). Workers would now need to work 43 years to qualify for full pension pay-outs. The disruption was far reaching, many schools were closed and public transport came to a halt. Buoyed by the success of the strike action, unions have called for another day of protest on 31 January 2023.
China’s economic data held up better than expected in December, despite a major increase in the number of COVID infections. Q4 GDP came in at 2.9% yoy, above market consensus of 1.6%. This implies full-year 2022 GDP growth of 3.0%. Given these stronger numbers, and news that the reopening of the Chinese economy is proceeding faster than expected, expectation for 2023 GDP growth have been revised upward. The National Bureau of Statistics reported that China’s population did in-fact decline for the first time in 60 years, a drop of approximately 850,000 people.
The Dow Jones (-2.70%), S&P500 (-0.66%) and Nasdaq (0.55%) ended the week mixed. The Euro Stoxx 50 (-0.74%) and FTSE 100 (-0.94%) ended lower. In Asia, the Hang Seng posted another positive return this week up (+1.31%), the Shanghai Composite Index (+2.18%) and Japan’s Nikkei 225 Index (+1.66%) also ended the week in the green.
Market Moves of the Week:
South African law markers are developing new emergency legislation to speed up energy projects to add generating capacity to the ailing electricity grid. These developments, announced on Tuesday by the National Energy Crisis Committee, will be tabled in Parliament to “allow projects to proceed more quickly and enable coordinated and decisive action.” This comes at a time when Eskom Holdings SOE Ltd is facing mounting pressure to deliver a sustainable end to loadshedding. The parastatal is also facing a barrage of legal action brought by opposition parties and civil society organisation alike.
South African headline and core inflation declined in December, surprising to the downside. Headline inflation fell from 7.4% yoy in November to 7.2% yoy in December. The core inflation print was marginally lower from 5.0% to 4.9%, contrary to expectation of a small increase. On the back of a more benign inflation outlook, expectations of the peak policy rate have been lowered, limiting the degree of further rate hikes.
Intraday on Friday, the JSE ALSI briefly surpassed the 80,000-point mark, unfortunately these gains could not be sustained, and the index closed the week slightly negative (-0.08%). The rand came under some pressure this week, trading at R17.10/$ by Friday close, depreciating 1.49% against the greenback. Two of the three major sectors ended the week lower, resources (-0.47%) and financials (-0.80%), whilst industrials showed some resilience given the weaker rand, closing the week up (0.61%). The SA listed property sector also posted negative returns for the week (-0.36%).
Chart of the Week:
Despite attractive real yields, foreigners have been net sellers of South African government bonds. Over the past 3 years, non-residents have been offloading government bonds worth R60.6bn ($3.6bn). Foreign ownership now sits around 25%, the lowest it’s been in over a decade.