Week in Review: Fitch Downgrades the U.S.

The Fed delivered another interest rate hike this week, as expected, while Chair Jerome Powell indicated that there might be additional hikes in the future, depending on the incoming data, which has recently shown a robust U.S. economy.

Continue reading

Week in Review: ECB Follows FED

Great Britain’s longest-serving monarch, Queen Elizabeth II, died at the age of 96 on Thursday at Balmoral Castle in Scotland. Prince Charles, the eldest of the Queens four children, is now King Charles III. At 73, he is the oldest person to accede to the throne in British history. The King pledged “lifelong service” in his first televised address to the UK as monarch, in which he paid tribute to his late mother Queen Elizabeth II.

On Thursday the ECB increased its key interest rates from 0% to 0.75% in a bid to curb inflation which stood at an annual 9.1% in August. This large move shows the ECB is following in the Fed’s footsteps. “This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the ECB’s 2% medium-term target,” the ECB stated in its official statement. European inflation is forecasted to fall from an average of 8.1% this year to 5.5% next year and 2.3% in 2024.

New British Prime Minister Liz Truss announced that the government would intervene to help reduce soaring energy costs for British households and businesses. Under the £150 billion plan, a typical household will pay no more than £2500 a year on energy bills. In Germany, Chancellor Olaf Scholz said the government would also spend EUR 65 billion to shield households and businesses from soaring energy costs.

Shares in Europe rose for the week, in local currency terms, the pan-European STOXX Europe 50 Index ended the week 0.72% higher, while the UK’s FTSE 100 Index increased 0.96%. Earlier in the week the British pound depreciated further against the U.S. dollar before retracing some of its losses, while the euro rose above parity with the U.S. dollar after the ECB hiked its key interest rate.

U.S. equities were also higher this week, with both the S&P 500 (+3.65%) and Nasdaq (+4.14%) making strong gains. Investor sentiment grew more confident over the week with moderating inflation fears as intra-week oil prices briefly hit their lowest level since Russia’s invasion of the Ukraine. Investors will be closely watching the U.S. consumer price index report for August, which is scheduled to be released on Tuesday. The report is especially important as it will be one of the last data points Fed leaders will see before the central bank announces its rate hike decision at its September meeting. Markets strongly expect the central bank to take up its benchmark borrowing rate by another 0.75%.

In Asia, Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 2.04% with the government announcing new measures to cope with rising inflation. China’s stock markets also rose on expectations of further policy support with the broad, capitalization-weighted Shanghai Composite Index advancing 2.37%.

 

divider-02

 

Market Moves of the Week

 

South Africa’s balance on the current account of the balance of payments fell back into a deficit of R87-billion in the second quarter (Q2) from a surplus of R157-billion in Q1, South African Reserve Bank data showed on Thursday. Falling prices of SA commodity exports, and rising prices of the commodities imported, namely oil, were key factors adding to the rands recent weakness.

South African manufacturing output rose by 3.7% in the year to July, Statistics South Africa said on Thursday. The gain was off a low base as manufacturing was down 4.1% a year earlier given riots and violence in Durban after the jailing of former President Zuma. Compared with June, output declined marginally by 0.2%, loadshedding and logistical bottlenecks continue to be the main challenges for the sector.

Co-operative governance minister Nkosazana Dlamini-Zuma announced that she will once again challenge President Cyril Ramaphosa for the ANC leadership when the party holds its national conference in December.

The JSE all share index tracked global peers to end the week up 1.97%.  The resources sector led the gains (+5.04%), followed by the SA listed property sector (+2.41%), industrials (+1.59%), while the financial sector ended marginally down (-0.42%) over the week.

The rand ended the week at R17.31/$ after blowing out to above R17.50/$ on Thursday, it started the week around R17.30/$.

 

divider-02

 

Chart of the Week

 

For the first time in two years, US consumers expect home prices to fall over the next 12 months due to higher mortgage rates and recent home price gains. An August survey by the Fannie Mae Economic and Strategic Research (ESR) Group expects total home sales to decrease 16.2% in 2022. This decline represents a further downward revision from last month’s forecast of a 15.6% drop, as recent incoming data points to a faster slowdown in near-term sales than previously expected.

 

 

_____________________________________________________________________________________________

 

Week in Review: Mixed Data as S&P500 Regains Bull Market Status

On Thursday, the S&P500 index experienced a significant development as it entered a bull market. The broad equities benchmark demonstrated a 0.6% increase, concluding the day at 4,292.93 points. This surge represents a notable 20% leap from its lowest point on October 12, 2022, when it stood at 3,577.03 points. Investors reacted favourably to indications from the Central Bank, which suggested that it is nearing the conclusion of its interest rate hiking cycle. Last week, the Federal Reserve hinted that it is likely to abstain from implementing a rate hike during its June 13-14 meeting. This anticipated pause has acted as a catalyst, propelling stock prices to higher levels.

On Thursday, the US Labour Department reported that weekly jobless claims had unexpectedly increased this week to 261,000, well above expectations and the highest level since October 2021.

Economists at the World Bank have revised their global GDP forecast for 2023, increasing it from the earlier projection of 1.7% to 2.1%. This upward adjustment indicates an improvement; however, it also suggests a significant deceleration compared to the 3.1% growth rate observed in 2022. In addition, the World Bank has reduced its growth outlook for 2024 from 2.7% to 2.4%.

While major economies have exhibited more resilience than anticipated in 2023, the economists caution that the impact of higher interest rates and tighter credit conditions will likely dampen growth in 2024. These factors are expected to take a toll on economic expansion going forward.During a meeting at the White House, US President Joe Biden and UK Prime Minister Rishi Sunak reached an agreement to initiate negotiations on a trade pact between their countries. This trade agreement holds the potential to benefit British automakers by allowing them to qualify for electric car subsidies. Furthermore, it could facilitate the joint development of advanced weaponry. The focus of the trade discussions would revolve around critical materials that play a vital role in the production of batteries used in electric vehicles. The proposed trade package aims to foster collaboration and strengthen economic ties between the US and UK.

According to revised GDP data, the Eurozone’s economy experienced a technical recession during the winter period, albeit by a small margin. The data reveals that the economy contracted by 0.1% in both the fourth quarter of 2022 and the first quarter of this year. This weak growth performance is not unexpected, considering the significant impact of the war in Ukraine on European energy markets.

In Japan, revised figures released this week by the Cabinet Office indicates that the economy experienced stronger growth than initially estimated during the first quarter of 2023. Gross domestic product (GDP) expanded at an annualized rate of 2.7% quarter on quarter, surpassing the initial reading of 1.6% and exceeding economists’ forecasts. The upward revision of first-quarter GDP can be largely attributed to robust corporate investment. Despite apprehensions surrounding a slowdown in global growth, particularly in China, businesses in Japan demonstrated increased spending as sentiment remained resilient.

Saudi Arabia has announced its intention to implement an additional reduction of 1 million barrels per day in oil supply during July. This decision has been prompted by a decline in crude prices and will bring the country’s production to its lowest level in several years. Despite the potential consequences, this bold step has been taken by Saudi Arabia, which holds significant importance as a member of the OPEC+ coalition, with the aim of stabilizing the market.

However, it is important to note that this move does involve some concessions to key allies. Russia, a prominent member of the coalition, has not committed to further output cuts. Additionally, the United Arab Emirates (UAE) has negotiated a higher production quota for the year 2024. Despite these compromises, Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, has expressed a strong commitment to taking whatever measures are necessary to restore stability to the market. Brent Crude Oil closed the week lower, down 1.65% to $74,94 bbl.

Chinese equities ended the week on a mixed note, following the release of the latest inflation data, which has increased concerns surrounding the post-pandemic recovery, China’s CPI rose 0.2% in May.  The recent release of weak export and import data has fuelled expectations for increased economic stimulus in China. The data indicates that both domestic and international demand remain subdued. In May, exports experienced a significant decline of 7.5% compared to the previous year, surpassing initial forecasts for a weaker performance. Additionally, imports fell by 4.5% compared to the same period last year. Notably, China’s share of US goods imports in April reached its lowest level since 2006, as reported by The Wall Street Journal. Analysts are concerned that exports may further decline, despite their current elevation compared to pre-COVID levels.

The Shanghai Composite index posted a modest gain of 0.04% for the week, while Hong Kong’s Hang Seng Index extended the previous week’s gains, posting a strong 2.32% week-on-week return.

US stocks ended the week slightly higher, with the S&P 500 up 0.39%, the Dow Jones Industrial Average up 0.34%, and the tech heavy Nasdaq Composite rising slightly 0.14%. The Euro Stoxx 50 ended the weak lower (-0.78%), while the FTSE 100 (0.96%) closed the week in positive territory. Japan’s Nikkei 225 index gained 2.35% this week, continuing its positive trend for the year (23.65% YTD).

Market Moves of the Week:

On the domestic front, recent economic data indicates a notable resilience, as the South African economy narrowly averted a recession during the first quarter. According to the latest data released on Tuesday, the economy expanded by 0.4%, effectively returning to pre-COVID levels. Out of the ten industries monitored by Stats SA, eight experienced growth in Q1, with manufacturing and finance, real estate, and business services making the most significant positive contributions.

Furthermore, South Africa’s current account deficit exhibited a substantial narrowing, declining from 2.3% of GDP in Q4 2022 to 1.0% of GDP in Q1 2023, contrary to the consensus forecast of a widening deficit. The primary catalyst for this improvement was the balance of trade in goods and services, which shifted from a deficit of 0.8% of GDP in Q4 to a surplus of 0.6% of GDP in Q1.

Adding to the positive developments, there has been some relief from Stage 6 national loadshedding, and a constructive meeting between government officials and business leaders on Wednesday, which has reignited optimism that a potential solution could be identified to mitigate the persistent power outages.

Although there were some positive developments on the news and economic front, the JSE ALSI posted a modest decline for the week (-0.25%), the only positive sector contributor was Financials up 7.25%. Both Industrials (-1.95%) and Resources (-2.71%) were down for the week. The Rand made a strong recovery, receding below the R19/$ mark. The currency was trading at R18.72/$ by Friday close, appreciating 3.99% against the Dollar. The SA listed property sector continues to face headwinds, the sector closed the week marginally lower -0.15%.

Chart of the Week:

In May 2023, the European Union’s transition to clean energy reached a remarkable milestone. Solar panel generation exceeded the bloc’s coal power plants for the first time, production should be further boosted over the summer months. Power prices turned negative during some of May’s sunniest days as grid operators struggled to handle the surge. Source: Ember & Bloomberg.