The old adage “sell in May” certainly lived up to expectations this month, with global equities coming under pressure as a result of U.S. led trade tensions. Investors were first jolted in early May by a Sunday tweet from President Trump announcing new duties on Chinese imports, upending expectations for a U.S.-China trade deal. On Friday, President Trump turned his tariff gun to Mexico, for reasons extending beyond trade and economics - illegal immigration. President Trump decided to impose a 5% tariff on all imports from Mexico, from the 10th of June.
At the same time, tensions between the U.S. and China continue to escalate as China threatened this week to retaliate by withholding supplies of rare earths which, as its name suggests, are reasonably rare (not because they are difficult to find, but more so because they are so difficult to refine). About 80% of the world’s rare earth comes from China which is used in almost every crucial technology, such as U.S. military technology, semi-conductors and cell phones. Trump’s comments during his visit to Japan that the U.S. was now “not ready” to ink a trade deal, and that tariffs “could go up very, very substantially, very easily” did little to ease trade tensions between the two countries.
Unsurprisingly, yield curve inversion has once again become a major theme amongst investors this week as ongoing trade tensions could become quite impactful to global growth. While May marked the most sizable stock market pullback this year, bonds rallied significantly, helping stabilise multi-asset portfolios. U.S. and global yields declined, with the 10-year Treasury ending at 2.13%, the lowest level in 21 months, and German yields dipping further into negative territory.
In contrast to this, U.S. economic data releases during the week remained strong with the second estimate of annualised GDP climbing to 3.1%, higher than market expectations for an advance of 3.0%. Consumer confidence registered a rise to 134.1, compared to market expectations of an increase to 130.0.
In China, manufacturing PMI recorded a drop to 49.4, below market expectations, declining by the fastest rate in nearly 3 and a half years.
For the week, global equity markets were mostly weaker. In the U.S., the Dow Jones (-3.01%), S&P 500 (-2.62%) and Nasdaq (-2.41%) indices were all weaker. In Europe, the Euro Stoxx 50 (-2.10%) and FTSE 100 (-1.59%) both ended the week in negative territory, whilst Asian markets were mixed: Nikkei 225 Index (-2.44%) and Shanghai Composite Index (+1.60%).
Market Moves of the Week
Locally, President Ramphosa’s new cabinet announcement remained front of mind amongst investors. Overall, it has been viewed as fairly positive and well put together. In all, seven government departments have been collapsed, or at least merged into larger departments, meaning that there are now 28 departments, down from 35 previously. There were substantial changes in the composition of the executive, too, with 13 former ministers losing their positions in cabinet.
Positives: at least 19 of the 25 ministers appointed are closely aligned to the president, with some of his strongest supporters placed in key economic and governance portfolios. The most impressive new appointments and/or redeployments were of Thoko Didiza (agriculture, rural development and land reform); Ronald Lamola (justice and correctional services); Barbara Creecy (environment, forestry and fisheries); and Naledi Pandor (international relations and cooperation).
Negatives: the most obvious shortcoming relative to expectations is that cabinet remains too large and cumbersome for the president’s reconfiguration message to resonate. Beyond this, some of the appointments (though politically understandable) were disappointing, including Maite Nkoana-Mashabane (as minister for women, youth and persons with disabilities); former state security minister David Mahlobo (as one of the deputy ministers of human settlements, water and sanitation); and Lindiwe Zulu as minister of social development. What was also concerning was the ease with which Mr Mabuza and Gwede Mantashe circumvented the concerns of the ANC’s Integrity Commission, which will pose challenges for the ANC in terms of forcing future internal accountability.
Whilst all eyes were on the cabinet announcement, MSCI (Morgan Stanley Capital International), the world’s largest index provider, underwent its regular index rebalancing on Wednesday, 28 May. Due to the inclusion of Argentina and Saudi Arabia, as well as an increased weighting to China A shares, South Africa was down weighted in the MSCI Emerging Markets Index, prompting money managers to adjust their holdings to SA equities, causing outflows of R13.3 billion on the day. This contributed to the rand’s weakness during the week, trading at R14.59 by Friday market close despite a positive market readthrough regarding the newly elected SA cabinet.
The JSE All Share Index ended the week up +2.25%, with all of the major sectors stronger including resources (+1.71%), industrials (+2.47%), financials (+3.00%) and the property (+2.50%) sectors.
Chart of the Week
With all the gloom surrounding Chinese financial markets in the wake of the trade war escalation, the chart above indicates that it’s not all bad news in China. The chart indicates that there has been strong growth in property prices as well as a recent rebound in producer price inflation (PPI). It’s also worth highlighting that even with the gloom of the trade war, consumer confidence in China has been resilient, running at multi-decade highs. Although the trade war is a clear and definite negative for China, it’s not the only game in town for China’s economy.
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