On Wednesday, South African Finance Minister Tito Mboweni delivered a grim assessment of the nation’s finances in a special Supplementary Budget Review (SBR) that forecasts a deep South African recession and plunging tax revenues as a result of the Covid-19 outbreak and subsequent lockdown measures. Gross domestic product (GDP) is forecast to shrink by 7.2% in 2020, the most in almost nine decades, and the consolidated budget deficit is expected to surge to 15.7%. The country’s projections indicate that its debt will be more than 100% of GDP by 2025.
June continues to be a volatile month for financial markets, with one week's gains being reversed the following week. Worries over a resurgence in coronavirus infections that could halt the global economic recovery and a rebound in corporate earnings, offset enthusiasm over some positive economic data released during the week.
Several U.S. states including Texas, Florida and Arizona reported a record number of new cases which led to some rollback of reopening measures, whilst Germany has reintroduced lockdowns in two districts and officials in Beijing have also been attempting to contain a fresh outbreak. Major emerging market countries including Brazil, Russia, India and Mexico continue to be overwhelmed by rising infection rates. The world is approaching 10 million infected and 500,000 dead.
To date, the MSCI World Index (a broad index capturing 1,637 companies across 23 developed market countries) has rebounded by 34% from the March 23 low and is within 13% of the February 19 high. Ongoing volatility is likely to persist in coming months as investors measure the positive effects of unprecedented amounts of global stimulus against the expected speed of economic and corporate earnings recoveries.
In the U.S., economic data reported during the week showed an improvement in service and manufacturing sector activity. Weekly jobless claims declined by less than expected, but continuing claims fell more than anticipated and moved below 20 million people for the first time since late April.
German and French business confidence recovered at record rates in June, ahead of expectations, whilst the Eurozone Composite Purchasing Managers’ Index (PMI) surged to 47.5 in June from 31.9 in May, the second-biggest jump in the survey’s history.
Meanwhile, tensions between the U.S. and Europe intensified as the European Union (EU) chastised the U.S. for threatening to slap additional tariffs of USD 3.1 billion on EU and UK products. The EU said widening the range of tariffs would inflict unnecessary economic damage on both sides of the Atlantic.
Global equity markets finished the week mostly lower. U.S. and European markets were weaker with the Dow Jones (-3.31%), S&P 500 (-2.86%), Nasdaq (-1.90%), Euro Stoxx 50 (-1.99%) and FTSE 100 Index (-2.05%) all negative. Asian markets including the Nikkei (+0.15%) and Shanghai Composite Index (+0.40%) managed to post modest gains.
Market Moves of the Week
South Africa’s inflation rate dropped to a decade-low in April, the first full month reflecting the impact of the strict nationwide lockdown. Consumer prices rose 3% from a year earlier, compared with 4.1% in March.
The JSE All Share Index was similarly under pressure, ending the week down -1.06%, led lower by the financials (-5.65%) and industrials (-0.51%) sectors. The resources sector “bucked” the trend, finishing the week up +1.07%, supported by a higher gold price ($1784.80 per ounce).
Chart of the Week
The U.S. 10-year real yield (expressed as the nominal yield with inflation subtracted) dropped to a new multi-year low of -0.6% this week, levels last seen during the so-called taper tantrum of 2013. Historically, negative real yields have signaled bearishness about the future of the economy. Importantly though, it also fuels the relative attractiveness of equities and acts as a prop for gold, whose greatest disadvantage as a financial asset is that it pays no income. When safe assets like Treasuries effectively pay a negative return, gold therefore becomes more attractive, all else equal.
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