Saudi Arabia and Iran are among six countries invited to join BRICS (Brazil, Russia, India, China and South Africa) as new members next year, South African President Cyril Ramaphosa announced on the final day of the BRICS Summit.
Key themes for the week include:
- BRICS expansion underway
- NVIDIA surges on the back of strong earnings
- United States (US) mortgage rates hit two-decade high
- US retail stocks falter over concerns of a weaker consumer
- Additional supply and weaker Chinese demand stall oil prices
BRICS announced plans to expand its membership during its annual summit in Johannesburg this week. The five-member bloc invited Argentina, Egypt, Ethiopia, Iran, the United Arab Emirates, and Saudi Arabia to join the economic community, with their memberships taking effect in January 2024. BRICS aims to counter the Western-dominated international order, represented by institutions like the G7 and the World Bank.
The Bloc’s expansion feeds into global concerns about increasing polarisation, especially given ongoing geopolitical tensions, including Russia’s invasion of Ukraine and poor US-China relations. Iran’s inclusion is particularly notable, suggesting that China and Russia’s influence outweighed reservations from countries like India, Brazil, and South Africa, who have friendly ties with the West. Despite this, South Africa’s representative insisted that the group is not anti-West.
South African President, Cyril Ramaphosa, stated that this is just the first phase, and the door is open for the inclusion of more countries. Brazilian president, Lula da Silva, added that the enlargement would not dilute, but instead increase the BRICS influence and its ability to address global issues. The group’s share of global gross domestic product (GDP), along with its purchasing power parity, will increase to around 37% with the addition of its new members.
NVIDIA’S ARTIFICIAL INTELLIGENCE POWERS RESULT IN $1 TRILLION VALUATION
Computer chip manufacturer, Nvidia, reported its second quarter revenue to be a staggering $13.5 billion, smashing analyst estimates of $11.2 billion. The company has nearly doubled its size in just a year. This performance is off the back of its data-center unit, which has soared, and accounted for $10.3 billion of the company’s total revenue. The unit grew by a whopping 171% year-on-year and its revenue far exceeded analyst expectations of $8.03 billion. Nvidia’s performance is almost entirely as a result of booming demand for the company’s latest Artificial Intelligence (AI) chips, which are being snapped up by tech giants who are building their generative AI services. The recent performance has pushed Nvidia’s valuation to over $1 trillion, making it the first chipmaker to reach this milestone and the company’s shares have more than tripled since the beginning of the year.
DATA IN A NUTSHELL
US business activity showed signs of stagnation in August, with growth at its weakest level since February as demand for new business in the service sector contracted. The S&P Global US Composite Purchasing Managers Index (PMI), which tracks manufacturing and service sectors, fell to 50.4 in August from 52.0 in July. This was its biggest downward move since November 2022. While August’s reading represented the seventh straight month of growth, it was only just above the 50 level – the line between expansion and contraction – as demand weakens for both manufactured goods and services.
The latest data released from Freddie Mac (the Federal Home Loan Mortgage Corporation) on Thursday showed that mortgage rates in the US have surged to 7.1%, reaching their highest point in over two decades. This escalation perpetuates an ongoing trend of high borrowing costs which have slowed the housing market down. This marked the first time since last spring that the rate on the 30-year fixed-rate mortgage rose above 7%, compared to a year ago when rates were around 5%. While US mortgage rates aren’t directly tied to the US Federal Reserve’s (Fed’s) moves, they tend to move loosely with 10-year Treasury yields, which reached their highest levels, since 2007, on Thursday.
In the US, investors are expecting rates to be higher for longer and this has pushed US Treasuries higher in recent weeks. Ongoing high interest rates have resulted in S&P Global Ratings downgrading a few US lenders due to the tougher conditions. All eyes will be on Jerome Powell’s speech at Jackson Hole on Friday for any hints about the Fed’s thinking around higher rates, the US economy and inflation. A hawkish tone will likely be supportive of the dollar.
South African inflation dropped to its lowest level in two years in July as Consumer Price Inflation (CPI) slowed to 4.7% last month, down from 5.4% in June, while analysts were expecting the number to come in at 5.0%. In a reversal of trends, fuel prices have become a mitigating factor against inflation, according to Stats SA. After driving inflation to a 13-year high of 7.8% in July 2022, where transport contributed 44% to the overall rate, fuel prices have since eased. The cost of inland 95-octane petrol dropped from R26.74/litre in July 2022 to R22.46/litre in July 2023. This decline resulted in an annual fuel rate of minus 16.8% in July 2023, pushing the transport category into negative territory for the first time since January 2021.
EQUITIES – BIG TECH ARE THE BIG WINNERS
The week started with a big tech rally as stocks overlooked higher Treasury yields. The S&P 500, which saw its longest losing streak since February, bounced back while the Nasdaq 100 was up over 1% at the start of the week, helped by Nvidia climbing 8.5% on Monday, ahead of its Wednesday results presentation. Cyber security firm, Palo Alto, also surged 15% on Monday after reporting a strong set of results and an upbeat outlook for billings, easing concerns about a slowdown in demand. Retailers’ earnings were scrutinized by investors this week. Kohl’s Corp. and Urban Outfitters Inc. rose after beating estimates, while Abercrombie & Fitch Co. advanced after raising its full-year outlook. Foot Locker Inc. fell after cutting its full-year forecast and reported results that missed expectations as concerns increased over weakening consumer spending. Macy’s dropped 14% after results showed credit card delinquencies accelerated in the second quarter.
In the United Kingdom (UK) private sector firms suffered their first contraction in seven months, showing the growing pressure of higher interest rates on households. Economists say this further supports the view of a mild recession in the UK. The Bank of England (BoE) may have to reconsider its decision to increase interest rates in September due to the slowdown in both activity and inflation. The FTSE 100 is up 1% for the week.
In local markets, the JSE All Share Index is up 1.7% for the week driven mainly by resources. Precious metals staged a comeback on Wednesday, with Harmony posting a trading statement which saw headline earnings per share beat expectations.
COMMODITIES: OIL SLOWS IN THE FACE OF ADDITIONAL SUPPLY
The oil rally took a breather this week over mounting concerns that Iran and Iraq might soon increase supply. A slowdown in Chinese demand for oil is also complicating the oil market.
Gold prices reached a two-week high on Thursday as the US dollar and Treasury yields retreated. European natural gas prices fell as signs pointed to a resolution of a labour dispute at Australia’s biggest LNG export plant, easing fears around supply constraints.
The US Dollar Index is trading above 103 following Thursday’s selling off, as uncertainty around mixed data coming out of the US remains top of mind.
The euro rebounded from its recent lows of €1.08/$ as euro area PMI increased from 42.7 to 43.7 in August.
The British pound followed the euro and recovered from lows resulting from weak UK PMI data as markets focus on lower US Treasury yields.
The rand is trading at R18.76/$, R20.23/€ and R23.61/£.
Sources: Reuters, Wall Street Journal, Bloomberg, New York Times, Financial Times, Daily Maverick and Business Insider.