As part of their economic recovery plans following the pandemic, many countries have opted to invest in infrastructure as a way of boosting growth. This week saw United States (US) President Joe Biden’s highly anticipated infrastructure development plan make headlines.
Key themes for the past week include:
- US Senate approves Biden’s infrastructure development plan
- US inflation undershoots expectations
- S&P500 and DAX hit all-time highs
- Dollar continues to set the tone
$1 TRILLION INFRASTRUCTURE BOOST
There has been a lot of speculation around the proposed US infrastructure development plan by the Biden administration over the past few months. However, on Tuesday, the Democratically-controlled Senate passed the $1 trillion bill, boosting sentiment in the US economy.
The bill forms part of the Biden administration’s key priorities aimed at climate change, universal pre-schooling, and affordable housing for all, but is also deeply rooted in the notion of “taxing the wealthy”, which has been championed by the Democratic party. In support of this, Bernie Sanders, the Chair of the Senate Budget Committee noted on Tuesday, “Today we move this country in a very different direction with a budget plan that will ask the wealthiest people in our country to start paying their fair share of taxes.” Bernie Sanders, whom has often been labelled a liberalist, also noted that the American people have become tired of two people having more wealth than the bottom 40% of the nation.
While many celebrated the bill, and lauded it as the catapult the US economy needs, all were not impressed. Senator Lindsey Graham, the top Republican representative on the budget committee publicly condemned the bill, noting that it is likely to fuel inflation even further, lead to higher taxes and energy costs, as well as lead to more illegal immigrants looking for employment in the construction sector.
However, even as the US political elite bicker about the sense of the bill, polls indicate that the majority of the US population is in favour of it, and that they believe it will lead to more jobs, as well as better financial security for the population, as a whole, following the pandemic that brought many families to their knees.
The infrastructure bill, that is the largest investment into bridges, roads and housing in decades, includes $550 billion in new spending, as well as $450 billion in previously approved infrastructure investment.
The non-partisan Congressional Budget Office (CBO), in a statement last week, noted that the $1.2 trillion infrastructure bill would increase federal budget deficits by $256 billion over 10 years — an assessment rejected by negotiators who said the CBO was undercounting how much revenue it would generate.
GLOBE IN A NUTSHELL
US Consumer Price Index (CPI), released on Wednesday, was the key data event for the week. The US inflation rate remained flat at 5.4% in July, in line with the previous month’s 13-year high and marginally above the market expectation of 5.3%. The dominant upward pressure came from increases in the process of food, new vehicles, and shelter. On a monthly basis, consumer prices rose 0.5% in July, their lowest level since February’s 0.4% gain.
The number of Americans claiming new unemployment benefits dropped for a third straight period to 375,000 in the week ending 7 August, moving closer to a pandemic low of 368,000, reached at the end of June. The figures bolstered views of a solid recovery in the US labour market despite the continuous threat of the Delta variant. The total number of claimants is likely to decline further in the coming weeks as more states roll off federal-enhanced unemployment benefits ahead of their official September expiration date at national level.
Meanwhile, Producer prices for final demand in the US rose 1% in July, exceeding market expectations of 0.6%. Nearly three quarters of the Producer Price Index () rise is due to a 1.1% advance in services costs, the largest increase since the data was first calculated in December 2009.
United Kingdom (UK) gross domestic product, released on Thursday, grew by 4.8% quarter-on-quarter (April to June 2021), recovering from a 1.6% contraction in the previous three-month period, as activity and demand recovered following the easing of Coronavirus restrictions. Household consumption jumped 7.3% while public spending rallied 6.1%. Fixed investment, however, continued to contract despite an increase in business investment.
Ireland’s annual inflation rate picked up to 2.2% in July, up from 1.6% in June, its highest level since March of 2012. Main upward pressure came from transport, however, costs also rose significantly for housing & utilities, amid an increase in the cost of home heating oil, electricity, gas, higher rents, and mortgage interest repayments. On a monthly basis, consumer prices rose by 0.4%, following a 0.2% increase in the previous month.
Eurozone industrial production fell by 0.3% in June, slightly more than the expected 0.2% decline. Decreases in the production of capital goods and energy were partially offset by growing output for non-durable consumer goods, durable and intermediate goods.
Germany’s 10-year Bund yield fell back below -0.45% during the second week of August, following the release of US economic data that suggested that inflation in the world’s largest economy may have peaked. Earlier this week, yields touched their highest levels since mid-July, amid expectations of early tapering by the US Federal Reserve (the Fed), and even as the European Central Bank (ECB) is expected to continue its massive bond buying.
Manufacturing production in South Africa accelerated by 12.5% year-on-year in June, exceeding market expectations of a 11.25% rise. The release noted the fourth consecutive month of rising industrial activity, although at a much softer pace. On a seasonally adjusted monthly basis, industrial production dipped 0.7%, following a downwardly revised 2% decline in May. Meanwhile, The South African Chamber of Commerce and Industry (SACCI) business confidence index dropped to 93.2 in July from 96.2 in June, pulling away from a more than three-year high of 97 in May. It was the lowest reading since October 2020, reflecting the negative impact of several days of civil unrest in the country. “The spate of looting and destruction during July in certain areas of South Africa, whatever the intention, was a setback to inclusivity, growth and job creation,” SACCI said.
EQUITIES: PROGRESS, NOT PERFECTION
US equities saw their Nasdaq technology index battling to recover recent losses from China’s tech crackdown, while the S&P500 pushed another 0.28% higher this week. The Dow Jones showed the most promise this week, flirting with all-time-highs and adding another 0.79% to its value by Thursday’s opening bell. When turning to second quarter earnings, AMC Entertainment, reported a better-than-expected loss, while cautioning that their movie theatre chains are still worse-for-wear, when alluding to forward-looking earnings. Warren Buffett’s Berkshire Hathaway reported a 21% jump on operating earnings on the back of a recovering economy, with their energy and railroad investments playing a large part in the strong results numbers. Other companies reporting stronger-than-expected earnings included Palantir, Coinbase, and digital health company, Doximity.
The European Union (EU) saw the French CAC 40 moving 0.76% higher, while the German DAX came in softer for the week, moving just over 0.5% higher. With a mixed set of first-half earnings for 2021 rolling out, the DAX saw travel and telecommunications stocks returning better-than-expected numbers. Some of these included travel agency TUI AG, who saw their balance sheet moving to a better cash flow situation, while telecoms giant Deutsche Telekom saw their forward-looking profit guidance being raised after solid first half numbers. Weaker earnings numbers were seen from the likes of Henkel, Delivery Hero and SGL Carbon.
Reaching an 18-month-high on Wednesday, the UK’s FTSE 100 started showing signs of growing investor-confidence as it moves towards a more-stable and sustainable growth path, independent of the EU. With COVID-19 restrictions becoming more-relaxed across the UK and greater EU, following the rapid rollout of the Pfizer and Johnson & Johnson vaccines, the reopening of the travel and leisure and hospitality industries helped the UK economy grow by 1% in June alone. By Thursday, mining and energy sector stocks were the only companies creating a small drag on the FSTE 100, with Rio Tinto, BP, and Royal Dutch Shell being the main detractors. In more-positive news, Insurance company Aviva saw their stock gaining value, following a reported 17% rise in their first half operating profit. The company announced that dividends of £4 billion would be paid out to shareholders.
Following last week’s continued turbulence in the wake of the crackdown of Chinese technology companies, the Shanghai and Hong Kong exchanges breathed a sigh of relief, gaining back another 2.57% following the 7% index-corrections recently seen on their shores. With Beijing having filed a lawsuit against Tencent over the weekend, for breach of privacy laws, another tech giant, NetEase, announced the delay of its music-arm’s public listing, due to uncertainty around the China Communist Party’s seemingly fluid privacy regulation guidelines. Some of the leading performers out of China’s tech industry this week, albeit recovery, came from the likes of Tencent, up over 5%, food delivery company, Meituan, up over 8%, and video-app, Kauishou Technology, up over 3%, by midweek.
Locally, the JSE All Share Index and Top 40 were relatively robust this week, both adding a respectable 1% – 1.20% to last week’s closes. A weaker rand at the beginning of the short 4-day trading week, helped dual listed stocks setup a good foundation for the major indices by Tuesday’s close. The resources sector returned 0.84% by Thursday afternoon, while the industrial and financial sectors returned 1.44% and -1.35% respectively – the industrials, assisted by Naspers and Prosus’ recovery, and the financials impacted negatively by a weaker rand. Some of the bigger news headlines this week saw the likes of MTN nearing the completion of their sale and leaseback deal of SA towers which could raise up to R11 billion. The separation of their fibre and fintech units is also underway, as they attempt to make a dent on balance sheet debts. Tiger Brands have continued their KOO and Hugo canned foods recall – due to a defect in its cans – which now spans all the way across to Australasia. The company estimates that 9% of their annual production has been recalled and has warned that the negative impact on their balance sheet could amount to approximately R650 million. Tiger Brands traded near R188.10, or 1.60% lower for the week, by Thursday afternoon.
ALL THAT GLITTERS IS NOT GOLD
After falling more than 11% a week ago, Brent Crude and US West Texas Intermediate (WTI) oil clawed back around 5.70% this week, after failing to fall below recent-lows set in mid-July. A smaller-than-expected fall in US oil inventories (0.447 million vs an expected decline of 1.27 million) helped both Brent and WTI work their way back to prices of $71.50 and $69.16 per barrel, respectively, by Thursday afternoon, after starting the week at $67.00 (Brent) and $65.25 (WTI) per barrel. In the bigger scheme of things, oil prices do seem to be rolling over slowly, as the expanded Oil Producing Export Countries (OPEC+) continue to find a happy-medium between oil output and a global economy that is still battling to get back to pre-pandemic production-and-growth levels.
Starting the week off on the back foot, gold pushed above its critical $1,750 per fine ounce level by Thursday. With the backdrop of a weaker US dollar and the weaker-than-expected CPI numbers reported in the US, the Fed’s view on tapering could likely have been eased briefly, with yields dipping slightly in the immediate term. If gold can hold for a day-or-two around current levels, a move towards $1,775 per fine ounce could be seen in the near-term. On the downside, a support level of $1,735 may add some short-term stability to the precious metal.
Swinging within a 3% trading range over the last week, palladium traded around 0.5% higher since Monday. Platinum, on the other hand, fought back 5.35% this week after falling below its critical $1,000 per ounce over the weekend. With the price of platinum and silver, which fell under its $25 support-level, coming under relative pressure over the last month, gold remains the favoured precious metal as we move into the week ahead. By Thursday afternoon platinum, palladium, and silver traded at $1,017, $2,640, and $23.42 per ounce, respectively.
AT THE DOLLAR’S MERCY
The dollar continues its seesaw ride, gaining momentum only to run out of steam when certain data releases disappoint. On Thursday, the dollar index regained some ground toward the 93 level, close to levels not seen since early April, after data showed weekly initial claims fell for the third week in a row. Kansas City Fed President, Esther George, said on Wednesday the standard for reducing the bond-buying program may have already been met by the current spike in inflation, recent labour market improvements, and the expectation for continued strong demand.
The euro traded around $1.17 for majority of the week, hovering around its weakest level since early November, as investors turned to the dollar amid expectations of early tapering by the US Federal Reserve. At the same time, the ECB has been dovish for some time, after policymakers pledged last month to keep interest rates at record-low levels for even longer, in an effort to bring inflation back to its 2% target. ECB President, Christine Lagarde, also warned about a fresh wave of the Coronavirus pandemic and its impact on the economic recovery.
The British pound traded largely flat at $1.385, hovering around its weakest level since the end of July, as investors rushed to the dollar amid expectations that the Fed is closer to tapering. Meanwhile, the Bank of England’s hawkish turn helped to curb the losses. Policymakers in the UK raised inflation forecasts for 2021 and signalled that “some modest tightening” of monetary policy over the central bank’s forecast period was likely to be necessary if the economy continues to improve.
The South African rand hovered around the R14.70 against the greenback this week, down from a three-week high of R14.30 hit in the previous week, amid lower commodity prices and general dollar strength. Locally, investors continued to digest the latest political developments after President Cyril Ramaphosa, last Thursday, announced several changes to government structures and a cabinet reshuffle in certain departments, including a new finance minister. On the pandemic front, newly appointed Health Minister, Dr Joe Phaahla, has expressed concern about the rising number of COVID-19 infections in the Western Cape, which has, once again, become the country’s epicentre.
We start the day at R14.78/$ R17.35/€ and R20.42/£