Central banks stepped into the spotlight this week, with investors watching and planning cautiously on the side-lines.
Key themes for the past week include:
- Central banks shifted to a more-hawkish view
- 40% of United Kingdom (UK) consumers are still not comfortable travelling abroad or being in large crowds
- Naspers and Prosus remain under fire
- Oil prices fall more than 7% on COVID-19’s Delta variant flare-up in China
This week saw both the Bank of England (BoE) and the United States (US) Federal Reserve (the Fed) gently slanting towards a more-hawkish view on their respective monetary policies, following the recent dovish views expressed by both central banks in the recent past. With US second quarter GDP rising at an annualised rate of 6.5% and the UK expecting their 2021’s annual GDP to rise to 7.25%, both regions have started changing their tune.
With the Fed currently buying $120 billion in debt instruments per month, Wednesday’s meeting indicated that they will now look to scale back on their bond purchasing program in early 2022, as the economy gradually finds its own sustainable traction. The UK have indicated that they will continue with their £875 billion bond-buying program until economic stability is proven on their shores.
This week saw markets taking a small pause while policymakers had their say.
A GLOBAL VIEW
Globally we saw a quieter week when looking at major economic data, however inklings of quicker-than-expected economic recovery in the UK and US regions, alike, started entering conversations within their respective central banks. Analysts across the globe are now expecting tightening of monetary policy to be implemented towards the back end of 2022, versus an originally planned 2023, in order to keep inflation under control.
Continuing jobless claims numbers came in at their lowest level since March 2020, falling by 366,000 claims to 2.93 million. At its peak, continuing jobless claims reached over 20 million in April 2020. Initial unemployment insurance claims for the last week of July came in at 385,000, which equated to 14,000 less claims than the previous week. Although this number is an improvement, the market was looking for a number of 384,000. US ISM Manufacturing Purchasing Managers Index (PMI) data slid slightly in July to 59.5 versus a previous 60.6, citing that worsening labour and material shortages could create forward-looking fractures within the market. ISM Non-Manufacturing PMI for July came in at 64.1 versus an expected 60.5.
The underlying US dollar index (DXY) remained steadfast against other major currencies, following Fed Vice Chair, Richard Clarita’s hawkish stance on US monetary policy heading into 2022. Clarida alluded to the likelihood of interest rate hikes being implemented in early 2023, should their economic recovery conditions be met by late 2022. Clarida also mentioned that the tapering of bond buying may be seen towards the end of this year or early next year, should the labour market indicate consistent stability in the months ahead.
The UK saw their July Markit Manufacturing PMI numbers coming in as expected at 60.4, down from June’s 63.9, still indicating an expansionary environment. When looking at their Markit Services PMI numbers, the UK printed a better-than-expected 59.6 number, however also falling slightly short of June’s 62.4 number. Construction PMI numbers came in lower for July at 58.7 compared to expectations of 64. Total UK vehicle sales for July dropped 29.5% year-on-year compared to 2020.
Turning to the BoE’s monetary policy meeting on Thursday, the majority of the committee agreed that current economic conditions allow for the Bank to start looking at raising interest rates slowly again over the next year or two. The Sterling traded only 0.2% higher against the dollar, following their announcement to levels of around $1.392/$. It was also agreed that continuation of the £150 billion government bond purchase programme will remain until year end with the intention of keeping interest rates at their current 0.1%. An increase of interest rates to 0.25% is likely to be seen in early 2022.
Concerns around the economic recovery in the European Union (EU) continues, as a recent survey in the UK indicated that around 40% of UK consumers are still not comfortable embarking on international holidays, with the threat of the COVID-19 Delta variant still lurking. On top of this, 40% also indicated that they weren’t even comfortable going to ‘large local public gatherings’ in the UK. The main reasons cited were both the UK government’s volatile legislations around the virus and the growing concern around the Delta variant. With most of the EU and UK’s citizens working from home, the need to spend money on reactionary items has come down substantially and will remain that way until further clarity on how daily living and routines morph around the ongoing COVID environment that they have found themselves in throughout 2021. Having said this, EU Markit Manufacturing PMI numbers came in stronger-than-expected for July at 62.8 against an expected 62.6.
South Africa had a very quiet week in terms of data releases, with ABSA’s manufacturing PMI numbers coming in at 43.5 in July compared to a previous month’s 57.4. This is the steepest drop in these PMI numbers since May 2020, which can be attributed to a mix of civil unrest, stricter lockdowns, declining sales orders and lower business activity in the travel and leisure sectors. New vehicle sales for July also came in lower month-on-month at 32,949 compared to June’s 38,030.
EQUITIES: WAITING ON CLARITY
US equities remained relatively unchanged this week, with the technology sector making up for some lost ground experienced last week on the back of China’s clampdown on the sector. With a slight miss on the expected initial jobless claims numbers and the fragility seen within US ISM manufacturing numbers, US equities surprised in holding steady. When looking at earnings, sports goods manufacturers, Adidas and Under Armour, reported stronger earnings, with positive outlooks going ahead. Adidas did however express concern over falling sales in China where a boycott of their brand continues. Uber and Lyft ride-hailing applications, also beat most analyst expectations, with Uber expecting the company to flip to profit by year end. Uber Eats delivery services helped drive their business during COVID lockdowns. Other companies that beat expectations this week on second quarter earnings include, CVS Health, Sony, BP, Ralph Lauren, WPP and Wayfair. Companies that missed analyst expectations for the second quarter include, Roku, Etsy, and General Motors.
While the US remained relatively calm this week, the EU saw the French CAC 40 moving 2.6% higher, while the German DAX trended 1.6% higher. Both indices are now testing all-time-high levels, as the global economy slowly climbs out of the uncertain COVID environment. When looking at earnings, Germany’s Commerzbank saw their second quarter numbers coming in lower due to an internal restructuring, while Lufthansa turned to a positive cashflow following the decline of airline travel during global lockdowns.
The UK’s FTSE 100 also headed higher this week, following the BoE’s unchanged views on both interest rates and their bond-buying program. Although the greater index was up this week, the mining sector did create some drag on the FTSE with companies such as Anglo-American PLC, BHP Group PLC, Rio Tinto PLC and Glencore PLC all falling between 1% and 4% since Monday. By Thursday the FTSE had advanced 1.3% higher for the week.
China’s Shanghai and Hong Kong exchanges took some time recovering from the Chinese Communist Party’s assault on the technology sector last week, with both exchanges clawing back more than 1% respectively since Monday. With the Delta variant now flaring up all over China, investors should remain cautious entering the markets over the next week.
Locally, the JSE All Share Index and Top 40 was dragged around 1.5% lower during the week, on the back of a weaker mining sector. This was coupled with continued selling pressure experienced within Naspers and Prosus on the lead-up to their share swap, and China’s recent crackdowns. The resource sector saw over 4% being stripped from it this week, while Naspers and Prosus both saw another 7.5% being wiped off their market values since Monday. Where the industrial and resources sectors fell short, the financial sector added stability, with the Financial 15 index adding 5% to its year-to-date performance. Some of the bigger moves came from Nedbank (11.45%), Standard Bank (8.20%), Firstrand bank (6.58%) and Capitec (4.83%).
COMMODITIES: A MOMENT OF PAUSE
This week saw both Brent Crude oil and US West Texas Intermediate (WTI) oil tumbling around 8% on the back of oil inventories falling less than expected (88 million-barrel drop versus an expected 2.9 billion-barrel drop), while yet another flare up in COVID-19 cases in China now potentially sees travel restrictions being reimplemented in the region, ultimately lowering the demand for oil. With China being the leading importer of oil, responsible for around 26% of all oil imports globally, further pressure caused by the Delta variant could see China’s 40 million-barrel imports per month falling in line with slowing demand. When looking at price action, in a technical-charting sense, WTI and Brent seem to be hinting at a momentum shift to the downside. By Thursday, brent traded at $70.75 per barrel, while WTI traded at $68.69 per barrel.
Aside from a brief heartbeat on Wednesday this week, the spot gold price flatlined within a tight 0.33% range of $1 808.60 and $1 814.45 per fine ounce. Trading around its 21-day moving average, gold waited hesitantly as European markets traded cautiously ahead of the BoE’s Thursday monetary policy meeting, as speculators bet on a stimulus-slowdown. Heading west, the hawkish comments from the Fed’s Vice Chair, Richard Clarida, also stifled gold’s progress this week. By Thursday afternoon, gold remained just above its $1,800 support level at $1,809.00 per fine ounce.
Platinum and palladium prices tended to be more volatile this week, compared to gold. Platinum slid around 3% by Thursday’s trading day, while palladium held its own trading around 0.8% lower for the week. Although a stronger palladium price was seen in the platinum group metals sector this week, it should be noted that the precious metal now approaches both its 100-and-200-day simple moving averages around the $2,700 level, which will act as a resistance in the near-term. By Thursday, platinum and palladium traded at $1,015.00 and $2,645.00 per ounce.
THE RAND HITS BACK
The dollar index (DXY) held its ground this week with some life being breathed back into the currency, following Richard Clarida’s hawkish view on US monetary policy on Wednesday. After trading near 91.80 against other major global currencies, the DXY traded at 92.24 by Thursday evening.
With both the BoE and US Fed turning gently hawkish on monetary policies heading into 2022, the euro slid 0.5% against the US dollar to trade near $1.18 by Thursday evening.
The British Pound remained steadfast against the US dollar this week trading at $1.393 by Thursday evening.
The South African rand, and greater emerging market basket of currencies, used the earlier parts of the week to take advantage of a weaker US dollar at the close of last week. By Thursday evening, the rand had strengthened by 1.3% to R14.38 against the US dollar, mainly helped along by the uncertainty on the Fed’s timing of monetary policy intervention heading into the next two years.
We start the day at R14.51/$ R17.16/€ and R20.21.
Written by: Citadel Trader, Jordan Weir and Citadel Global Director, Bianca Botes.