Protests, riots and violence have reared their ugly heads across the globe over the past few years, for a myriad of reasons. No matter what sparks unrest, the eruption of violent protests and riots always shakes us to the core.
Key themes for the past week include:
- Violent riots in South Africa
- US Inflation overshoots the mark
- OPEC remains at loggerheads
- US dollar whiplash
A NATION ON FIRE
It’s been a week of what has been marked the most violent riots witnessed in South Africa since the start of democracy. The state operated insurance company SASRIA braces itself for claims in excess of R7 billion. Businesses, across the country, have been brought to their knees by the looting and destruction. Many closed their doors as a pre-emptive measure to try and save themselves, while warehouses and malls have been reduced to little more than smouldering piles of rubble.
Initially, the violence was attributed to the incarceration of former president, Jacob Zuma, with the looting being an inevitable result of protest action. But as the week progressed, it has started to emerge that there might be sinister forces behind it.
For quite some time, the political tension in South Africa has been palpable. Contributing factors include divisions within the ruling party, high unemployment, structural economic difficulties, and high levels of poverty. But what was not expected was that this level of civil unrest would flare up and spread as quickly.
The destruction of the retail sector has sparked a humanitarian crisis, with people queuing for kilometres to get staple food items. There is also a growing fear of national food, medical supplies and fuel shortages being a near-term reality. South Africans are filled with emotions ranging from disbelief and anger, to outright sadness for the state of our country.
Unfortunately, escalation of the tensions based on emotion will not solve the problem, and it is now clear that the future of our nation lies in the hands of the country’s citizens.
While the violence will end, make no mistake that the events of the past week, and the response of government and communities to these events, will shape the future of South Africa for years to come.
A GLOBAL VIEW
United States (US) inflation made waves this week as it hit its highest levels since 2008, coming in at 5.4% in June, much higher than the expected 4.9%. Markets quickly bet on tighter monetary policy by the US Federal Reserve (the Fed). However, testimony by Fed Chairman, Jerome Powell, quickly stemmed any speculation when he stated that the Fed’s benchmark standard of “substantial further progress” toward full employment and price stability is still quite far off, even as the country continues to make headway in the economic recovery. Powell, however, did note that the Fed is ready to intervene should inflation spiral out of control.
Jobless claims in the US fell to their lowest levels since the start of the pandemic, with 360 000 people claiming unemployment benefits, meeting expectations. Employers across the country have been complaining about the struggle to fill open positions, noting ongoing labour shortages due to enhanced benefits as part of COVID-19 economic stimulus, concerns about contracting COVID-19 and finding childcare.
The yield on the benchmark 10-year Treasury note hovered around 1.3% this week, remaining at their weakest levels since February.
The unemployment rate in the United Kingdom (UK) edged up to 4.8% in May, marginally above expectations of 4.7%. With the relaxation of many Coronavirus restrictions, total hours worked increased during the quarter, however the figure still remains well below pre-pandemic levels. The number of employees on British company payrolls surged by 356 000, the biggest increase since the start of the pandemic. There were 862 000 job vacancies in April to June 2021, 77500 above the pre-pandemic levels seen in January to March 2020.
Meanwhile, two Bank of England (BoE) policymakers indicated that stimulus measures may have to be reduced in the near term, to keep inflation from overheating. Michael Saunders on Thursday joined BoE Deputy Governor, Dave Ramsden, in noting that both growth and inflation in the UK economy have exceeded the central bank’s May forecasts.
The Chinese economy accelerated by 7.9% year-on-year in the second quarter, slowing dramatically from a record 18.3% growth in quarter one and underperforming market expectations of 8.1%. A slowdown in factory activity, higher raw material costs, and new COVID-19 outbreaks in some regions all weighed on the country’s economic recovery. During the first half of the year, the economy grew by 12.7%, amid a low base effect from last year’s slump. China has set an economic growth target of above 6% for 2021 after 2020 saw the country’s growth expanding just 2.3%, its lowest rate in over four decades.
South Africa’s retail sales soared 15.8% in May, compared to the previous year, beating market expectations of 12.2%. The largest increases were recorded for “all other retailers” at 87.7%; food, beverages and tobacco in specialised stores jumped 54.2%, and household furniture, appliances and equipment saw a 52.3% increase. On a monthly basis, retail sales advanced 2.1%, reversing the downwardly-revised 0.6% decrease seen the previous month.
EQUITY MARKETS ENTER A HOLDING PATTERN
US equities were seen flirting at all-time-high levels, yet again this week, with the Nasdaq, S&P500 and the Dow Jones all trending moderately sideways. The week’s big news came from Apple Inc., which announced that it will need to increase next-generation iPhone production by 20% to 90 million devices this year. When looking at services, Apple looks to be introducing a payment service where customers can “buy now and pay later” through any Apple Pay supported device. By the end of June some of the best performers on the Dow Jones Industrial Index, for the first half of 2021, came from Goldman Sachs at 43.9%, American Express at 36.7% and Walgreens growing at 31.9%, while the three worst performers during the same period were Verizon, .
Heading over to Europe, the French CAC40 and German DAX were largely unmoved this week, while the pan-European Stoxx 600 closed at all-time-highs on Monday, ahead of the Fed’s meeting. European markets are waiting for the second quarter US bank earnings which will start being released this week. As we head into overall quarter two earnings, markets are likely to remain hesitantly cautious in the near term.
Turning to the UK, the FTSE100 opened lower on Thursday, following a slight slip in their unemployment rate in May from 4.7% to 4.8%. Overall, UK markets also trended sideways this week, as investors anticipate US equity’s next move.
Shanghai and Hong Kong exchanges saw moderate increases this week, however the ever-growing shadow of regulatory crackdowns on Chinese technology companies increasingly comes under scrutiny by western-based asset managers. So far, Alibaba, Ant Group and Didi hail-riding services have all come under heavy regulatory fire from the Chinese government, which is starting to leave a sour taste in offshore investors’ mouths. As western analysts dig deeper into the reasons for these regulatory moves, sentiment seems to be turning negative towards Emerging Market investments. Red flags are being raised and need to be considered by investors looking into the Chinese technology sector.
Despite violent disruptions in South Africa this week, the JSE All Share Index rallied against the odds by adding almost another 3% return for 2021. The strength of the index was largely fueled by the continued upward momentum being experienced within US equities, while the 1.7% weakening of the rand also benefitted dual-listed companies for the most part. On Thursday, Standard Bank announced its firm intention of acquiring all of Liberty Holdings’ issued ordinary shares, with the end goal of delisting Liberty once the deal is completed. All-in assumed purchase price per share was calculated at R89.46, seeing Liberty trade almost 25% higher on the day, at levels of around R84.23.
INFLATION HEDGES AND SUPPLY UNCERTAINTY
US West Texas Intermediate (WTI) crude oil and the Organisation of Petroleum Export Countries (OPEC) Brent Crude saw a generally weaker week as expected supply increases seem to be on the horizon. The 1.5% decrease in both Brent and WTI prices this week was spurred upon by OPEC producers still looking for a compromise in forward-looking oil output, as OPEC+’s (including Russia) relationships seem to be waning. Analysts see oil prices remaining stable in the short term, until final oil output agreements are reached within the OPEC+ consortium. Having said this, the general view is that oil prices are trading in overbought territory. By Thursday brent traded at $74.18 per barrel, while WTI traded at $72.29 per barrel.
Gold spot prices traded around the $1,810 per fine ounce level this week. Favour turned back to the precious metal as US core Consumer Price Index (CPI) figures came in higher than market expectations. After gold’s recent 7.8% pullback in June, the metal is now back in the ‘good-books’, as asset managers turn to gold as an inflation hedge. A gradual press to higher to levels of around $1,850 per fine ounce is expected in the near term.
Palladium remained muted this week, while platinum moved around 3.5% higher. Platinum is set to have a reasonable 12 months ahead, should the global economy and vehicle manufacturing get back into full swing. At this point, the only thing holding platinum demand back is the shortage of semi-conductor chips which are heavily integrated into modern day vehicles. The setback in the production of these chips will directly impact vehicle output and ultimately platinum demand. On Thursday platinum traded at $1,140 per ounce, while palladium traded near $2,805 per ounce.
CURRENCIES ON EDGE
The US Dollar Index was steady at 92.4 on Thursday, after shedding 0.5% in the previous session as investors digested dovish comments from Fed Chairman. However, rising Coronavirus cases in some parts of Asia and fears over the spread of the delta variant continued to lend the greenback some support.
The euro traded around $1.18 on Thursday, dipping to its lowest level since early April, after European Central Bank President, Christine Lagarde, noted on Sunday that the central bank will update its guidance on monetary stimulus at its next meeting. She indicated that fresh policy might be introduced in 2022 to replace the current Pandemic Emergency Purchase Program.
The British pound steadied above the $1.38 mark, moving further away from a two-and-a-half-month low reached early in July of $1.3737, after fresh data indicated that UK inflation reached three-year highs of 2.5% in June, raising expectations the BoE will have to raise rates soon to stop the economy overheating.
It has been a seesaw for most emerging currencies this week, with the whiplash movements in the US dollar, but the South African rand felt the pinch slightly more, as local factors weighed in on the depreciation earlier this week. The rand touched R14.80 against the greenback on Wednesday, its lowest level since April, as the local violence and riots, coupled with high US inflation dragged the unit downward. Some of these losses reversed on Wednesday evening as the US dollar retreated following dovish comments from the Fed.
We start the day at R14.55/$ R17.18/€ and R20.13/£.