While the world has largely been focussed on the pandemic, global economic geopolitical tensions heat up.
Key themes for the past week include:
- Chinese policies result in trade concerns
- United States (US) Federal Reserve (Fed) policy remains dovish
- US GDP misses the mark
- Dollar hits one-month low
CHINA TIGHTENS CONTROL
In recent years, China has been in the headlines on numerous occasions, ranging from trade tension with the US to the security bill imposed in Hong-Kong. While geopolitics have been largely overshadowed by the pandemic, certain dynamics are still alive and well. Over the last year, China has tightened controls, not only on Asian territories but also businesses. Its global peers are closely watching the impact these actions may have on trade relations and business activity in the future.
This week saw the controversial sentencing of outspoken billionaire, Sun Dawu – who runs the largest agricultural business in the Northern province of Hebei – to 18 months in jail, for speaking out against human rights and other politically delicate topics. Sun is one of a handful of people that have openly accused the Chinese government of covering up the outbreak of Swine Flu in Africa in 2019.
China has also been in the spotlight for cracking down on businesses and entrepreneurs in the country. Major technology companies, including Alibaba, Didi and Tencent are all under investigation for wide array of regulatory issues. This follows the controversial Security Bill in Hong Kong, that resulted in many global companies relocating from the special administrative region. China has also continued with its claim on Taiwan. Taiwan has rejected China’s claim over the country, and reiterated their sovereignty and democracy.
Forbes, this week, reported that China might be willing to go to war with Taiwan in order to gain control over the region. The article highlighted that actions by the Chinese government, seems to point to the assembly of a major naval fleet in anticipation of an invasion on Taiwan. Should this happen, there will be an economic price to pay, with the ripple effects to be felt across the globe.
And while Donald Trump may no longer be the commander in chief in the US, one can bet that the US government will not hesitate to intervene, which could reignite the tensions between the two nations, and even take it to new heights.
A GLOBAL VIEW
US GDP, released on Thursday, indicated that the US economy advanced an annualized 6.5% quarter-on-quarter during the second quarter of 2021, well below expectations of 8.5%. Growth was predominantly driven by increases in personal consumption expenditures in areas such as services and nondurable goods, as vaccinated Americans took advantage of the ability to travel and engage in activities that were restricted before.
Meanwhile, US initial jobless claims also disappointed, dropping by less than expected. The number of Americans filing new claims for unemployment benefits dropped to 400,000 in the week ending 24 July, not far from a 16-month low of 368,000 reached at the end of June, the number however remained above market expectations of 380,000.
While the Federal Open Market Committee (FOMC) statement on Wednesday evening triggered little immediate response, markets certainly started digesting the news soon after. The Fed, while remaining dovish, expressed little concern for the current Delta variant outbreaks in the US, but will monitor the situation on an ongoing basis. It kept interest rates unchanged and bond-buying steady at the current $120 billion per month. The bank did, however, offer some hints that asset purchases could start being reduced soon. Officials noted that the economy has made progress toward employment and inflation goals, and that the Committee will continue to assess progress in coming meetings.
The yield on the benchmark US 10-year Treasury note hovered around 1.26% on Thursday. Investors, who have been weighing rising inflation, bet the Fed would soon start tapering and concerns over the rapid spread of the Coronavirus Delta variant that would likely drag global growth down.
Taking a look at the United Kingdom (UK), while it’s been a relatively quiet week on the data front, net mortgage borrowing in the UK hit an all-time high of £17.9 billion in June 2021, beating market expectations of £7.9 billion with ease.
Meanwhile, investors digested mixed comments from several Bank of England (BoE) officials. Policymaker Gertjan Vlieghe, said on Monday that the Central Bank should not scale back its stimulus until well into 2022, following similar remarks from Monetary Policy Committee member Jonathan Haskel. In addition, Catherine Mann, who joins the BoE as a policymaker in September, warned against curbing stimulus too soon. Earlier this month, however, Deputy Governor, Dave Ramsden, and BoE official, Michael Saunders, said that the bank could reverse monetary stimulus sooner than expected as the economy reopens and inflation remains above the target.
The economic sentiment indicator in the Euro Area rose for a sixth consecutive month to an all-time high of 119 in July 2021, beating market expectations of 118.5. Sentiment has been assisted by hopes of a strong economic recovery due to the reopening of economic activities. However, it is worth noting that the latest improvement was weaker than previous months.
Sticking to the European Union (EU), Germany’s consumer price inflation rate is expected to pick up to 3.8% year-on-year in July of 2021, the highest since December 1993 and above market expectations of 3.3%, a preliminary estimate showed. The spike in inflation is mainly attributed to the value added tax effect, after the government cut the tax temporarily in the second half of 2020 as part of pandemic-related economic support.
Producer prices in South Africa were up 7.7% year-on-year in June 2021, following a 7.4% rise in May, and above market expectations of 7.3%. It is the highest producer inflation since February 2016, with upward contribution coming from soft drink producer Coca-Cola, petroleum, chemical, rubber and plastic products (15%); food products, beverages and tobacco products (6.3%); and metals, machinery, equipment and computing equipment (8.4%). A low base effect from last year is also weighing in.
EQUITIES RESPOND TO CHINA CONFLICT
Like most global equity markets this week, Chinese government action within the technology sector has sent ripples around global financial markets. Starting the week on the back foot, the Nasdaq saw a 2.25% drop over the course of Monday and Tuesday, while the Dow Jones and S&P 500 fared slightly better with lesser, or more-diversified, exposure to the tech sector. Overall, US markets traded warily this week as the Fed said there’s no rush in addressing monetary policy just yet. Notable companies which beat earnings expectations this week were: Yum Brands, Comcast, Volkswagen, Qualcomm, Ford, Google, Microsoft, Apple, Starbucks, Twitter, Intel, and Domino’s. With one of the stronger earnings seasons currently underway, it feels like investors could be in for higher market moves in the short-to-mid-term.
EU indices were mixed this week, with the German DAX performance index remaining relatively flat, while the French CAC 40 advanced 2.25%. A handful of companies reported stronger-than-expected earnings for the second quarter, namely French luxury goods company LVMH Moet Hennessy Louis Vuitton who benefited from an economy moving out of lockdowns. Chemical’s company, Croda International, saw their shares advancing almost 6% on the back of stronger results for the first half of 2021. Looking at Germany, biotechnology company, Morphosys, saw their earnings coming in lower, with an operating loss of €71.4 million being reported, compared to 2020’s €48.4 million loss.
In UK, the FTSE 100 remained flat this week with airlines like International Airlines Group and EasyJet helping stabilize any volatility as the UK is now allowing vaccinated persons from the EU and USA to travel to, and skip any form of quarantine in, the UK from 2 August. Turning to the financial sector, both Barclays Bank and Wealth Manager, St. James Place, reported strong earnings for the second quarter, with Barclays reporting a quarterly profit of £2.1 billion up from £90 million, while St James Place reported a profit-after-tax of £120.9 million. Aston Martin saw their sales numbers rising 224%, while also stating they’re expecting to sell up to 6,000 cars this year. The primary contributor to the jump in sales were orders for Aston Martin’s new DBX SUV which retail for roughly £144,000 (ZAR 2.9 million).
Shanghai and Hong Kong exchanges traded around 4% lower by Thursday, after the Chinese Communist Party (CCP) clamped down on China’s largest technology companies, citing data security and financial stability for the country. Private education has now also been added to the list of targets. July saw a number of companies experience the first strong wave of clampdowns, with material chunks of their market values being wiped out: Tencent lost $170.2 billion, Alibaba $103.9 billion, Meituan $87.9 billion, Ping An Insurance Group Co of China ltd $29.2 billion and Prosus NV down $26.5 billion.
Locally, the JSE All Share Index managed to fight off the incredible 16% drop both Naspers and Prosus experienced this week. Since the beginning of July, around 23% has been wiped off Tencent’s market value. Last week the Chinese government stripped Tencent of its exclusive music streaming rights, while also slapping it with anti-trust fines. The CCP then took aim Tencent’s, WeChat, halting any new user registrations until mobile application issues have been resolved.
With the drag created by the local industrial sector, the financial and resources sectors came into their own this week, with the resources sector advancing around 8%. Anglo Platinum surprised its shareholders with a R175 interim dividend. Anglo Platinum outperformed all expectations, printing profits of R63.3 billion and paying out R46.4 billion of that to shareholders. By Thursday, the JSE had added 2.6% for the week.
COMMODITIES BREAK FREE FROM COVID-19’S DELTA VARIANT CHAINS
US West Texas Intermediate (WTI) crude oil and Oil Producing Export Countries (OPEC) Brent Crude oil saw prices rise more than 3.5% this week, on the back of a 4.1-million-barrel drawdown in inventories on the US front. When looking at stockpiles, the US currently holds their lowest level of oil inventories since January 2020. Despite the threat of the COVID-19 Delta variant, global growth seems to be moving on with no hinderance whatsoever, leading to the recent drop in oil stockpiles we are currently seeing. By Thursday, Brent Crude traded near levels of $75.30 per barrel, while WTI traded at $73.10.
Gold spot prices traded in a relatively tight range this week between $1,795 and $1,800 per fine ounce before finally breaking above the higher limit on Wednesday evening to levels of around $1,820. This move can be attributed to Wednesday’s FOMC announcement, where Fed Chair, Jerome Powell, remained broadly dovish on the underlying monetary policy. If US GDP numbers continue to come in softer than expected, we can expect momentum to favour gold in the mid-term.
Platinum continued to close the gap between itself and palladium this week, with the precious metal moving around 1% higher since Monday to levels of around $1,078, while palladium slid another 1% to trade near $2,646.54 per fine ounce.
DOLLAR LOSES ITS SHINE
The dollar fell below 92 against a basket of currencies on Thursday, its lowest level in four weeks following the weaker than expected GDP data. The greenback was already under pressure, following the dovish Fed comments on Wednesday evening, with the GDP release just worsening the position.
The euro appreciated towards $1.19 at the end of July, after touching its weakest level since early April last week when the dollar hit a four-week low after the Fed said that it was in no rush to withdraw stimulus. At the same time, investors expect that the European Central Bank will remain dovish for some time while worries about the spread of the Delta variant mounted.
The British Pound hit a four-week high of $1.396, as a result of the weaker dollar. England lifted its final Coronavirus-induced restrictions last week amid skepticism among epidemiologists around the rapid spread of the Delta variant.
Prior to the weakening of the dollar on Thursday, the South African rand traded around R14.80 for a large part of the week, as the country grapples with a third wave of COVID-19 restrictions and the recent unrest in parts of the country is likely to slow ongoing recovery.
We start the day at R14.56/$ R17.30/€ and R20.31/£.