Over the last few weeks, market-related news has been sounding a bit like a broken record, replaying key themes of the Delta variant and the potential tapering of asset purchases in the United States (US) by the US Federal Reserve (Fed). While the narrative has remained largely unchanged, so has the overall market landscape.
Key themes for the week include:
- China faces economic woes
- More central bank officials call for monetary policy tightening
- US Jobless claims
- A big drop in inventories boosts the oil price
DELTA MAKES A DENT
As the world’s second largest economy, and the emerging market leader, it comes as no surprise that economic activity in China plays a significant role in global economic growth and trade.
While there has been a lot of speculation around the origin of the COVID-19 virus, and even more conspiracy theories about the intentional release thereof, as part of an “economic takeover” ploy, one thing is certain – the Chinese economy has not escaped the economic backlash caused by the virus.
The Chinese economic slowdown worsened, yet again, in August as continuing COVID-19 outbreaks expose the lacklustre consumer activity in the region, and cast a shadow over the country’s growth prospects. Retail sales grew a meagre 2.5% in August year-on-year, far below economists’ forecasts of 7%. It was the slowest increase in 12 months. Industrial production, which was one of the main drivers behind China’s phenomenal recovery in 2020, also missed the mark.
The disappointing economic data from the country, add to growing concerns over a loss of momentum across China’s economy. Recent flooding, regulatory interventions, new Coronavirus infections and a property market slowdown, are all driving down the country’s growth expectations for the upcoming year. Consumer activity – which has lagged behind the country’s wider recovery over the course of the pandemic as households remained cautious – has been hit hard by these disruptions. On Tuesday, KFC operator, Yum China Holdings Inc., said its adjusted operating profit would take a 50% to 60% knock in the third quarter as the spread of the Delta variant in China closed restaurants and “sharply reduced sales”.
Analysts across the financial sector have also started to downwardly adjust their economic growth forecasts, with Goldman Sachs decreasing their growth forecast for China to 2.3% from its previous 5.8% projection.
With the sharp reduction in consumer activity, the property market in China will continue to play a significant role. Here too, however, lay some worrisome factors. Concerns around the potential default of one of Chinas largest property developers, Evergrande Group, remains a concern, while data released on Wednesday indicated growth of 0.3% in property investments, the slowest rate in 18 months.
In recent data, US industrial production rose in line with forecasts, import prices dropped for the first time in 10 months, and the New York Empire State Manufacturing Index grew more than expected.
The US’s annual inflation rate eased to 5.3% in August from a 13-year high of 5.4% reported in June and July, matching market expectations. A slowdown was seen in the cost of used cars and trucks, and transportation services, while inflation remained steady for shelter and apparel. Conversely, faster price increases were seen in food, new vehicles, energy, and medical care services.
The number of Americans filing new claims for unemployment benefits rose to 332,000 in the week ending 11 September, from a pandemic low of 312,000 reported last week. This was due to a combination of unfavourable data, and a surge in applications that were delayed due to Hurricane Ida. It is the first reading after the 6 September 2021 expiration of enhanced unemployment benefits, including a $300 weekly supplement of regular state benefits from the government pandemic aid.
The annual inflation rate in the United Kingdom (UK) jumped to 3.2% in August of 2021, the highest since March 2012, from 2% in July, and above market forecasts of 2.9%. A low base effect from last year had the biggest impact, because of, in part, discounted restaurant and café prices in August 2020 resulting from the government’s Eat Out to Help Out scheme and, to a lesser extent, reductions in value added tax across the same sector. The predominant upward pressure came from prices of recreation and culture, transport, housing and utilities, food and restaurants, and hotels.
The eurozone trade surplus narrowed to €20.7 billion in July 2021, from €26.8 billion in the same period last year, as global demand continued to consolidate its recovery from the COVID-19 pandemic losses. Exports rose 11.4%, boosted by sales of raw materials such as crude materials, and fuels and lubricants, as well as manufactured goods on the back of chemicals and related products. Among major trade partners, exports to Russia increased by 19.1%, while sales to the US gained 9.7%, but fell by 0.9% to China. Imports grew by 17.1% largely led by a jump in purchases of crude materials, fuels, and lubricants. European new car sales slumped 23.2% in July and 19.1% in August compared to the same months in 2020, pointing to the first decline in registrations after four months of growth, as production lines were hard-hit by the global semiconductor chip shortage.
Japanese exports extended double-digit growth in August, lifted by robust global demand for machinery goods and semiconductor-related products, but the pace of growth declined amid persistent supply chain issues. Meanwhile, imports jumped 44.7% year-on-year to a 33-month high, amid strong domestic demand.
South African gold production declined to 44.5% in May from 177.9% in April, while mining production rose by 10.3% year-on-year in July, following a 19.1% jump in the previous month. It was the fifth straight month of rising mining activity, reflecting the gradual recovery from the COVID-19 shock last year. On a seasonally adjusted monthly basis, mining production advanced by 4.1%, the most in four months, reversing a 1.6% decline in the previous month.
ASIAN SHARES ALSO FEEL THE PINCH
The Shanghai Composite Index dropped by 1.34% to close at a near two-week low at 3,607 on Thursday. The index fell for the fourth straight session as concerns mounted over Beijing’s regulatory crackdown after a series of regulatory overhauls on industries, and as sporadic COVID-19 outbreaks brought into question the pace of economic recovery. The Hang Seng declined 1.5% to a nearly 11-month low, with shares of Evergrande plunging to their lowest in a decade, amid mounting fears that a liquidity crisis in the company could cause risks to the broader economy. Meanwhile, casino shares in Hong Kong continued to suffer sharp losses after Macau set a plan to revise gambling laws.
Japan’s Nikkei 225 shed 0.62% to close at 30,323 on Thursday, falling for the second session, amid profit-taking, as traders continued to cash in after a recent rally that was driven by hopes for a new strong political leadership. In the meantime, local media said that Tokyo is considering convening an extraordinary parliamentary session on October 4th to elect a successor to outgoing Prime Minister, Yoshihide Suga. On the business side, Google LLC said on Thursday that it has launched News Showcase in Japan, a service that delivers news content, from various publishers, to users. Tokyo Electron sank 3.05% while SoftBank Group lost 1.39%.
US stock futures traded slightly lower on Thursday, as market participants were concerned about the impact of the Delta variant on economic recovery and uncertainty over the timing of the Fed’s tapering. Meanwhile, US President Joe Biden met with the country’s top CEOs and other distinguished business leaders on Wednesday to encourage companies to make vaccinations mandatory for employees, as the country experienced a surge in COVID-19 infections among its unvaccinated population. On Wednesday, Wall Street regained momentum, further recovering from its recent losses amid a boost from energy shares. The Dow added 0.7% to end at 34,814. The S&P 500 added 0.9% to 4,481. The Nasdaq was up 0.8% to 15,162.
European stocks rebounded on Thursday, breaking away from a weak handover from Asian markets, as investors welcomed upbeat corporate earnings. Online trading firm, IG Group, jumped a near 5% as results from the first quarter of the 2022 financial year saw a 6% rise in net revenues to £221.7 million, while fashion retailer, Superdry, surged more than 8% as revenues recovered by 1.9% in the 2021 financial year. The Stoxx 600 and Frankfurt’s DAX 30 both added 0.6%, while the French CAC 40 and Madrid’s IBEX 35 each climbed 0.8%.
The UK’s FTSE 100 traded slightly higher on Thursday, in line with its European counterparts, as investors digested a batch of corporate earnings. Fashion firm, John Lewis, revealed a net loss of £29 million in the first half of the 2021/22 financial year, compared to a net loss of £635 million in the same period a year earlier. Meanwhile, UK Prime Minister Boris Johnson sacked and replaced several senior ministers on Wednesday, looking to strengthen his support ahead of the Conservative Party Conference and push forward with his domestic reform agenda.
The local FTSE/JSE All Share index fell almost 1% to around 63,762 on Thursday, tracking its Asian peers, amid mounting concerns over China’s economic recovery and as Beijing’s regulatory crackdown has intensified. On the domestic front, July’s weak economic data, caused by civil unrest and restrictive COVID-19 measures, suggests that South Africa’s economy could contract over the third quarter. On the earnings front, FirstRand, Africa’s largest bank by market value, reported a 56% rise in full-year profit, with credit losses easing as it recovers from the impact of the COVID-19 pandemic.
OIL REBOUNDS WHILE GOLD GIVES UP GROUND
West Texas Intermediate (WTI) crude futures were around $72.60 a barrel on Thursday, after touching a two-and-a-half-month high of $73.14 a barrel the day before, after a bigger-than-expected draw in US crude inventories, supply disruptions, and prospects of higher demand. Energy Information Administration data showed crude stocks in the US fell by 6.42 million barrels in the latest week, almost double the market forecasts. Earlier this week, American Petroleum Institute data showed a bigger-than-expected 5.44 million barrel drop in inventories, while stocks of gasoline and distillate also declined. Although tropical storm Nicholas did not damage Texas refineries, around 30% of production in the US Gulf of Mexico remains shut after hurricane Ida, which passed over three weeks ago. On the demand side, both International Energy Agency (IEA) and Organization of the Petroleum Exporting Countries (OPEC+) raised their demand forecasts for next year.
Gold prices fell almost 1% to around $1,780 an ounce on Thursday, close to levels not seen in a month, after holding above the key psychological level of $1,800 the day before. Traders are cautiously awaiting a signal on the Fed’s timeline on withdrawal of its massive stimulus.
Copper futures traded around $4.40 per pound, amid a subdued dollar but remained under a one-week high of almost $4.50 and about 10% below a record high of $4.90 hit in May, as supply constraints from top producer, Chile, eased. On the demand side, trade data released earlier in the month showed imports of unwrought copper and products into China, the world’s biggest copper consumer, were 394,017 tonnes in August, down 7% from July, and down 41% year-on-year.
Coal, having gained a whopping 120% this year, steadied at $177 per tonne, near a recent record high of $179, boosted by soaring demand for electricity and power particularly from China and India, amid tight supplies. Despite efforts to decarbonize the global economy, renewables such as wind and solar have been struggling to meet an uptick in demand after COVID-19 related lockdowns eased. According to the IEA, global electricity demand is expected to rise by 5% in 2021 and by 4% in 2022. On the supply side, Indonesia has been struggling with persistent rainfall while rail and port constraints hit shipments from Russia and South Africa. On top of that, a trade spat with Australia has curbed Chinese imports while a surge in global gas prices led some utility companies in Japan and Europe to switch to coal.
CURRENCIES REMAIN FOCUSSED ON THE FED
The dollar index stood at 92.6 on Thursday, little changed from Wednesday, and close to levels not seen in a week, as investors await the Federal Open Market Committee meeting next week for further clarity on when the Fed will start cutting stimulus. Tapering tends to benefit the dollar as it will mean the number of dollars in circulation will be lower.
The euro fell back under $1.18 this week, hovering around its weakest level since 27 August 2021, due to growing risk aversion, as rising COVID-19 infections could force some countries to reintroduce restrictions. The European Central Bank decided last week to move to “a moderately lower pace” in its €1.85 trillion Pandemic Emergency Purchasing Programme from the €80 billion a month level it has run at since March, amid a stronger near-term outlook for prices and growth. Still, the Central Bank did not provide any detail about the exact end date of emergency support, leaving that contentious decision for December’s meeting. On the other hand, a smaller-than-expected rise in US inflation coupled with hawkish comments by Fed officials led to uncertainty on when the Fed would begin tapering its asset purchases.
The British pound held steady around the $1.383 level, after economic data showed UK inflation hit a more than nine-year high in August and reignited concerns about a sooner-than-expected policy tightening by the Bank of England. At the same time, concerns about slowing global growth due to coronavirus outbreaks dampened appetite. Earlier this week, the Confederation of British Industry, the UK’s biggest business lobby, warned that higher taxes to pay for social care costs and the National Health Service after the pandemic could further slow economic growth. Meanwhile, the UK is preparing a mass booster vaccination program as it plans to scrap mandatory vaccination certificates in England.
The South African rand depreciated almost 1% to R14.50 against the US dollar since Monday, its lowest level since 2 September 2021, pressured by weak domestic data and a more pessimistic economic outlook for the country. A decline in retail sales in July coupled with poor manufacturing data last week raised concerns about the extent of the impact of social unrest and tighter lockdown restrictions on South Africa’s economy in the third quarter. This was despite the fact that President Cyril Ramaphosa announced the relaxation of COVID-19 lockdown restrictions in South Africa to level 2, shortly after the unrest. At the same time, market sentiment continued to be hit by persistent fears of a slowdown in global growth due to the fast-spreading Delta variant and the prospect of an early tapering of Fed stimulus.
We start the day at R14.56/$ R17.14/€ and R20.10/£.
*Kindly note, due to the upcoming Heritage Day public holiday, there will be no weekly wrap on 24 September 2021.