South Africa’s relationship with Russia has been in the spotlight leading up to the BRICS (Brazil, Russia, India, China, South Africa) conference scheduled to take place in South Africa during August. Many analysts have been concerned over what South Africa would do should Russian President, Vladimir Putin, attend the conference in person. Would the BRICS host “declare war” on Russia, by arresting its President, as per the International Criminal Court’s (ICC’s) warrant of arrest? Or would it choose the ire of the West by giving the BRICS head of state immunity? Yesterday, thankfully, South Africa was spared the decision as it was announced Putin would not be attending the conference.
Key themes for this week:
- Putin to attend BRICS summit virtually
- Local and global inflation data still taking center stage
- China’s sluggish recovery weighs on industrial commodities
- South African Reserve Bank (SARB) pauses its hiking cycle, for now
PUTIN TO STAY AT HOME
The BRICS summit, to be hosted in South Africa this year, has received a lot of unwanted attention, as controversy has raged around Putin’s visit and whether he would be arrested by South Africa, if he did.
The BRICS summit is the annual meeting of the leaders of five of the world’s major emerging economies. The BRICS nations represent some of the largest and most influential economies in the world. At the summit, their leaders come together to discuss various economic, political, and strategic issues that are of mutual interest to its members. The BRICS bloc is aimed at enhancing cooperation and collaboration amongst the member countries in an attempt promote sustainable economic growth, development, and prosperity. The summit provides a platform for leaders to exchange ideas, discuss common challenges, and explore opportunities for cooperation in areas such as trade, investment, technology, finance, and infrastructure.
South Africa granting diplomatic immunity to BRICS’ leaders, including Putin, became a point of contention this year, given the ICC arrest warrant out for Putin. In the lead up to the event, everyone has been waiting with bated breath to see if Putin would, in fact, attend the Conference in August. Commentators discussed whether the Conference could be moved to another BRICS country that was not a signatory to the ICC, and if that was not an option, which side would South Africa choose, Russia or the West?
In his affidavit, which was recently disclosed to the public, following an order from the South Gauteng High Court, President Cyril Ramaphosa said that South Africa had informed the ICC about facing difficulties in carrying out the arrest warrant for Putin. He expressed concern over the potential risk of engaging in armed conflict with Russia if it were to proceed with the arrest. In the affidavit, Ramaphosa stated that Russia made it extremely clear, that the arrest of President Putin would be deemed a declaration of war, and that an arrest would have also undermined a South African-led mission aimed at ending the war in Ukraine and “foreclose any peaceful solution”.
However, just hours after the affidavit was made public, the South African government announced that Putin had decided not to attend the conference in person, and that Russia’s Foreign Minister, Sergei Lavrov, would represent Russia in his place. This solved a rather large problem for South Africa.
While President Ramaphosa announced that a “mutual decision” was reached by the two countries, widespread rumours suggested that Putin’s decision not to attend the BRICS Summit was, indeed, linked to the ICC arrest warrant. However, the Office of the Presidency has explicitly denied this speculation and clarified that South Africa’s relations with Russia are still strong and stable, leading many to draw a different, and perhaps more likely conclusion, that Putin is politically too exposed to physically leave Russia, following the recent mutiny by the Wagner group.
Whatever the reason behind the decision, it remains a welcome relief to South Africa, which has suffered tremendous fallout on the back of its perceived close ties to its BRICS counterpart.
INFLATION DOMINATES DATA CALENDER
In June, United States’ (US) retail sales experienced a year-on-year increase of just 1.5%. This growth fell below a previously adjusted 2% rise in May, further bolstering the case for a pause in interest rate hikes by the US Fed, following the expected 25 basis point hike next week, as weak retail sails point to an ailing US economy.
Consumer price inflation (CPI) in the United Kingdom (UK) dropped to 7.9% in June, its lowest level since March 2022. This decrease was slightly below the market consensus of 8%, primarily due to a decline in fuel prices. The core rate, which excludes volatile items like energy and food, also eased to 6.9% from the previous month’s 31-year high of 7.1%. Despite the recent slowdown, both rates remained significantly above the Bank of England’s (BoE’s) target of 2%, ensuring the Central Bank will continue with its ongoing tightening campaign.
The CPI rate in the euro area for June was confirmed to be 5.5%, its lowest level since January 2022, primarily driven by a decline in energy prices. However, the core rate, which excludes volatile items like food and energy, increased to 5.5%, slightly above the initial estimate of 5.4%. This core rate remained close to a recent peak of 5.7%, indicating that policymakers at the European Central Bank (ECB) are likely to continue raising interest rates in the coming months. Notably, energy prices dropped by 5.6 %, compared to a decrease of 1.8% in May, while prices for food, alcohol, and tobacco, as well as non-energy industrial goods, rose at a slower pace.
South Africa’s annual inflation rate continued to ease, reaching a 19-month low of 5.4% in June, a decrease from 6.3% in May, and was even lower than the market’s expected rate of 5.6%. The inflation rate returned to the SARB’s target range of 3% – 6%. Notably, food inflation dropped to an eleven-month low of 11%, down from 11.8% in May, and prices also softened in categories like household contents and services, clothing, transport, and restaurants and hotels. However, inflation accelerated for housing & utilities, recreation & culture, and alcoholic beverages & tobacco. The annual core inflation, which excludes items like food, non-alcoholic beverages, fuel, and energy, slowed to 5% in June, in line with market estimates of 5.1%.
The Chinese economy exhibited a year-on-year growth of 6.3%, in the second quarter of 2023, expanding more than the 4.5% recorded in the first quarter, but fell short of market expectations of 7.3%. For the first half of the year, the Chinese economy grew by 5.5%, in response to the challenges posed by the COVID-19 pandemic and its impact on the economy. China had set a GDP (gross domestic product) growth target of approximately 5% for this year, following a 3% expansion in 2022. The government has been cautious about implementing significant stimulus measures, due to the significant rise in local government debt.
CORPORATE RESULTS REMAIN IN THE SPOTLIGHT
On Thursday, US stock futures showed a mixed trend as traders analysed recent earnings reports. Dow Jones futures rose by around 80 points, with healthcare-products manufacturer, Johnson & Johnson, gaining about 1% in premarket trading due to positive revenue and earnings results. However, tech company, IBM’s shares declined by 0.7% after its revenue fell short of expectations. The S&P 500 futures remained relatively stable, while Nasdaq 100 futures experienced a 0.6% decline. In premarket hours, entertainment firm, Netflix’s shares dropped by about 7% as its revenue missed forecasts. Similarly, Tesla’s stock fell approximately 4% despite reporting positive profits, triggered by Elon Musk’s indication of further price cuts and production slowdown at the electric car manufacturer. Today, insurer, Travelers, airline, American Airlines, and asset management firm, Blackstone, are also scheduled to release their earnings reports.
European stock markets tried to bounce back, with the DAX index rising approximately 0.4%, and the pan-European STOXX 600 gaining around 0.3%, as traders analysed fresh corporate earnings reports. The basic materials sector showed strong performance, driven by Anglo American’s positive report of a 42% increase in copper production during the first half of the year. Real estate and energy shares also saw gains. However, the tech sector struggled, as Taiwan Semiconductor Manufacturing, the world’s largest chipmaker, reported a decline in profits and reduced its outlook. Disappointing results from US-based companies Netflix and Tesla also had a negative impact. Chip manufacturer, ASML Holding, also continued to experience losses from the previous session. In other news, Swedish vehicle manufacturer, Volvo, reported a 54% decline in second-quarter operating earnings, while home appliance firm, Electrolux’s sales were down by 8%. On a positive note, global defense and security company, Saab, reported a 44% rise in operating profit and raised its organic sales growth guidance.
On Thursday, the UK’s FTSE 100 index continued its upward trend for the third consecutive session, driven by a significant surge of over 3% in industrial metal mining companies. Glencore and Rio Tinto experienced gains, with their shares up by more than 2% and 3%, respectively. Furthermore, easyJet announced a record pretax profit of £203 million ($262.5 million) for its third quarter, surpassing market expectations. This impressive performance was attributed to a rebound in summer travel demand and minimal disruption despite ongoing strikes. In other corporate news, Royal Mail owner IDS reported a 0.3% increase in revenues for its third quarter. However, parcel volumes declined by 10% at Royal Mail while growing by 4% at its overseas arm, GLS. As a part of its restructuring, the group appointed Martin Seidenberg, who has been CEO of GLS since June 2020, as the new CEO of Royal Mail.
INDUSTRIALS REMAIN IN THE FIRING LINE
Rhodium futures are currently hovering around $4,150/ounce, staying close to a near four-year low of $4,000 reached in early July. The rise in US interest rates has raised concerns about economic growth, while strengthening the US dollar. This is putting pressure on industrial metals. Moreover, disappointing data from China, the largest consumer of industrial metals globally, has also contributed to worries about weakening demand. Despite China’s GDP growth accelerating to 6.3% in the April-June period, it fell short of the market consensus of 7.3%. Additionally, exports and imports of Rhodium declined in June, producer prices experienced the most significant drop since December 2015, and passenger vehicle sales fell for the first time since January. On the supply side, power cuts in South Africa, the war in Ukraine, and increased production of hybrid cars are expected to provide some support to metals’ prices. Rhodium is trading nearly 73% lower year-on-year, while other industrial metals such as cobalt and palladium are also feeling the pressure, shedding 33.7% and 31.25% respectively.
However, the field is divided on the metals front, with gold, platinum, silver, copper, and iron ore posting gains year-on-year, while steel, lithium, titanium and HRC steel all join industrial metals by trading in the red. On Thursday, the gold price surged above $1,980/ounce, reaching its highest level in two months. The rise was fuelled by easing US inflation, leading to expectations that the Fed might be nearing the end of its current monetary policy tightening cycle. However, the US central bank is still anticipated to raise interest rates by 25 basis points this month, with traders reducing their bets on further rate hikes later in the year.
On Thursday, West Texas Intermediate Crude futures stabilised above $7.00/barrel following the recent period of heightened volatility. Traders are carefully evaluating the oil market’s outlook for the second half of the year. Oil prices received a boost earlier in the week when China’s top economic planner promised to implement measures to restore and expand consumption in the world’s leading crude importer. On the supply side, Russia’s energy ministry announced a 2.1 million-ton reduction in oil exports for the third quarter, in line with planned voluntary export cuts of half a million barrels per day in August. Expectations of nearing the end of the current monetary policy tightening cycle also contributed to the bullish sentiment. Additionally, official data showed a decline in US crude inventories by 708,000 barrels last week, which was less than the market’s expectation for a larger 2.4 million barrel drop.
DOLLAR REMAINS NEAR 12 MONTH LOWS
The US Dollar Index moved above 100 as investors analysed the prospects of an end to tightening monetary policy. Weekly jobless claims data declined to a two-month low, indicating strong demand for workers, while continuing claims saw their highest increase in over three months. The Dollar Index dropped to a more than one-year low last week, standing below 99.6, due to expectations that the Fed is approaching the end of the rate hiking cycle amid easing inflation.
The euro rose above $1.12, reaching its highest level since February 2022, as investors expect the ECB to continue raising interest rates as it tries to bring inflation down to its 2% target. Eurozone inflation declined to a 17-month low of 5.5% in June, but the core rate remains high at 5.4%. Traders anticipate rates to peak at 4% by the year’s end, but weak economic data might prompt the ECB to revise its inflation forecasts in September, possibly keeping the deposit facility rate at 3.75%.
The British pound has dropped below $1.30 but remains near a 15-month high of $1.314, which was reached on 14 July. This came after data showed a decrease in inflationary pressures in the UK, suggesting the BoE might not need to raise rates as much as initially expected. In June, the inflation rate eased to 7.9%, its lowest level since March 2022 and slightly below market expectations of 8.2%. This aligned with the BoE’s projection made in May. The core rate was at 6.9%, not far from the previous period’s 31-year high of 7.1%. Investors have also been shifting away from the dollar due to signs of cooling inflation in the US, leading to expectations that the Fed’s aggressive policy tightening may be nearing its conclusion.
The rand weakened back above the R17.90/$ mark on Thursday, following a rally to R17.73/$ leading up to the interest rate announcement by the SARB. South Africa’s central bank moved to keep rates on hold, but indicated that it is by no means the end of the hiking cycle, and interest rate decisions moving forward will be data dependant. The currency however remains nearly 4.6% stronger, with the focus now shifting to the Fed’s rate announcement next week. On the domestic front, the economy is still in a delicate state, showing signs of fragility. Businesses and households are grappling with significant challenges due to ongoing and persistent blackouts, which continue to pose a serious threat to the local economy as power outages disrupt daily activities and hamper productivity.
The rand is trading at R17.90/$, R19.95/€ and R23.09/£.
Sources: SARB MPC release, Refinitiv and Trading Economics.