As the COVID-19 pandemic continues to play out, the Delta variant is becoming increasingly concerning, even in regions already vaccinated. This has dampened the mood across markets this week.
Key themes for the past week include:
- Delta variant set to become the most dominant strain globally
- European Central Bank (ECB) press conference outlines monetary policy shift
- Gold dips below $1800, again
- United States (US) initial jobless claims soar to two-month high
DELTA VARIANT – A FORCE TO BE RECKONED WITH
The World Health Organisation (WHO), on Wednesday, voiced its concerns around the Delta variant of the COVID-19 virus, saying that the variant is set to become the dominant strain globally in the next few months. The WHO noted that the Delta variant, that was first identified in India, has now been found in 124 countries, with a jump of 13 countries over the past week, alone. According to severe acute respiratory syndrome Coronavirus 2 (SARS-CoV-2) sequences submitted to the global science initiative, GISAID, over the four weeks ending 20 July, the Delta variant exceeded 75 percent of detected cases in several countries.
Meanwhile, a new study by an American-based laboratory, has found that the Johnson & Johnson (J&J) single dose vaccine proves to be less effective against the highly contagious Delta variant. The study revealed that the vaccine produced relatively lower levels of antibodies than its peers. New York University scientists found that J&J’s vaccine produced roughly five times lower levels of the protective antibodies against the delta variant compared to the levels raised against an early Coronavirus strain. The study also added that those individuals who have already received the vaccine will likely need to receive another vaccine to effectively fight off the new strain of the virus.
In the US, as many as 83% of new COVID-19 infections are attributed to the Delta variant, while Israel, one of the countries to get rid of mask wearing and social distancing, are again putting up their guard. Health Minister, Nitzan Horowitz, has warned that Israel is predicting a “serious rise” in cases in the coming weeks and months, as new cases of COVID-19 almost doubled over the past week.
Many other countries will be keeping an eye on the United Kingdom (UK), as the UK economy is set to reopen despite the rise in the number of COVID cases as a result of the Delta variant. The UK will act as a test case for other countries with high vaccination rates, as they will try and gauge whether COVID-19 and its variants, can be managed, much like the normal flu, in a fully functioning and operational economic and social environment.
A GLOBAL VIEW
The ECB was first to take the spotlight this week, following a week with a rather uneventful data calendar. As the first ECB meeting kicked off on Thursday, following the announcement that it will be mooting a 2% inflation target, all eyes were on ECB President, Christine Lagarde, to provide guidance on monetary policy moving forward. In support of this new target, the ECB noted in the press conference, that the Governing Council anticipates key rates to remain at their current lower levels until such time that the ECB believes inflation has advanced sufficiently, and sustainably enough, to maintain a stable level of near 2% in the medium term. The central bank left interest rates and asset purchases unchanged as expected.
Taking a look at the US, initial jobless claims hit a two-month high with 419 000 Americans claiming unemployment benefits in the latest week, notably higher than market expectations of 350 000. The four-week moving average which removes week-to-week volatility also increased by 750 to 385 250. Employers continue to struggle to fill open positions, citing enhanced benefits, concerns about contracting COVID-19, and finding childcare as some of the reasons. Many analysts expect labour shortages to ease by September. As schools reopen, childcare concerns will be alleviated, while unemployment benefits are also set to expire throughout the country in September.
The week saw the UK report a drop from its 48-year high in business optimism. The Confederation of British Industry’s (CBI’s) quarterly gauge of manufacturing optimism in the UK fell to 27 in the third quarter of 2021 from 38 in the previous three-month period. Apprehensions about the availability of materials and components, skilled labour, and plant capacity contributed to factors likely to limit output. The manufacturing sector also continues to face heightened cost pressures, with firms reporting that average costs growth in the three months to July quickening to their fastest pace since 1980. The outlook further ahead, however, is more positive, with investment intentions for plant & machinery, and training & retraining, improving to their strongest levels since 1988 and 2015, respectively. Meanwhile, investors are keeping an eye out for any signals of a potential change in policy position of the Bank of England (BoE), after policymaker, Michael Saunders, said last week that the central bank could decide to halt its bond-buying programme early, amid inflationary pressure.
In South Africa, the South African Reserve Bank (SARB) kept interest rates on hold at 3.5%, as expected. In May, inflation spiked to above 5%, a 30-month high, which along with stronger-than-expected economic growth in the first quarter, created some expectations that interest rates may head higher sooner than expected. However, the economic damage caused by the violent riots last week, along with a return to more stringent lockdown measures, and the rampant third COVID-19 wave in Gauteng, have tempered those expectations. SARB governor, Lesetja Kganyago, noted that the direct and indirect cost of recent events would likely slow the country’s economic recovery. Even though some sectors have largely recovered to pre-pandemic levels, production remains muted.
Q2 EARNINGS BREATH LIFE BACK INTO EQUITIES
US equities saw the biggest three-day rally since April, backed by growing optimism around US second quarter earnings results which hit the newsfeeds. Out of all the companies on US shores that have posted their second quarter earnings, 86% have beaten analyst expectations, while 12-month forward-looking earnings expectations seem to be rising at faster rates than have been seen in years. Some of the bigger companies that have beaten analyst expectations include Crocs, AT&T, Coca-Cola, Johnson & Johnson, Netflix, Chipotle, IBM, Nike, Morgan Stanley and Wells Fargo. All the positive earnings headlines briefly overshadowed global concern around future COVID-19 spikes which could create further unexpected drag on certain global economies. By Thursday, the Nasdaq was up 1.40% for the week, the S&P500 up 0.80% and the Dow Jones up 0.30%.
European stocks, which followed the US’s positive trend this week, flattened out on the run up to the ECB’s monetary policy meeting on Thursday. The ECB released their monetary policy guidance shortly after lunchtime on Thursday, announcing that interest rates on main refinancing operations, marginal lending facilities, and deposit facilities will remain unchanged at 0%, 0.25% and -0.50% respectively. Some of the bigger European movers of the week were found within the travel and leisure sectors with Swedish outdoor and transportation equipment manufacturer, Thule Group, jumping more than 12% following strong second quarter earnings numbers, while Dutch-based chemicals company, Corbion, fell more than 8.4% on Wednesday. By Thursday afternoon, the CAC40 was up 0.95% for the week and the German DAX coming in flat.
Turning to the UK, the FTSE100 fell slightly this week, with stocks the aviation and travel & Leisure sectors creating stability within the index. Rolls Royce shares jumped by 7.7% on Wednesday, while retailer, Next, increased by 7.5%, after reporting strong sales figures and sharing positive profit forecasts. When looking at the travel and hospitality sectors, Whitbread, Compass Group and IAG all added over 5% to their share prices by Thursday.
Shanghai and Hong Kong exchanges added 1.01% and 2.12%, respectively, to their market value at Thursday’s close for the week, with China Evergrande Group adding almost 8% to its share price on Thursday, mainly helped by a strong performance in the cryptocurrency space overnight. With the week’s tragic flooding making up most news headlines, foreign investors quietly lapped up Chinese Mainland stocks for three days straight, as confidence slowly swings back to China’s growth story.
Locally, the JSE saw both the Top 40 and All Share Indexes adding around 1% to their market values, following both the dovish ECB reports and strong earnings coming out of the US. Following the shockwaves emanating from the mass looting and disruption in KwaZulu-Natal last week, Retailer Mr. Price still has 111 stores closed to public, following the damages and loss of inventory due to looting. Lewis Stores also currently has 60 stores that have not been reopened. Shoprite Group also did not come out of the looting frenzy unscathed, as over 115 of their 1189 stores (including subsidiaries) succumbed to material damage. 54 Checkers LiqourShops were also impacted by the violence. No solution is in site for Multichoice after the Nigerian government threw a largely fictitious accusation at the company last week, and thereby freezing its bank accounts in Nigeria. The company has since been in communication with Nigerian authorities, but nothing has come of the talks yet. The extension of the recent alcohol ban saw South African Breweries gradually winding-down certain beer production facilities this week, as supply chain strain within the alcoholic beverage industry grinds to a halt. Most major indexes such as the financial index and resources index remained flat this week, with the industrials sector leading the overall local market higher by 1% by Thursday, with Naspers and Prosus adding some momentum.
THE EBB AND FLOW OF SUPPLY AND DEMAND
US West Texas Intermediate (WTI) crude oil and the Organisation for Oil Producing Countries (OPEC) Brent Crude oil had a reasonably volatile week, on the back of OPEC+ looking to increase overall output per day by 400 000 barrels each month from August through to December 2021. The United Arab Emirates announced that it will now also look at awarding various contracts to oil producers in their region, ultimately increasing their barrel-per-day-output to five million barrels in the medium-term, compared to the previous long-standing four million barrels per day. Failure of OPEC+ to come to an agreement on the extension of suppressed oil output saw countries taking back the reins and slowly increasing forward-looking oil supply, which lead to around an almost 7% drop in Brent Crude and WTI prices to levels of $68.00 and $65.25 per barrel respectively by Tuesday. Thursday saw Brent and WTI prices recover to levels of around $72.20 and $70.60 per barrel.
Gold spot prices held relatively well through to Wednesday, eventually dipping below the $1 800 an ounce support level during Thursday’s session ahead of the ECB’s monetary policy meeting. Analysts expect the ECB to keep monetary policy relatively flexible in the short- to mid-term, which helped assist a wave of confidence into equities and a slight outflow from precious metals, which are typically safe-haven assets. Gold traded around $1 795 per fine ounce on Thursday, below its recent support level of $1 800, which is now slowly morphing into its resistance level.
Following platinum’s almost 5% decline last week, prices remained stable around the $1 080 level during the trading week, while palladium increased its gap on platinum by 2.5% to trade at levels of $2,675 by Thursday. With South Africa moving towards a more sustainable energy path, platinum has been earmarked as the favoured precious metal to be used in the production of electrolyser or fuel cell technology systems in future. South Africa remains the world’s leading platinum producer focusing on catalytic converters for fossil fuel powered cars. However, a gradual swing into the green energy sector is a probable likelihood.
INITIAL JOBLESS CLAIMS DAMPENS DOLLAR
The dollar index extended the decline to 92.5 on Thursday as investors digest an unexpected rise in initial claims and strong earnings report. A surprise increase in initial jobless claims underscored the unevenness of the labor market’s recovery, while most corporate results have so far surprised on the upside. However, the dollar has been on a steady ascent since mid-June and remains close to four-month highs after the US Federal Reserve sharply raised its forecasts for inflation this year and brought forward the time frame on when it will hike interest rates.
The euro bounced back above the $1.18 mark on Thursday, as an unexpected increase in US jobless claims hit the dollar. However, the euro remained close to three-and-a-half-month lows after the ECB left interest rates and asset purchases unchanged as expected.
The British pound traded around the $1.37 level for most of the week, after reaching its weakest level since mid-January, as England proceeded to lift its final Coronavirus-induced restrictions even as infections rise, yet again.
Following a brief recovery in the rand, after the riot-induced sell-off witnessed last week, the rand continued on its bumpy ride this week, trading in a broad range of R14.50 to 14.70, as risk aversion intensified globally amid fears of the new Delta variant and the effectiveness of certain vaccines.
We start the day at R14.72/$ R17.32/€ and R20.24/£