On Tuesday, Americans voted in the United States (US) midterm election. While many anticipated an overwhelming win for the Republicans, the Democrats put up a fierce fight and performed much better than initially expected.
Key themes for this week include:
- Republicans take Congress, but by narrower-than-expected margins
- US inflation cools
- Dollar dampens as risk sentiment improves
- Gold and platinum soar on weaker dollar
IS CONGRESS GOING RED?
While votes are still being counted in the US midterm elections, the Republicans have secured a narrow majority in congress, but, at the time of writing, control of the Senate was still up for grabs.
A Republican Congress will bring a wave of changes to the US political stage with dramatic policy changes likely. The Republican victory in Congress, even though by a slim margin, will see an end to many Democratic policies, especially social programmes that include environmental and healthcare spend.
Control by the Republicans will also open the door for investigations into contentious matters such as the relationship between President Joe Biden’s son, Hunter Biden and China, the withdrawal of troops from Afghanistan, and the democratic administration’s immigration policies.
We will also likely see a drive by Republicans for severe fiscal budget cuts and a refusal to raise the debt ceiling. After two years of calm, a move like that could threaten a default on US debt, and any deadlocks between the two parties on spending will likely see the threat of another federal shutdown.
Key drivers of voter dissatisfaction with the Democratic government, according to the pre-election polls, were the issues of inflation and a possible recession. Republicans took full advantage of these fears in the run-up to the elections and vowed to open up oil drilling in the US to counter the surge in oil prices. The Democrats, on the other hand, avoided addressing the economic issues at hand, and rather focused heavily on the contentious issue of abortion.
The question now is, with a split government, how will it effect the dollar? At the time of writing, the US Dollar Index was trading just over 15% stronger year-on-year, as interest rate hikes and risk aversion bolstered the greenback’s appeal. However, given the numerous potential stalemates the US government will face over the next two years, the dollar might not continue its reign for much longer.
DATA IN A NUTSHELL
The annual US inflation rate cooled for a fourth consecutive month, to 7.7% in October, the country’s lowest inflation print since January, coming in below market forecasts of 8%, and significantly lower than the 8.2% in September. The US’s energy index increased by 17.6%, below the 19.8% seen in September, due to a slowdown in price increases of gasoline, up 17.5% in October, compared to 18.2% in September, and electricity, which was up 14.1% in September compared to the 15.5% rise in September. The US Consumer Price Index (CPI) rose 0.4%, also coming in below expectations of 0.6%. The core inflation rate – which excludes food and energy – advanced 6.3% year-on-year in October, after reaching a 40-year high of 6.6% in September. Markets were anticipating a 6.5% gain. Meanwhile, US initial jobless claims rose by 7 000 to 225 000 in the week ending 5 November, the highest increase in four weeks and exceeding expectations of 220 000.
European retail sales contracted by 0.6 % year-on-year in September, their fourth consecutive contraction. Retail trade has been under pressure, as consumers remain hesitant to spend money, given rising borrowing costs, stubbornly high inflation, and a deepening energy crisis across Europe.
China’s annual inflation dropped to 2.1% year-on-year in October, from 2.8% in the previous month, compared with market expectations of 2.4%. This was the country’s lowest reading since May and is attributed to a slowdown in costs of both food and non-food goods. Official data showed that food inflation eased to 7.0% from September’s 25-month high, despite further increases in pork prices. In addition, non-food inflation slowed to 1.1% from 1.5% in September, amid smaller increases in prices of transport, communication, health, as well as a decline in the cost of housing. China has set a target CPI of around 3% for 2022, the same figure as in 2021.
South African mining production contracted by 4.5% year-on-year in September, after an upwardly revised 6.4% fall in the previous month. This marks the eighth consecutive month of declining mining activity. The sector has been hampered by strikes and ongoing power cuts. Gold production in South Africa sank by 12.4% year-on-year, following a downwardly revised 17.1% slump in the previous month. On the flip side, manufacturing production gained 2.9% year-on-year in September, the third consecutive monthly gain, beating market expectations of a 2.35% decline. The largest positive contributions came from the manufacture of motor vehicles, parts and accessories, other transport equipment and food and beverages.
US INFLATION TRIGGERS STOCK RALLY
Stock futures contracts, tied to the Dow Jones, rallied 800 points on Thursday, and those linked to the S&P 500 and Nasdaq jumped 3% and 3.8%, respectively, after US inflation slowed more than expected in October, raising hopes that the US Federal Reserve (the Fed) will be less aggressive when it comes to future interest rate hikes. On the corporate side, Rivian Automotive soared by almost 15% in premarket trading, after the electric-vehicle manufacturer reaffirmed its full-year production outlook.
European stock indices rebounded on Thursday afternoon, with Germany’s DAX 40 jumping above the 14 000 mark for the first time since early June, driven by softer CPI readings in the US. On the corporate front, German laboratory services group, Synlab, posted weaker-than-expected profits in the third quarter, while Britain’s Domino’s Pizza Group reported an 8% slump in sales, but reiterated its full-year core profit expectation.
London listed equities also rebounded aggressively during afternoon trade on Thursday, with the benchmark FTSE 100 rising towards the 7 400 mark, driven by real estate, utilities, and healthcare gains. Investors also welcomed a softer-than-expected US inflation reading. Energy provider, Centrica, and medical products and technologies company, ConvaTec Group, were among the biggest gainers on the index, up 9.7% and 7.7%, respectively. On the flip side, discount retailer, B&M European Value Retail, dropped more than 5%, and was the biggest loser on the FTSE 100, after it kept its financial guidance for this year.
The JSE All-Share index also tracked its peers to trade 1.2% higher on Thursday afternoon, as US inflation enhanced risk appetite, and eased fears of further aggressive hikes by the Fed. On the earnings front, pulp and packaging company, Sappi, reported a strong annual rise in net profit for the year, and resumed its dividend distributions.
GOLD AND PLATINUM SOARS ON WEAKER DOLLAR
Brent Crude futures held below $93/barrel on Thursday after shedding nearly 6% in the past three trading sessions, pressured by higher-than-expected US crude inventories and China’s ongoing battle against COVID-19 outbreaks. Official data showed that US crude stockpiles rose by 3.93 million barrels last week, higher than forecasts for a 1.36-million-barrel build. Meanwhile, fresh COVID-19 outbreaks in top commodity consumer, China, stoked fears that authorities would be poised to stick to their zero-COVID policy. On the supply side, the outlook remained tight as the expanded Organization of the Petroleum Exporting Countries, OPEC+, reduced output by two million barrels a day in November, while the European Union is set to ban Russian crude imports by 5 December 2022.
Gold prices rocketed by over 1% on Thursday to trade above $1 730/ounce, following the lower-than-expected US inflation reading, that sent the dollar tumbling. Markets now widely anticipate a 50 basis point rate hike in December instead of another 75 basis points.
Platinum futures rebounded back to $965/ounce, their highest level in four months. With the dollar having depreciated more than 4%, after hitting 20-year highs at the end of September, the appeal of greenback-priced commodities has been boosted. However, the price of platinum is still down more than 15% since it peaked in March, amid rising interest rates and lower demand on the back of slowing economic growth. The persistent semiconductor crunch has knocked vehicle production, and analysts who forecast supply-demand balances say they expect the platinum market to be in surplus this year and next year.
DOLLAR LOSES ITS LUSTER
The US Dollar Index depreciated by over 1.5% to trade below 109 on Thursday, its lowest level in eight weeks, as markets raised bets on a slower pace of rate hikes by the Fed, following the cooler inflation print. The most pronounced buying activity was for risk-sensitive currencies such as the Australian and New Zealand dollars. In addition, the yield on the US 10-year Treasury bond fell to 3.9%, the lowest yield in almost a month. Fed fund futures show that markets expect a 50 basis point rate hike in December after four consecutive 75 basis point increases, while expectations for the terminal rate eased to 5%.
The euro gained ground against the greenback, to trade above parity on Thursday, as investors sold off their dollars. Meanwhile, the European Central Bank is still expected to tighten monetary policy further to tame the eurozone’s stubbornly high inflation, despite fears of economic slowdown.
The British pound rallied more than 2% against the dollar, to trade above the $1.16 mark for the first time since 31 October, as global risk appetite improved. Last week, United Kingdom (UK) policymakers delivered a 75 basis point rate hike, the most significant rate increase since 1989, but noted that borrowing costs were likely to go up less than markets were expecting. They also acknowledged that the UK has already entered a recession. Investors are also keeping a keen eye on British Finance Minister, Jeremy Hunt, who is set to outline tax increases of up to £60 billion, next week, along with a range of spending cuts.
The South African rand basked in the renewed risk appetite, gaining 1.65% against the greenback at the time of writing, to trade at R17.45/$, the rand also strengthened against the euro, gaining 0.38% on Thursday afternoon, but lost ground against the pound. The rand continues to take its cue from global markets.
The rand is trading at R17.41/$, R17.75/€ and R20.36/£