This week we turn our attention to a number of recent emerging market elections, which are contributing to market volatility.
Key themes for the week include:
- Bets of a Federal Reserve (Fed) rate cut drag down treasury yields
- Wall Street eagerly awaits jobs report
- Oil prices recover from four-month lows
- Rand slips to its lowest level since April
EMERGING MARKETS FACE TURBULENCE AMID KEY ELECTIONS
Emerging markets have been thrust into the global spotlight as recent elections in South Africa, India, and Mexico have raised questions about political stability and the countries’ economic prospects. In the past two weeks, the political landscapes of these countries have experienced significant shifts, putting pressure on markets and stirring investor concerns.
India: A surprising election outcome
In India, Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) faced a major setback after it failed to secure an outright majority for the first time since coming to power a decade ago. Despite leading the party to two landslide victories in the past, Modi’s third-term bid will now depend on coalition politics. The BJP secured 240 seats, falling short of the 272 needed for a majority in the 543-member parliament. The main opposition, Congress Party, made significant gains, doubling its seat count from the previous election.
Modi’s loss of parliamentary majority has raised questions about his ability to implement his Hindu nationalist agenda without compromise. Although he declared the results a “victory” and promised continued development, the reality is that his government will now need to negotiate with smaller parties to push through policies. Stocks responded negatively to the election results, with Indian markets losing $386 billion in value—a reaction that some analysts described as “overdone,” considering India’s federal structure. India’s ongoing commitment to fiscal reforms, however, could mitigate any immediate economic disruption.
Mexico: A historic win
In Mexico, the political scene saw a historic shift as Claudia Sheinbaum became the country’s first woman president. Sheinbaum, a close ally of outgoing President Andres Manuel Lopez Obrador (AMLO) won decisively, and her Morena Party approached the congressional majorities necessary for substantial constitutional amendments. Despite AMLO’s controversial policies and his handling of crime, which have often been criticised, his legacy of social programs and increased minimum wages played a crucial role in Morena’s success.
The election outcome in Mexico was largely viewed as a continuation of AMLO’s policies, with a strong emphasis on social welfare and state control over strategic sectors. Investors, while initially wary of AMLO’s approach, appear to be more optimistic about Sheinbaum’s potential to maintain economic stability and foster growth.
South Africa: Coalition conundrum
South Africa’s political landscape was dramatically altered as the African National Congress (ANC) lost its parliamentary majority for the first time since the end of apartheid in 1994. The ANC’s failure to secure over 50% of the vote has led to intense coalition negotiations. Potential partners range from the pro-business Democratic Alliance to the radical Economic Freedom Fighters (EFF), each with vastly different ideologies.
The election results reflect a growing disillusionment among South Africans, particularly younger voters who are increasingly concerned with economic stagnation and high unemployment rates. The ANC’s previous dominance, rooted in its historic role of ending apartheid, seems insufficient to address the country’s current socio-economic challenges. Forming a stable coalition government is critical, but the ideological diversity of potential partners could lead to increased instability and policy gridlock.
Globally, the slurry of elections in 2024 come at a time when global economic conditions are already strained. These political shifts will contribute greatly to short-term volatility and fluctuations in sentiment and market performance. However, the fundamental economic conditions and overarching trends are expected to have a more significant influence on the long-term economic trajectories of countries around the world.
The focus will now shift to the next highly anticipated election – that of the United Kingdom (UK), scheduled for 4 July. This election could also see another significant political shift.
DIVING INTO THE MARKETS
United States (US) 10-year yields near two-month lows
The yield on the US 10-year Treasury note is hovering around 4.3%, near its two-month low. This reflects growing expectations of a potential rate cut from the US Fed in September. Economic data has shown initial jobless claims exceeding expectations for the second week running and a downward revision in labour costs. The Automatic Data Processing (ADP) National Employment Report also undershot expectations, while the Job Openings and Labor Turnover (JOLTS) report and ISM Manufacturing Purchasing Managers Index (PMI) pointed to weaker economic activity. The probability of a September rate cut has risen to around 69%, with today’s jobs report being a key focus for investors.
The UK’s 10-year Gilt yield rose to 4.2%, following the European Central Bank’s (ECB’s) decision to cut interest rates by 25 basis points and raise its inflation forecasts. This shift tempered expectations for further immediate rate cuts. The Bank of England’s (BoE’s) meeting on 20 June is widely expected to hold back on rate cuts until September, as British inflation, albeit declining, remains higher than initially forecasted. Meanwhile, political uncertainty due to July’s general election is affecting the UK market outlook.
South Africa’s 10-year government bond yield climbed to around the 10.90% mark, close to its highest level since April. This comes as the market weighs political risks amid ongoing coalition negotiations. The ANC is in discussions with various opposition parties, raising the possibility of a Government of National Unity (a broad coalition government consisting of all parties), which could include radical groups like the EFF. This potential shift is causing concern among investors.
Wall Street awaits further data
US stock futures were flat on Thursday, following record highs in the S&P 500 and Nasdaq. Investors are awaiting further economic data to assess future Fed policies. The rise in initial jobless claims and lower labour costs support expectations of a potential rate cut in September. Athletic apparel company, Lululemon, saw its shares surge over 8% due to positive earnings, while major tech stocks like Microsoft, Amazon, and Meta saw slight declines in pre-market trade. Computer chip maker, Nvidia, was set to reach another record high.
Germany’s DAX index increased by 0.4%, with multinational software company, SAP, leading gains at nearly 3.7%, driven by strength in the tech sector. Conversely, pharmaceutical company, Bayer, and semi-conductor producer, Infineon, fell significantly. The UK’s FTSE 100 remained subdued, with value retailer, B&M, dropping over 7% due to disappointing earnings and global technology business, Ocado, falling after being removed from the index. In the FTSE 250, engineering and consulting firm, John Wood Group, saw a nearly 10% rise on news of potential takeover talks.
Japan’s Nikkei 225 rose by 0.55%, closing at 38,703, driven by a tech-led rally in the US and falling Treasury yields. This has increased expectations of two potential Fed rate cuts this year. Japanese tech stocks, including Disco Corp and Tokyo Electron, posted significant gains, with investment holding company, SoftBank Group, surging, following news of investment by investment firm, Elliott Management.
South Africa’s JSE index edged higher on Thursday, trading above the 77,000 level after two consecutive sessions of losses. Market sentiment was bolstered by increased hopes for a Fed rate cut in September due to signs of a cooling US labour market. Locally, investors are monitoring coalition talks aimed at forming a new government in South Africa. Among single stocks, global chemicals and energy company, Sasol, and iron miner, Kumba Iron Ore, were the top performers, each gaining more than 3%, while luxury goods brand, Richemont, and diversified gold producer, Gold Fields, also saw notable increases.
Oil and gold win back some lost ground
Brent crude futures approached $79/barrel, marking a second day of gains after dropping to four-month lows. Oil prices are recovering alongside broader risk assets as Treasury yields decline and expectations of a Fed rate cut grow. The Energy Information Agency reported an increase in US crude inventories, reversing the previous week’s decline. The expanded Organisation of the Petroleum Exporting Countries, OPEC+, announced continued supply cuts into 2025, although some members will begin easing cuts in October.
Gold prices held at $2,360/ounce, slightly recovering from a recent one-month low. Labour market data suggesting a cooling US economy has increased expectations of multiple rate cuts from the Fed this year. Initial jobless claims rose unexpectedly, adding to the evidence of a softening US labour market and increasing bets on more than one rate cut.
The dollar subdued near two-month lows
The US Dollar Index recovered some lost ground this week, but remained near a recent two-month low. Signs of a softening labour market increased pressure on the dollar, with markets now positioning for two rate cuts from the Fed this year. Meanwhile, the euro was stable around $1.088/$ following the ECB’s decision to cut interest rates by 25 basis points. The ECB maintained a cautious approach to further cuts due to ongoing inflation pressures, which supported the euro.
The British pound edged down to $1.28/£ after a strong performance in May. The BoE is expected to hold off on cutting rates until September, and political uncertainty from July’s general election is also affecting market sentiment.
The South African rand hovered around R18.90/$, for most of the week, before briefly breaching the R19.00/$ mark in overnight trade. This dip followed the announcement that the ANC National Executive Committee has opted to pursue a government of national unity. The currency will remain under pressure as ongoing negotiations take place between parties, to reach a unity agreement that could include radical parties, like the EFF, which raises concerns about South Africa’s economic stability. Additionally, a recovery in the US dollar and an unexpected contraction in South Africa’s gross domestic product in the first quarter of 2024 are contributing to the rand’s decline.
Key Indicators:
USD/ZAR: 18.92
EUR/ZAR: 20.61
GBP/ZAR: 24.19
BRENT CRUDE: $79.94
GOLD: $2,376.10
Sources: Bloomberg, Reuters/Refinitiv and Trading Economics.
Written by: Citadel Global Director, Bianca Botes.