The world is full of controversial figures, many of them in political leadership positions. Boris Johnson, now the ex-prime minister of the United Kingdom (UK), is one of them. Many commentators have drawn parallels between him and former United States (US) President, Donald Trump. And just like Donald Trump, he is no longer in office. But in Johnson’s case, he was forced out by members of his own party.
Key themes for this week include:
- Boris Johnson steps down
- European Central Bank (ECB) minutes show many favour bigger interest rate hike
- Oil suffers major losses
- US exports soar
- Euro near twenty-year low
BORIS TENDERS HIS RESIGNATION
After a controversial three years as British Prime Minister, Boris Johnson resigned on Thursday. Johnson was elected as the leader of the Conservative Party and Prime Minister in 2019. At the time, the British pound reacted favourably to the news. Now, his resignation comes after a June 2022 vote of no confidence in his leadership, following the scathing Sue Gray “Partygate” report. Gray’s report expressed widespread dissatisfaction with Boris around a number of unlawful gatherings during COVID-19 lockdowns. The final nail in Johnson’s coffin, however, was the “Chris Pincher scandal”, where Johnson was accused of knowing about his Chief Whip’s inappropriate sexual behaviour before appointing him to one of the Party’s top positions. As a result, a record number of Conservative Members of Parliament resigned their positions in protest.
During Johnson’s time as Prime Minister, he was also accused of cronyism, deceit, bigotry and amorality. But Johnson’s wit and humour saw him well-liked by many supporters. His resignation deals another blow to a country already faced with many challenges, dating back to Brexit. So, what does the future hold as Johnson exits the picture?
While markets have reacted positively to the resignation, there are still numerous political and economic risks facing the country that won’t be solved by a change in Prime Minister or the country’s political leadership. In fact, Johnson’s resignation has only served to intensify the uncertainty for the country. While the roadmap envisioned by Johnson was not always clear, concise, or even logical, there are those that argue that it is better than no roadmap.
Citibank analysts who were quoted in mainstream media said, “In the months ahead, we see a UK heading into a once-in-a-generation squeeze in living standards, absent of a defined strategy, and facing deep governmental division. The risk of profound policy error is therefore significant.”
The race for power will now kick off and the timing could not be worse, given the current global geopolitical and economic uncertainty. The UK economy faces massive growth and inflationary pressure with Bank of England (BoE) and the government in a precarious position of fighting skyrocketing inflation while protecting the economy. The future of the UK hangs in the balance, and investors will be eagerly awaiting the outcome of the Conservate leadership battle, as they bet on the future of the world’s fifth largest economy.
DATA IN A NUTSHELL
US exports soared by 1.2% or $3 billion in June, up from May’s $255.9 billion. It is the biggest jump since the reading began in 1950. Exports of goods increased by $2.7 billion, driven by industrial supplies and material, such as crude oil, non-monetary gold and natural gas. Meanwhile, the number of Americans filing for new unemployment claims, unexpectedly rose to 235 000 in the week that ended 2 July, compared to market expectations of 230 000, indicating that the tight labour market is starting to show signs of easing. In addition, US-based companies announced plans in June, to cut 32 517 jobs from their payrolls – the highest reading since February last year, and a 58.8% increase from the 20 476 cuts announced in the same month last year. The Automotive sector announced the highest number of job cuts, 10 198, amid supply chain issues, semiconductor shortages, surging gas prices, and increased demand for electric vehicles.
Britain’s 10-year Gilt climbed to above 2.1% – after hitting a five-week low, coming in below 2% earlier in the week – after Boris Johnson announced the end of his term as Britain’s Prime Minister. In addition to the country’s political woes, the BoE warned that the UK’s economic outlook has worsened markedly due to the impact of the war in Ukraine and has instructed banks to ramp up capital buffers to deal with looming economic shocks. On the monetary policy front, the BoE has raised rates five times since December, however, investors are now anticipating that the pace of future hikes will slow in coming months. Labour productivity in the UK – measured by output per hour – decreased by 0.6% quarter-on-quarter in the first three months of 2022, following a 1.3% rise in the previous period. Productivity, however, remains 1.7% above its pre-pandemic levels.
Staying with central banks, the ECB’s June minutes revealed that the majority of the ECB policymakers favoured a 25 basis point hike for July, but some officials preferred to keep the door open for a larger increase. The Central Bank however concluded that a 25 basis point increment was a balanced first step and that it will open the door to a larger increase in September. A lower rate hike will also allow the ECB to benefit from updated projections and from observing the impact of the first rate hike on financial conditions over the summer. The annual producer inflation in the euro area fell to 36.3% in May, from a record-high of 37.2% in April, coming in below market expectations of 36.7%. Prices slowed for energy and intermediate goods. On the other hand, costs rose further for durable and non-durable consumer goods as well as for capital goods.
The Caixin China General Composite PMI (purchasing managers index) jumped to 55.3 in June, up from 42.2 in May, signalling renewed growth in the private sector and at its fastest pace since December 2020, on the back of an improved COVID-19 situation and the implementation of various measures to support a recovery in the economy. Both manufacturers and service providers saw strong improvements in output, as operations resumed. New orders increased at their fastest pace since October 2021, and export sales grew by their highest levels in 19 months.
PAUSED PANIC BENEFITS STOCKS
US stocks opened higher on Thursday, with the Dow Jones adding over 200 points, while both the S&P 500 and the Nasdaq each gained for a fourth consecutive session, as concerns over recession and tight monetary policy to rein in inflation took a breather. Energy, financials and consumer discretionary shares were among the top performers for the day, and chipmakers including Micron, AMD and Nvidia got a helping hand after Samsung posted its best April-June quarterly profit in three years. The price of gaming retailer, GameStop, shares surged by 9%, after the company announced that a 4-for-1 stock split was approved by its board.
European shares also extended gains during afternoon trade on Thursday, with the DAX adding almost 2% and the STOXX 600 gaining 1.5%. Mining and Energy shares were among the top performers. Traders will keep a keen eye on political uncertainty over the coming weeks.
The UK FTSE 100 rose more than 1% on Thursday, extending a 1.2% gain from the previous session, assisted by gains in oil, gas, and mining shares. Johnson’s resignation also ended the political chaos that was impacting the markets negatively. Oil giant, Shell, was up by over 2% after saying it would reverse up to $4.5 billion in write-downs on oil and gas assets after it raised its energy prices outlook.
The Japanese Nikkei 225 Index climbed 1.47%, while the broader TOPIX Index gained 1.42% on Thursday, erasing losses from the previous session and taking cues from a positive overnight session on Wall Street. Consumer-related and technology stocks led the rebound, with notable gains from Sony Group, Aeon Co, Kao Corp, SoftBank Group, Tokyo Electron and Recruit Holdings.
The JSE FTSE All Share Index jumped over 2% on Thursday, extending gains for the second straight session, in line with its global peers, as investors digested the hawkish Fed minutes. Mining, financial and tech companies were among the top performers. In South Africa, the focus remains on loadshedding and the government’s national advisory body has called for a wide-ranging intervention to alleviate South Africa’s loadshedding crisis, including a declaration of an energy emergency.
COMMODITIES RIDING THE WAVE
Following a slow start on Thursday, Brent Crude futures soared more than 4% to above $105 per barrel, as stimulus measures out of China lifted risk appetite. Brent Crude, Oil’s benchmark, is down more than 5% so far this week, pressured by fears of a global economic slowdown and an industry report showing a surprise jump in US crude stockpiles. Intense concerns that a looming recession will dampen energy demand have driven oil prices down, despite signs that supply remains tight in the global market. The American Petroleum Institute also reported that US crude inventories expanded by about 3.8 million barrels last week, defying expectations for a 1.1 million barrel drop.
Gold traded below $1 750 an ounce on Thursday, hovering near its lowest levels in nine months, remaining under pressure from a rallying dollar, as heightened recession fears and expectations of aggressive interest rate hikes by major central banks drove investors out of bullion and into the dollar.
Copper futures, often used as an indicator of economic wellbeing, jumped more than 4% to above the $3.50 per pound mark, having touched its lowest level since November 2020 earlier this week, assisted by expectations of higher demand from top consumer China, on the back of new stimulus measures. However, the metal remains almost 30% lower than its peak in March, as fears of a recession continue to hang over the market. The risk of recession in the US is growing as the Fed tightens monetary policy. Europe’s economic outlook is also darkening, due to soaring gas prices. On the production side, the latest data showed copper output in Peru fell 11.2% from a year earlier in May.
UK natural gas futures rose to above 300-pence-a-therm, close to a four-month high on fears of deeper supply cuts by Russia. Russian gas giant, Gazprom, limited flows in the main Nord Stream pipeline to just 40% of its capacity and the key pipeline is set to shut for maintenance on 11 July and is expected to remain shut for 10 days. There are fears that the pipeline will not return to full service after work.
HEADING FOR PARITY?
The Euro remained below $1.02, its lowest level in 20 years and is on the verge of hitting dollar parity, on growing concerns Russia may cut off gas supply to Europe and plunge the region into recession. The growing concern of a recession is in turn making it more difficult for the ECB to tighten monetary policy in a fight against inflation. While a rate hike of 25 basis points is expected in July, markets have reduced expectations of ECB rate hikes this year by 30 basis points to 135 basis points in recent weeks, as inflation hit a new record high of 8.6% and gas prices continue to surge.
The dollar index remained near 20-year highs, trading just below 107 on Thursday. The dollar gained support from the June Fed minutes that set the tone for higher interest rates in coming months to counter inflation. Policymakers stressed, yet again, the urgency of fighting higher consumer prices, even if it negatively effects growth. Demand for the greenback was also buoyed by the looming energy crisis in Europe and political turmoil in the UK.
The British pound strengthened briefly to trade at $1.2 on Thursday, following the resignation of Prime Minister Johnson. The UK is now on course to have its fourth leader within six years. Political turmoil in the UK is intensifying uncertainty around the country’s economic outlook. Sentiment, however, rose on the view that the new government could rapidly cut taxes and bolster spending to boost growth and improve relations with the EU. The pound has been on the backfoot, consistently trading weaker against the dollar since May 2021, hitting lows last seen during the pandemic, as recession risks loom and investors bet that BoE will be unable to control rising inflation without causing further damage to the already strained economy.
The South African rand took yet another tumble, to trade around R16.80/$, its lowest level since September 2020, amid broad-based dollar strength due to the Fed’s firm hawkish stance and fears of a global recession. Additional pressure from loadshedding, that is expected to weigh heavily on local economic growth, also dampened the mood. There is widespread concern that the current round of loadshedding could have long-term effects on the country’s economic growth. The currency was also pressured by the dollar strength. Meanwhile, South Africa’s higher-than-expected inflation data in June points to a further interest rate hike in July, which is expected to top initial 25 basis point forecasts.
The rand is trading at R16.74 /$, R17.02/€ and R20.09/£.