This week, after months of speculation and uncertainty, United States (US) Federal Reserve (Fed) Chair, Jerome Powell, announced that the Fed will begin trimming its asset purchases, starting this month. With that out of the way, speculation has shifted to when the Fed might initiate interest rate hikes and the timetable it will follow in doing so.
Key themes for this week include:
- US Fed greenlights taper
- The world talks climate at climate change summit, COP26
- Robust US earnings support equities
- Eurozone flash Purchasing Managers Index (PMI) hits 6-month low
COP26 ZEROS IN ON A CARBON-FREE FUTURE
The 2021 United Nations Climate Change Conference (COP26) kicked off this week in Glasgow, Scotland. During the conference, delegates from countries will meet in different forums with the aim of lowering carbon emissions and addressing climate change related issues. The global energy context going into the conference includes record high natural gas prices in Europe, amidst a gas shortage, elevated oil prices in response to the energy crunch, and China reopening its coal power stations to bridge its own energy crisis.
During the conference, United Kingdom (UK) Prime Minister, Boris Johnson, announced a deal between South Africa and the European Union (EU), the UK and the US, to support South Africa’s energy transition away from coal towards green energy. The R131 billion in pledged funding over three to five years is estimated to curb up to 1.5 gigatonnes of emissions over 20 years. British Chancellor, Rishi Sunak, announced that almost 500 financial services firms, globally, agreed to align $130 trillion of their assets towards the climate goals outlined in the COP21 Paris Agreement held in 2015.
US President, Joe Biden, expressed disappointment at the absence of China’s and Russia’s respective leaders from the conference this year. China made the decision not to upgrade its climate targets ahead of COP26 to the chagrin of some dignitaries, however, the country remains committed to its existing goals to transition to an 80% non-fossil fuel energy mix by 2060. China was not the only country to disappoint – after a pledge by 100 countries to end and reverse deforestation by 2030, Indonesia appeared to walk back on its commitment, with the Indonesian environment minister Tweeting that “forcing Indonesia to zero deforestation in 2030 is clearly inappropriate and unfair”.
DATA IN A NUTSHELL
In the US, weekly jobless claims fell to a 19-month low last week, suggesting strong momentum in the economy. Initial claims for unemployment benefits fell to 269 000, which is the lowest level since the middle of March 2020, when there were mandatory business closures during the first wave of COVID-19 infections. Labour costs increased at an 8.3% annualized rate, last quarter, after rising by 1.1% in the April-June quarter. Not considering the Coronavirus distortions in 2020, the jump in labour costs was the largest since the first quarter of 2014. This follows on the news, last month, that wage growth in the third quarter was the largest on record, and the strong wage growth coupled with rising rents will challenge the Fed’s narrative that the current inflation is transitory.
The Bank of England (BoE) kept interest rates unchanged on Thursday, surprising the market which was expecting a rate hike. Had it done so, the BoE would have been the first of the world’s major central banks to hike rates in the aftershock of the COVID-19 outbreak. The bank, however, kept alive the prospect of a hike soon, cautioning that it will probably have to raise rates from its current low of 0.1%.
Eurozone business growth fell to a six-month low in October as supply chain bottlenecks and logistical challenges associated with the COVID-19 pandemic pushed input prices up at the fastest rate in more than two decades. The Flash Composite PMI fell to a six-month low of 54.2 in October from 56.2 in September, just below an earlier 54.3 “flash” estimate.
STRONG EARNINGS SURPRISE TO THE UPSIDE
Wall street indices are on course to further extend the gains following the Fed’s announcement to start scaling back its bond repurchasing program, even though the Central Bank has taken a more patient stance towards raising interest rates from record lows. On the back of this news, major indices were all in the green this week, with the S&P 500 gaining 1.2%, the Nasdaq Composite 2.1%, and the Dow Jones Industrial Average up 1.0%.
Earnings season has been very strong in the US and companies have had, on average, positive earnings surprises of 10.3%, which is above consensus estimates. Margins have been strong, despite concerns around price pressures and supply bottlenecks. The strong earnings beats have been driven mainly by financials, energy, and healthcare stocks.
Home goods retailer, Bed Bath & Beyond, surged on Wednesday, by as much as 54% at one stage, before settling at a 15% gain at the end the day. The move followed a sequence of announcements in which the company expects to complete its $1 billion share buyback program two years ahead of schedule. The company also launched its digital marketplace and announced a partnership with supermarket group, Kroger Co. On the other end of the spectrum, gaming company Activision Blizzard fell around 14% after the company announced that the release of two of its titles would be delayed.
In China, the markets were lower, burdened by a spike in new Coronavirus cases, which threatens to curb consumer spending in an already slowing economy, which is also being hampered by strains in the property market. The Hang Seng was down 1.1% for the week, with the Shanghai Composite also losing 1.2%.
In South Africa, the JSE All Share Index was flat for the week, gaining a paltry 0.5%. The financial index continued to perform well, returning 2.1%, the Industrial index gained 1.2%, however, the resource index lost 0.9%. The platinum miners led the way this week, clawing back some of the previous month’s losses with Northam and Implats gaining 9.1% and 7.3% respectively. MTN was up 6.4% on the back of a credible set of results. The laggards for the week were the diversified miners with Glencore losing 3.6% and BHP down 3.4%, as well as pharmaceutical group, Aspen, which fell 3.1%.
HAS OIL PEAKED?
The West Texas Intermediate (WTI) Futures peaked at $84.71 early in the week before tumbling almost 6% and breaking below $80 per barrel on Wednesday. The sharp move came ahead of Wednesday’s release of the Federal Open Market Committee (FOMC) minutes which revealed that, starting November, the Fed will begin to taper its asset purchasing program by $15 billion per month. By Thursday, the WTI Futures retraced some losses, closing the day at $80.70.
Gold opened the week at $1 780 per fine ounce and closed on Thursday at $1 792 per fine ounce after a late rally which saw the precious metal touch $1 798. Gold has struggled over the last two weeks in the face of easing implied US inflation expectations, and an upward momentum in US real yields over the same period.
Coal futures took a further beating this week trading at $158 on Thursday which translates to a
11.3% weekly loss, leaving coal down 41% from its October all-time high of $269. The price action in coal over the last two weeks conforms with China’s recent decision to liberalise its coal markets in an effort to stabilise its energy crunch. It is worth noting, however, that at these levels, coal is still around 60% above its average pricing in the five years prior to the pandemic.
POUND STERLING WEAKER ON BOE RATES DECISION
On the back of the interest rate decision by the BoE, the pound sterling fell against the US dollar by its highest margin in more than six weeks and was down 1% at $1.35. The sterling has fallen 2.5% against the dollar over the past three months. The pound has also lost value against the euro, and fell 0.6% to a monthly low of 85.32 pence. The euro also came under selling pressure on the back of the persistent rebound in the dollar, which pushed the US Dollar Index to new three-week highs of around 94.35.
The South African rand depreciated early on Thursday ahead of the final local government election results. The final count indicated that the ANC recorded its poorest, ever, electoral showing. The rand traded 0.5% weaker against the dollar, on Thursday, at R15.32/$, giving up some gains on the back of the Fed interest rate news.
In other emerging markets, the Turkish Lira continued its nosedive as it weakened more than 1% against the dollar on Thursday amidst persisting concerns of further interest rate cuts and expectations that this will lead to higher inflation which is already at two-year highs. Turkey’s annual inflation rose to near 20% in October after its central bank aggressively cut its policy rate.
The rand is trading at R15.23/$ R17.60/€ and R20.56/£.