Two major events dominated investors’ focus this week. The release of the South African Medium-Term Budget Policy Statement (MTBPS), which was delivered by Minister of Finance, Enoch Godongwana, on Wednesday afternoon, and the United States (US) Federal Reserve’s (Fed’s) November interest rate decision, announced on Wednesday night.
Key themes for this week include:
- MTBPS in line with expectations
- Markets rally as Fed indicates likely end to hiking cycle
- Equity markets rally
- US dollar softens
THE SPOTLIGHT ON WEDNESDAY
The South African MTBPS Cameo
Godongwana’s delivery of the MTBPS had a subdued impact on the market. The South African rand, bond yields, and equity markets remained relatively unchanged in the wake of the statement. However, this lack of market reaction was not necessarily a positive sign but rather an indication that the Minister’s MTBPS aligned with market expectations.
The MTBPS outlines several economic risks for South Africa’s fiscal situation, particularly as the country approaches a crucial election year in 2024. Godongwana omitted specific budget figures while attempting to convey Treasury’s commitment to curbing expenditure.
While there were some positive aspects, such as realistic growth projections and a serious effort by Treasury to stabilise South Africa’s fiscal position, there are also significant concerns on the horizon. These include the country’s debt, as a percentage of the size of the economy, which has reached 77%, with this number expected to rise further, as well as uncertainties regarding future government spending and how it will be funded.
In essence, a national budget revolves around the balance between government revenue and expenses, and South Africa’s government is currently overspending. This overspending is being compounded by local structural issues and external factors, such as a weakening global economy and a decline in the commodity cycle, which has affected Treasury’s ability to generate the anticipated revenue set out in its February budget. While Godongwana’s message about austerity struck the right chord, the key question remains whether the South African government will implement the proposed reforms, especially given the country going into a pivotal election year.
The US interest rate decision takes centre stage
The US Fed, under Chair, Jerome Powell, decided to leave interest rates unchanged in their most recent Federal Open Market Committee meeting. Following the announcement on Wednesday, Powell’s remarks hinted that there might not be further rate increases this year, particularly given the cooling US economy. This led to a significant drop in US Treasury yields in overnight trading and a subsequent boost in technology stocks. While Powell did not rule out the possibility of future hikes, he emphasised that they would depend on the US economic trajectory.
Investors reacted to Powell’s comments shortly after weaker-than-expected manufacturing activity data was released, leading them to believe that a slowing US economy would discourage additional rate hikes. Powell’s tone was less hawkish than what the markets had anticipated as he acknowledged that monetary conditions had tightened considerably in recent months.
While Powell did leave the door open to the possibility of one more rate hike, the market interpreted his statements as a sign that the Fed might have concluded its series of rate hikes and could even cut rates by mid-2024. Even if the Fed refrains from raising rates further, it is expected that interest will remain above the 5% level until at least the end of 2024.
This scenario offers limited upside for Asian currencies, many of which have suffered losses this year due to the pressure of rising US rates.
Market focus now shifts to the upcoming non-farm payrolls data, set to be released later today. Any indications of a cooling labour market will likely reinforce the Fed’s decision to maintain interest rates at their current levels.
EQUITIES CLIMB ON UPBEAT SENTIMENT
US stock futures saw an extended uptick on Thursday, influenced by several factors. Initial jobless claims for the week exceeded expectations for the second consecutive time, while US labour costs unexpectedly decreased by 0.8% in the third quarter, in contrast with the anticipated 0.7% rise. These indicators suggest a gradual cooling of the US labour market. In response, contracts tied to the S&P 500 surged by 0.8%, the Dow Jones added approximately 180 points, and the Nasdaq 100 traded 1.2% higher, all before the market opened for the day. Earlier, stock futures were already on a positive trajectory as the Fed kept interest rates unchanged, as expected, and signaled a pause in rate hikes. The earnings season continued to play a role in market sentiment, with coffee retailer, Starbucks, gaining about 10% in premarket trading after exceeding earnings and revenue expectations. Pharmaceutical company, Eli Lilly, also saw a 1% increase following a report of earnings and revenue that surpassed expectations, although the company revised down its full-year profit guidance. Tech giant, Apple, is expected to report its quarterly results after the markets close.
In the United Kingdom (UK), the FTSE 100 showed an upward trend of more than 1% on Thursday. This was bolstered by positive corporate results and the Bank of England’s (BoE’s) decision to maintain its Bank Rate at a 15-year high of 5.25%, in line with expectations. Noteworthy stock movements included supermarket chain, Sainsbury’s, whose shares surged by over 4% after the company projected its full-year profits to reach the upper end of previously provided guidance. International energy company, Shell, also saw its shares rise by more than 1.5% after the oil major reported profits in line with expectations and announced a $3.5 billion share buyback. Entain shares rebounded by more than 2% after an initial dip of over 4%, as the gambling firm indicated that its margins were impacted by customer-friendly sports results. On the downside, consumer health company, Haleon’s stocks experienced a nearly 3% decline due to reports of reduced sales of flu medicines and dietary supplements.
European equity markets enjoyed a positive streak on Thursday, marking their best performance since July. Real estate stocks were on track for their most significant rise in nine months, while tech shares were poised for their most substantial gain in three months. Investor sentiment was buoyed by the US Fed’s decision to keep interest rates unchanged, and Powell’s comments reinforcing the idea that US rates may have reached their peak. In the corporate sphere, German airline, Lufthansa, reported quarterly profits slightly above analysts’ consensus, and fashion and lifestyle company, Hugo Boss’s third quarter sales and operating profit met market expectations. British food retailer, Sainsbury’s projected its full-year profit at the upper end of previous guidance, while airline, Norwegian Air, global bank, ING, and healthcare company, Novo Nordisk, all reported strong results. However, German fashion retailer, Zalando, anticipated a decline in sales for 2023. Frankfurt’s DAX 40 advanced by 1.6% to reach 15,160 points, and the pan-European STOXX 600 gained about 1.6% to reach 443 points.
In the Chinese markets, the Shanghai Composite experienced a 0.45% decline to close at 3,009, while the Shenzhen Component lost 0.94%, falling to 9,735 on Thursday. Mainland Chinese stocks faced challenges in gaining momentum and remained under pressure due to a surprising contraction in Chinese manufacturing activity, which has raised concerns about the country’s fragile economic recovery. Nevertheless, global sentiment remained positive, preventing Chinese stocks from suffering more significant losses. This was fueled by the US Fed’s decision to maintain interest rates for the second time and the US 10-year US Treasury yield falling to a two-week low.
On the South African front, the JSE All Share Index rose by more than 1% on Thursday. This positive trend aligned with global peers after the US Fed maintained unchanged interest rates for a second month running, allowing the economy to adapt to higher borrowing costs. Additionally, remarks by Powell suggested that the tightening cycle might be coming to an end. Locally, traders continued to digest the MTBPS. Among the top gainers were fashion retailer, Mr. Price, real estate companies, Hammerson and GrowthPoint, and pharmaceutical company, Aspen. Conversely, precious metals miner Sibanye-Stillwater saw a decline of more than 2% after the company mentioned possible changes at its palladium mines in the US due to an unexpected drop in metal prices.
GOLD AND OIL MARKETS: RECENT DEVELOPMENTS
West Texas Intermediate Crude futures rose above $81/barrel on Thursday, driven by a technical rebound. This was supported by the US Fed’s second consecutive decision to keep interest rates unchanged. Geopolitical tensions in the Middle East also contributed to the increase in oil prices. In contrast, US oil benchmarks hit a two-month low amid expectations that the Israel-Hamas conflict would be contained, easing concerns of it spreading through the oil-rich region. Weaker-than-expected manufacturing data from the US and China clouded the demand outlook.
Gold strengthened above $1,980/ounce, benefiting from a weaker dollar and softer global economic data, as central banks held rates steady. Copper futures reached a one-month high above $3.65/pound, driven by strong demand forecasts and supply concerns, with China expanding its budget for manufacturing investments. Data showed a significant drop in copper stocks at the Shanghai Futures Exchange and the London Metal Exchange, which plummeted nearly 40% in a week, erasing earlier gains. Operational issues in South American mines prompted companies like Southern Copper, Teck, and Anglo American to revise down their copper production forecasts for the current year.
US DOLLAR RETREATS
On Thursday, the US Dollar Index dipped below 106, marking a significant retreat from its recent one-month highs. This drop correlated with a decline in US Treasury yields, with the 10-year US yield falling to a more than two-week low of below 4.7%. The Fed’s decision to maintain interest rates contributed to these shifts. The Fed also acknowledged that the recent surge in yields had tightened financial conditions and hinted at the conclusion of rate hikes. Moreover, the latest data indicated a cooling labour market, with weekly claims exceeding expectations for the second consecutive week, along with unexpected third quarter labour cost reductions.
During the first two days of November, the euro was trading around $1.06/€, as traders assessed the global economic and monetary policy landscape, including the Fed’s decision main interest rates steady in its November meeting. In Europe, the European Central Bank (ECB) maintained interest rates at their current level for the first time in more than a year in October, as predicted. The ECB reiterated its intention to keep borrowing costs at a restrictive level for an extended period. Despite this, inflation in the eurozone fell below expectations, reaching 2.9% last month, nearing the ECB’s 2% target. However, signs indicate that the ECB’s tightening measures, are negatively impacting the European economy.
In the same period, the British pound made slight gains, reaching $1.22/£, as traders digested the BoE’s recent monetary policy decision. The central bank maintained interest rates at its current level for a second meeting in November, in line with expectations. The BoE reinforced its commitment to keeping interest rates high for an extended period and left the door open for another rate hike if evidence of persistent inflationary pressures emerged. BoE Governor, Andrew Bailey, emphasised that it was premature to consider rate cuts. Nonetheless, the UK’s economic outlook remains challenging, with inflation remaining high, at 6.7% in September, and significantly above the Central Bank’s 2% target. The BoE’s projections indicate economic stagnation in the third quarter of 2023 and minimal growth of just 0.1% in the fourth quarter is expected, with a forecast of zero growth in 2024 and a modest 0.25% expansion in 2025.
The South African rand continued to appreciate, trading near the R18.30/$ mark, its strongest level since early August. This was driven by a weaker US dollar, following the Fed’s decision to maintain rates steady. Domestically, South African Reserve Bank Governor, Lesetja Kganyago, has consistently emphasised the ongoing battle against inflation by the central bank, highlighting the skewed risks to the inflation outlook. He specifically cautioned at the last Monetary Policy Committee meeting that deteriorating public finances could lead to higher rates. Meanwhile, South Africa’s National Treasury forecasted larger budget deficits and increased debt for the next three years.
The rand is trading at R18.37/$, R19.53/€ and R22.42/£.
Sources: Trading economics, Investing.com, Refinitiv and the MTBPS address.