Markets are on edge as they watch the escalation of the Middle East conflict. This week we delve into some of the most prominent market events, as the global economic landscape remains volatile and uncertain.
Key themes for this week include:
- Rising bond yields continue to cause concern
- Chinese third quarter growth exceeds forecasts
- United States (US) unemployment benefit claims drop to lowest level since January
IN THE SPOTLIGHT
US Federal Reserve (Fed) Chair, Jerome Powell’s speech on Thursday at the Economic Club of New York, had investors on edge, as they feared a potential hawkish tone, following the more dovish sentiment of the recent Federal Open Market Committee (FOMC) meeting minutes. This apprehension followed a string of positive US economic indicators which suggest ongoing robustness within the US economy and labour market. Powell, however, surprised by taking a more cautious stance. While he left the door open for future hikes, he noted that the Fed needs to let the rise in bond yields “play out” and said that US monetary policy is currently not considered to be too restrictive. He also expressed concerns over significant geopolitical risk. His comments overall seem to point to no rate hike in November.
China’s economy displayed resilience in the third quarter of 2023, surpassing market expectations, by expanding 4.9% year-on-year. This growth instills hope that China will meet its official annual target of approximately 5% growth for the year. This resilience can be attributed to Beijing’s sustained stimulus efforts, which have helped counter the impacts of a prolonged property crisis and sluggish trade. Notably, the Chinese Gross Domestic Product (GDP) grew by 6.3% in the second quarter, benefiting from a favourable comparison to the low base of last year when strict lockdowns were in place in major cities, including Shanghai. Moreover, China’s economic health in September became evident as retail sales posted their highest increase in four months, marking the ninth consecutive month of growth. Meanwhile, industrial output growth remained at its highest level since April, reflecting ongoing economic strength. The surveyed jobless rate also saw a significant decline, reaching a 22-month low at 5%, and fixed investment continued to grow during the first nine months of 2023. In addition, data released earlier in the month indicated that exports experienced a slower decline, partly due to the peak shipping season for Christmas products. When considering the first three quarters of the year, China’s economy advanced by 5.2%, a noteworthy accomplishment. This contrasts with the previous year, when GDP grew by only 3%, falling short of the official goal of approximately 5.5%.
Bond markets worldwide are experiencing a surge in yields, keeping investors on alert. In the United States, Treasury yields have been on a steady ascent, with both two-year and 20-year yields surpassing the 5.25% mark. Notably, the 20-year yield reached a record high, while the two-year yield achieved its highest level since 2006. The benchmark US 10-year Treasury note yield, in particular, has seen a four-day consecutive increase, reaching 4.96% on Thursday, marking a 16-year high. This trend is driven by the mounting anticipation that the US Fed will maintain elevated interest rates for an extended period. Positive economic data and statements from Fed officials have reinforced their commitment to keeping borrowing costs high to combat inflation.
This surge in bond yields is not exclusive to the US. Across the globe, similar patterns are emerging. For instance, the 10-year government bond yield in Hong Kong has reached a 16-year high of 4.511%. New Zealand’s 10-year government bond yield rose to 5.6% on Thursday, extending its upward trajectory for the third consecutive day and maintaining its highest level in nearly 13 years. In the United Kingdom (UK), the 10-year bond yield has exceeded 4.7%, according to over-the-counter interbank yield quotes for this government bond maturity. Italy’s 10-year government bond yield has surged to a near 11-year high of 5.026%. Japan’s 10-year government bond yield has risen above 0.8%, hitting its highest level in a decade, aligning with the global trend of higher yields due to stronger-than-expected economic data in major economies. Australia’s 10-year government bond yield has surged above 4.7%, reaching its highest level in 12 years.
The Middle East conflict also remains a concern for investors as they closely monitor global conditions. This war has the potential to impact oil prices, potentially leading to higher global fuel prices, similar to what occurred after Russia’s attack on Ukraine. While current prices have stabilised after the initial surge in crude oil costs, it may be advisable to keep your petrol tank filled as a precaution in case the situation in the region escalates. Meanwhile, investors seeking safety during times of uncertainty could further strengthen the US dollar and increase demand for assets like gold. Although there was a rush to traditional safe-haven commodities when news of the conflict broke, the market has since stabilised.
A LOOK AT THE DATA
In the United States, manufacturing production declined for the seventh consecutive month in September 2023, with a year-on-year drop of 0.8%, following a 0.9% decrease in August. Industrial production remained flat with a 0.1% year-on-year increase, supported by growth in mining and utilities, while manufacturing saw a 0.8% decline. US retail sales exhibited positive growth, rising by 3.8% year-on-year in September, marking their highest increase in seven months and following a 2.9% rise in August. The US labour market remained tight, as unemployment benefit claims dropped to 198,000 in the week ending 14 October, their lowest level since January 2023.
China reported positive economic indicators as the surveyed urban unemployment rate decreased to 5.0% in September 2023, its lowest since November 2021. Fixed-asset investment in China increased by 3.1% year-on-year in the first nine months of 2023.
Meanwhile, in the euro area, inflation declined to 4.3% year-on-year in September 2023, down from 5.2% in August, while the inflation rate in the UK remained stable at 6.7% in September, defying expectations of a slight decrease to 6.6%.
In South Africa, annual inflation accelerated for the second consecutive month, reaching 5.4% in September, slightly above market forecasts but still within the target range. South Africa’s retail trade contracted by 0.5% year-on-year in August.
EQUITY MARKET OVERVIEW
In the US, stock futures were volatile on Thursday, due to rising Treasury yields and earnings reports. Banking and trust financial services company, Truist Financial, beat forecasts, while United Airlines posted a third-quarter loss and reduced its profit outlook. Union Pacific Railroad exceeded earnings but missed revenue expectations. Electric car manufacture and alternative energy firm, Tesla, saw its shares drop 5% in premarket trading after disappointing results, but digital streaming service, Netflix, surged nearly 14% with robust subscriber growth.
The UK’s FTSE 100 declined over 0.5% due to Middle East tensions and higher bond yields. Pest control giant, Rentokil Initial’s shares fell over 10% on softer North American demand expectations. London Stock Exchange Group and commercial property analytic company, Relx, maintained their outlooks.
European markets were negative for the week, with Frankfurt’s DAX 40 down 0.2% and the STOXX 600 losing 0.6% amid Middle East tensions and bond yield concerns. Multinational software provider, SAP, reaffirmed its full-year outlook, while international exchange organisation, Deutsche Boerse, reported lower profit but raised its outlook, and global health company, Merck, looked to 2024 for growth. Telecommunications and information technology company, Nokia, announced job cuts as third quarter sales dropped by 20%.
In Asia, the Nikkei 225 fell 1.91%, while the TOPIX Index dropped 1.36%, influenced by surging global Treasury yields and Middle East turmoil.
South Africa’s JSE All Share Index fell slightly to around 71,460, due to global risk-off sentiment, Middle East tensions, and interest rate uncertainty. Traders are keeping their attention focused on third-quarter earnings.
COMMODITY MARKET HIGHLIGHTS
On Thursday, West Texas Intermediate Crude futures slipped below $88/barrel, marking a reversal from the previous session’s gains, primarily attributed to technical correction. Investors remain fixated on the global supply situation. Wednesday saw oil prices reach two-week highs, propelled by mounting unrest in the Middle East, which prompted concerns over potential supply disruptions. Additionally, an unexpectedly substantial inventory draw reported by the US further buoyed prices. However, on Thursday, the market retraced slightly as the Organisation of the Oil Exporting Countries, OPEC, indicated no support for Iran’s proposal of an oil embargo on Israel. The US also issued a six-month license allowing transactions in Venezuela’s oil sector following an agreement between the Venezuelan government and opposition leaders to ensure fair elections in 2024.
Gold held steady around $1,950/ounce on Thursday, maintaining its position close to the highest levels it has seen in 11 weeks. This stability can be attributed to the escalating conflict in the Middle East, which has heightened safe-haven demand for the precious metal. The persistence of stronger-than-expected US economic data has solidified the belief that the Fed will keep interest rates elevated for an extended period. Consequently, this has led to the benchmark 10-year US yield reaching 16-year highs above 4.9%, which, in turn, has limited the upward momentum of gold prices.
Copper futures hovered near their lowest levels in over four months, reflecting apprehensions about diminished demand and elevated inventories. Concerns about a potential slowdown in industrial growth, driven by the fear of a new normal in the US economy involving higher interest rates, were prevalent. Moreover, China’s debt-laden property firms posed a financial contagion risk to major resource buyers in Asia. Despite a significant uptick in copper inventories this month, with stockpiles at the London Metals Exchange and the Shanghai Metals Exchange (SHMET) surging by nearly 50% to 56.7 thousand tonnes during the week ending October 13, investors remained attentive to warnings from industry experts regarding potential supply challenges to meet increasing demand in the years ahead. Reports from the Energy Information Administration and the International Copper Association projected a 26% growth in copper supply by 2035, substantially falling short of the expected 50% surge in demand.
CURRENCIES IN CONTEXT
On Thursday, the US Dollar Index saw a slight decline, reaching 106.3, as investors exercised caution ahead of the address by Fed Chair, Jerome Powell, and the string of upbeat economic data from the US. Earlier, Fed Governor, Christopher Waller, expressed a preference to “wait, watch, and see” whether the US economy would maintain its strength or weaken in the face of higher borrowing costs. The backdrop of surging Treasury yields and concerns about an expanded conflict in the Middle East provided some support for the dollar.
Simultaneously, the euro remained below the $1.06/€ threshold, influenced by solid US retail trade data and the ongoing Middle East tensions, which increased demand for the US dollar. Investors also digested data showing an upturn in German investor sentiment, reaching a six-month high in October. In terms of European monetary policy, European Central Bank (ECB) Chief Economist, Philip Lane, indicated, in a published interview on Monday, that contemplating rate cuts is still a considerable way off. The ECB is expected to make another interest rate decision next week, following September’s increase in its key policy rates to multi-year highs.
The British pound slightly advanced to the $1.22/£ level, supported by UK data indicating that despite the Bank of England’s (BoE’s) series of interest rate hikes in recent months, inflation remained high in September. BoE Governor, Andrew Bailey, expressed puzzlement over the persistent strength of pay growth in the UK on Saturday, and BoE Chief Economist, Huw Pill, emphasised on Monday that the Central Bank should not prematurely assume victory in the battle against high inflation.
The South African rand was trading around the R19.00/$ mark on Thursday, following the short-lived strength witnessed earlier in the week where the currency hovered near the over two-week high of R18.68/$ reached earlier in the month. This performance was primarily bolstered by expectations of prolonged high interest rates. On the domestic front, South African Reserve Bank Governor, Lesetja Kganyago, has consistently emphasised that the Central Bank’s fight against inflation is ongoing. He cautioned at the Monetary Policy Committee’s last meeting that worsening public finances would lead to higher rates, identifying potential risks to the inflation outlook, including elevated oil prices, global financial conditions, a strong dollar, and the possibility of food prices reversing their downward trend.
The rand is trading at R19.04/$, R20.12/€ and R23.04/£.
Sources: Reuter/Refinitiv, Bloomberg, Investing.com and Trading economics.