This week has been rather uneventful, with dynamics remaining largely static. In this week’s Weekly Market Wrap, we highlight some of the key dynamics at play.
- Data rules the roost
- Bank of England (BoE) takes a dovish tone while keeping rates steady
- Equities take their cues from earnings and data reports
- Gold holds steady
- Dollar edges lower on higher jobless claims report
CONTINUOUS NARRATIVES
Ever since the emergence of the rate-cut narrative and the data-driven approach by central banks, markets have largely opted to take their cues from data releases in an effort to predict central bank policy and the rate-cut trajectory. While it might seem like a logical approach, it has caused quite a bit of volatility in the market as traders and investors alike position and reposition themselves from datapoint to datapoint. This behaviour and the volatility it causes will continue to be the order of the day until such a point that a clear interest rate trajectory can be mapped. Some of these crucial data points include inflation readings, gross domestic product and labour market statistics.
Geopolitical risk remains firmly on the table. The wars in Gaza and Ukraine might be the first to pop into your head when thinking about geopolitical tensions, but the ever-fracturing ties between countries also play a pivotal role. Market participants continue to keep a keen eye on trade relations between China and the Western World, as well as anti-West trade treaties, which are becoming increasingly common.
Chinese economic activity and policies are being closely monitored as market participants remain cautious in the region. Even as it faces headwinds, China remains a major player in global trade and investment. Its large population and growing middle class make it an attractive market for businesses, while companies around the world rely on China for both exports and imports, which impacts supply chains and revenue streams. The continuous animosity between the US and China, China’s perceived friendliness towards contentious countries such as Russia, the recent clampdown on private businesses, and economic headwinds all create a more cautious and uncertain environment.
The upcoming 2024 United States (US) presidential election holds significant implications for global markets. Elections often introduce uncertainty, leading investors to react to potential policy changes, which give rise to increased fluctuations in stock prices, bond yields, and currency values. Different political parties have distinct economic approaches, which can impact market behaviour. The decisions regarding US trade, environmental, fiscal, and foreign policies will also significantly shape the global economic landscape. In addition, the US’s role in global affairs is significant, and the election outcome can influence international trade relations, geopolitical stability, and investor confidence on a global scale. Investors will closely watch the candidates’ positions on these matters in the months ahead.
MARKET RECAP
A confluence of factors is shaping the dynamics of global financial markets. Recent economic data is driving speculation about central bank policies and influencing asset prices across bonds, equities, commodities, and currencies.
US Treasury yields react to surge in jobless claims
The yield on the US 10-year Treasury note experienced volatility this week, initially climbing, but later retreating below 4.5% on Thursday. This fluctuation followed the release of unexpected data indicating a surge in initial jobless claims to a six-month high. The disappointing labour market figures have fueled expectations of an impending interest rate cut by the US Federal Reserve (Fed), with markets now pricing in a 69% probability of a reduction in September. Despite this, comments from various Fed officials, including Boston Fed President, Susan Collins, suggest a reluctance to lower rates until there is greater confidence in inflation reaching the 2% target. This cautious stance contributed to tepid demand during the Treasury’s Thursday auction of 10-year notes.
In the United Kingdom (UK), the yield on the 10-year Gilt sharply retreated to below 4.15%, marking a one-month low. This downward movement followed dovish signals from the BoE in its latest policy decision. While the BoE maintained its key interest rate at 5.25%, Governor, Andrew Bailey, and other Monetary Policy Committee members hinted at a potential rate cut. The BoE expressed confidence in inflation nearing its 2% target in the coming months but emphasised a continued restrictive monetary policy stance even in the event of a rate reduction. Market participants responded by increasing bets on a rate cut in the upcoming quarter, with expectations divided between whether the potential cut will be in June or in August.
South Africa’s 10-year government bond yield mirrored movements in US bonds, hovering around 10.80%. Investors closely monitored signals from the Fed, with hawkish remarks from some policymakers tempering expectations of a US rate cut in September. Domestically, the South African Reserve Bank is expected to maintain elevated interest rates amid persistent inflationary pressures and uncertainties surrounding the outcome of the general election. This cautious outlook has led analysts to consider the possibility of no local rate cuts in the current year.
Equities react to economic data and earnings reports
US stock futures initially faced downward pressure following the surge in jobless claims, signalling softening labour market conditions. However, losses were mitigated, with major indicess posting modest declines of around 0.1%. Meanwhile, ongoing earnings reports contributed to stock-specific movements, with companies such as online rental platform, Airbnb, and tech company, Arm Holdings, experiencing notable price fluctuations in premarket trading.
In Europe, the DAX index in Frankfurt extended its winning streak to reach a fresh record high, while the FTSE 100, in London, continued its upward trajectory following signals of potential rate cuts by the BoE. Corporate earnings updates and monetary policy outlooks remain focal points for investors, driving sectoral and individual stock movements.
Asian markets displayed mixed performance, with Japan’s Nikkei 225 index declining slightly while the broader Topix index edged higher. Investors grappled with conflicting signals from the Bank of Japan’s policy meeting and data indicating a slowdown in wage growth. Notable stock movements included gains in financial services institution Mitsubishi UFJ and consumer electronics and gaming company Nintendo, while vehicle manufacturers Toyota Motor and Mitsubishi Motor saw declines in their stocks.
Closer to home, the JSE index experienced a slight decline, hovering around 77,020, but remained close to its one-year highs. Traders were actively evaluating the possibility of rate cuts by the US Fed and analysing ongoing corporate earnings reports. Individual stocks saw mixed performances, with Sappi notably underperforming, registering a drop of over 3% after reporting lower sales for the second quarter.
Commodity prices react to supply data and geopolitical developments
Commodity markets have been influenced by supply data and geopolitical developments. Brent Crude futures rose toward $84/barrel, supported by a decline in US crude stockpiles and expectations of a US Fed interest rate cut, which could signal the potential for increased energy demand. However, oil prices remained close to two-month lows amid easing geopolitical tensions in the Middle East. Gold prices, on the other hand, held steady at around $2,310/ounce as investors awaited US economic data for clues on the timing of potential Fed rate cuts and assessed geopolitical risks.
Currency markets await policy guidance
Currency markets saw the dollar decline slightly following the surge in jobless claims. Investors are awaiting further guidance on Fed monetary policy amid expectations of easing measures later in the year. The focus is now turning to next week’s inflation data. Meanwhile, the euro remained near one-month highs against the greenback as data from the US continued to underperform expectations.
The British pound experienced losses following the BoE’s dovish stance. Governor Bailey indicated a likelihood of rate cuts in the coming quarters to make monetary policy less restrictive. There was a slight increase in traders’ expectations for a rate cut in June, although a 25-basis points reduction in August remains fully priced in. Additionally, policymakers have adjusted their inflation forecast downward while raising the growth outlook.
The South African rand gained during afternoon trade on Thursday, assisted by a softer dollar and less negative sentiment around the potential outcome of the upcoming election.
Monetary policy decisions and economic data releases continue to shape market sentiment. Investors remain vigilant for further developments in central bank policies and economic indicators.
Key Indicators:
USD/ZAR: 18.50
EUR/ZAR: 19.93
GBP/ZAR: 23.15
GOLD: $2,352.14
BRENT CRUDE: $84.33
Sources: Bloomberg, Reuters News, Refinitiv and Trading Economics.
Written by: Citadel Global Director, Bianca Botes.