For years we have been hearing about the devastating effects of man-made environmental disasters. Organisations like Green Peace have protested myriad issues from oil spills to the use of single-use plastics. But now, the biggest protest of all, seems to be coming from Mother Nature, herself. The impact of climate change is resulting in billions of dollars of devastation and lost economic output across the globe.
Key themes for this week include:
- Natural disasters add to global economic woes
- Dutch inflation rate at its highest level since 1971
- Turkey has highest inflation reading since 1998
- Gold price see-saws on weaker dollar and declining Treasury yields
- Oil gains on supply cuts
- Dollar regains power position on hawkish Fed comments
NATURAL DISASTERS POSE ADDITIONAL ECONOMIC GROWTH CONCERNS
According to global risk insurer, Aon, natural disasters in 2021 caused economic losses of $283 billion – only 38% of which was covered by insurance. Back in October Steve Bowen, a meteorologist, and Head of Catastrophe Insight at Aon, predicted that 2021 would become the sixth year, out of the last ten, to surpass the $100 billion insured-losses mark due to natural and climate-change-related disasters. In the end, his prediction was proved correct and underlines the vast and continuing economic costs caused by natural disasters.
In 2021, some of the costliest disasters included:
- Hurricane Ida, costing $65 billion
- Flooding in Europe, which cost the Union $43 billion
- The Texas winter storm, costing $23 billion
This year, natural disasters such as Hurricane Ian in Florida, and flooding in Australia are adding to the economic bill for 2022.
These numbers, already enormous, are expected to increase as climate change intensifies. They also do not factor in the costs attached to the loss of lives. While progress was made at COP26, where the Glasgow Climate Pact was signed and countries agreed to work according to the Paris Rulebook, many current structural and geopolitical elements present challenges to many countries in executing efficiently on plans to reduce carbon emissions.
The Natural Resources Defense Council (NRDC) does not just call on businesses and governments to work towards lowering their carbon footprints. It also calls upon individuals to play their part and suggests the following behavioural changes:
- Using bicycles instead of vehicles as far as possible.
- Carpooling or making use of public transport.
- Planting trees.
- Purchasing local goods and products; and
- Keeping the tyres on your car adequately inflated.
At an economic level, investors are increasingly applying Environmental Social Governance (ESG) principles as part of their analysis to identify material risks and growth opportunities when seeking investments. The three pillars of ESG are:
- Environmental: which focusses on waste and pollution, resource depletion, greenhouse gas emissions, deforestation, and climate change.
- Social: which includes employee relations & diversity; working conditions, including child labour and slavery; and local communities. This pillar seeks explicitly to fund projects or institutions that will serve poor and underserved communities globally, with a focus on conflict, and health and safety.
- Governance: this addresses tax strategy, executive remuneration, donations and political lobbying, corruption and bribery, and board diversity and structure.
ESG is about sustainability, not only of the businesses being run, but also the environment in which they operate.
DATA IN A NUTSHELL
The United States (US) S&P Global US Manufacturing Purchasing Managers’ Index (PMI), which measures the activity level of purchasing managers in the manufacturing sector, was revised higher to 52 in September from a preliminary estimate of 51.8, and above the 51.5 in August. Still, the reading points to subdued operating conditions, despite output and new orders returning to growth figures.
The US Institute for Supply Management (ISM) Manufacturing PMI, which measures the change in manufacturing production levels month-on-month, unexpectedly fell to 50.9 in September, pointing to the slowest growth in factory activity since the contraction in 2020. It compares with 52.8 in August and market forecasts of 52.2. Meanwhile, price pressures continued to ease to 51.7, their lowest level since June 2020, compared to 52.5 in August.
Staying in the US, US-based companies, in September, announced plans to cut
29 989 jobs from their payrolls, the highest number in three months, and compared to 20 485 anticipated cuts announced in August, as hiring starts to slow and downsizing events are starting to take place. The reading is also 67.6% higher than the 17 898 cuts announced a year earlier.
Locally, the seasonally adjusted ABSA PMI fell to 48.2 points in September from 52.1 in August, pointing to a renewed contraction in South Africa’s manufacturing activity. Extensive power cuts weighed on output, and new sales orders declined. “Even if it does not have a direct impact on curtailing output, some respondents flagged that load-shedding weighs on demand for their products, due to lower activity elsewhere,” ABSA said.
The annual inflation rate in Turkey rose for the sixteenth consecutive month to 83.5% in September, soaring from below 20% in the corresponding period of the previous year, but slightly below estimates of 84.6%. It was the highest inflation reading since July of 1998, as the lira plunged further to extend its record-lows, and the Turkish central bank, the TCMB, continues to slash interest rates.
The Netherlands’ annual inflation rate jumped to 14.5% in September from 12.0% a month earlier. This marked the fastest rise in consumer prices since the series began in 1971, mainly boosted by higher energy prices, consisting of gas and electricity. The annual core inflation, which excludes energy, food, alcohol, and tobacco, increased to a fresh record peak of 5.7% in September from 5.0% in August.
STOCKS LARGELY IN THE RED
Stock futures contracts, tied to the three major US indices, were all trading softer by around 0.5% on Thursday, amid lingering concerns about the impact of elevated inflation, a robust dollar, and tighter financial conditions on corporate America. The US Federal Reserve (the Fed) has maintained a hawkish monetary policy stance, in an effort to reduce demand-driven inflation. Meanwhile, the decision by the extended Organization of Petroleum Exporting Countries, OPEC+, to curb production further, in an already tight market, could increase fuel prices and add to soaring inflation.
London-based stocks came under pressure after a somewhat upbeat start on Thursday, with the benchmark FTSE 100 bottoming out around the 7 000 mark, pressured by a sell-off in the energy and materials sectors. Market sentiment was dragged down amid concerns around the pace of interest rate hikes against a backdrop of growing macro-economic difficulties. In addition, Fitch Ratings lowered the United Kingdom’s (UK’s) sovereign credit rating outlook to negative, citing risks posed by the measures announced in the Chancellor of the Exchequer, Kwasi Kwarteng’s, mini budget.
Stock markets in the European Union (EU) also remained under pressure on Thursday, with both the DAX and the STOXX 600 falling nearly 0.3%, as a rise in oil prices raised further concerns about inflationary pressures. Meanwhile, minutes from the last European Central Bank (ECB) meeting showed that policymakers are concerned that inflation will spike and, as such, pledged to continue raising rates. On the corporate front, Shell said that it expects a decline in profits in the third quarter on the back of a significant drop in refining margins and notably weaker earnings from natural gas trading. Mining and commodity trading company, Ferrexpo, said production of iron ore pellets had been under pressure due to a Russian blockade of Ukraine’s Black Sea ports.
The South African JSE FTSE All Share Index extended gains for the second consecutive session on Thursday, mainly assisted by a noteworthy advance in tech stocks. Industrials and financials were also among the top performers. Meanwhile, the news that OPEC+ agreed to make a large cut in oil production, continued to lead markets, with investors weighing risks to the global economic outlook. Locally, South Africa’s freight and rail operator, Transnet, said workers had started an open-ended strike across its operations because of a wage dispute with two major unions. The move could hurt key exports, including minerals.
OIL RALLIES AS CARTEL CUTS SUPPLY
Brent Crude futures traded near $93/barrel on Thursday, having rallied about 10% so far this week, as OPEC+ agreed to cut output by two million barrels per day translating to about 2% of global supply, the biggest supply cut since the start of the pandemic in 2020. Saudi Arabia said that the group moved in response to rising interest rates in the West, and in particular the US, coupled with a weakening global economy. The Biden administration, however, reproached the decision by the alliance, stating it would explore options with the US Congress on how to reduce OPEC’s influence over energy prices. Bloomberg reported that Goldman Sachs raised its fourth quarter price forecast for oil significantly following the OPEC+ decision. Meanwhile, Russian Deputy Prime Minister, Alexander Novak, said Russia may temporarily reduce output in response to a US-led plan to impose a price cap on Russian oil, which will add to the upward price pressure.
Gold prices continued their rebound, trading to $1 720 an ounce on Thursday after shedding nearly 1.4% in the previous session, as contradictory views on expected rate action by the Fed, assisted the metal price’s see-saw ride. Gold is trading close to 4% stronger this week, benefitting from recent dollar weakness and declining Treasury yields.
Copper futures rose toward $3.60/pound, extending a rally to its highest level in over three weeks, after the London Metal Exchange (LME) imposed an immediate ban on new deliveries of the metal from Russian firm, Ural Mining & Metallurgical Company. The LME stated that metals from the Russian firm, can only be delivered to its warehouses if the owner can prove to the LME that it will not constitute a breach of sanctions, Bloomberg reported. Copper also benefited from recent weakness in the dollar that has made greenback-priced commodities cheaper for buyers holding other currencies.
CHOPPY TRADE IN CURRENCY MARKETS
Choppy trade continued throughout the week, with the US Dollar Index trading around the 111 mark on Thursday, the greenback held on to gains from the previous session as better-than-expected US data and hawkish remarks from US policymakers supported the case for the continued Fed monetary tightening. Markets digested an ADP report – a preview of the US Labor Department’s monthly jobs data – which is pointing to another robust private sector hiring. The Institute of Supply Management’s (ISM) Services PMI data beat estimates, signaling that the US economy remains resilient and countered poor data from earlier in the week. On the monetary policy front, Atlanta Fed President, Raphael Bostic, said he favoured raising rates to 4.5% by year end or 125 basis points of additional tightening, while San Francisco Fed President, Mary Daly, pushed back against speculations for a dovish pivot by the Fed next year.
The euro continued its decline, to trade at $0.98, moving toward a 20-year low of $0.95 reached on 27 September, as investors remain hesitant that the ECB will be able to combat inflation while protecting the economy, as the risk of recession continues to rise. The latest ECB meeting minutes showed that policymakers pledged to keep raising rates at the cost of economic growth. Markets expect the Central Bank to hike rates by large increments in the October and December meetings, but the pace of next year’s rate-hike cycle could slow.
The British pound retreated from its recent three-week highs, to trade at $1.13, after UK Prime Minister, Liz Truss, said the Conservative Party will always be the party of low taxes, reiterating plans to cut taxes to stimulate growth. The sterling recovered from a record low of $1.03, hit on 26 September, after the Chancellor said the government would not cut the top 45% rate of income tax for the biggest earners, reversing earlier pledges.
The South African rand hovered near the R17.70/$ mark for most of the week, its strongest level since 22 September. The dollar traded softer on expectations of moderate interest rate hikes by the Fed. Meanwhile, the South African Reserve Bank is set to continue the tightening policy to stabilise inflation, with markets predicting a rate hike of another 25 basis points in November and again, in either January or March, before pausing at 6.75% for the remainder of next year.
The rand is trading at R17.98/$, R17.62/€ and R20.08/£.