In recent months, the focus in financial markets has been squarely on inflation and monetary tightening by global central banks. This week however, things took a turn for the worse in South Africa, a key emerging market, as local political uncertainty was put into the spotlight.
Key themes for this week include:
- South African President, Cyril Ramaphosa, on the ropes
- Euro area unemployment hits record low
- United States (US) Treasury yields retreat to lowest level since September
- Gold rebounds to two-week highs
- Dollar Index sinks to five-month lows
PRESIDENT RAMAPHOSA IN THE SPOTLIGHT
A recent report by independent consulting and accounting firm, Grant Thornton, entitled the Grant Thornton Emerging Markets Opportunity Index, High Growth Economies, said that South Africa is the leading emerging economy on the African continent in terms of being a potential investment destination. However, South Africa is not without its pitfalls. The most recent being political in nature.
In recent years, South Africa faced an array of leadership difficulties, with President Zuma and the State Capture findings still fresh in the minds of investors and residents alike. The most recent fallout follows an enquiry into President Cyril Ramaphosa’s handling of foreign currency receipts on his Phala Phala farm. The report found that he transgressed local foreign exchange and tax regulations, as well as flouted the constitution. This debacle opens up a whole new layer of risk for the struggling economy, and the local currency.
While the future of the President hangs in the balance, investors will now proceed to focus their attention on what the ramifications of this report will be, pondering whether Ramaphosa should be removed from office or not, and then, who his successor would be. Investors will take a particular interest in the policy stance of the successor and what that could mean for the country’s economic growth moving forward.
The South African economy is already facing numerous economic headwinds. This political blow only adds to the pressure of an already fragile situation. At the time of writing, the rand shed over 2.2% against the greenback, erasing most of its recent gains.
DATA IN A NUTSHELL
The economic sentiment indicator in the euro area rose one point to 93.7 in November, following eight consecutive months of declines, beating forecasts of 93.5, but only just. Economic sentiment, however, remains close to its lowest level in two years, as rising borrowing costs, stubbornly high inflation, and the prospect of an economic recession next year, as well as a deepening energy crisis in the winter months weighed on sentiment. Preliminary estimates indicated that the annual inflation rate in the euro area eased to 10%, in November, from a record high of 10.6% in October, beating market forecasts of 10.4%. Costs of both energy and services slowed while prices for food, alcohol and tobacco rose at a faster pace.
The number of job openings in the United States dropped by 353 000 to 10.3 million in October, in line with market expectations, and suggests demand for workers is starting to moderate, amid a softer economic outlook and higher interest rates.
The Caixin China General Manufacturing purchasing managers’ index (PMI) unexpectedly edged up to 49.4 in November 2022, from 49.2 in October, above market forecasts of 48.9. However, this was the fourth consecutive month of declines in factory activity, amid a new wave of COVID-19 cases and tough curbs in many parts of the country.
The South African unemployment rate dipped to 32.9% in the third quarter, down from 33.9% in the previous period and below market estimates of 33.4%. This was the lowest jobless rate since the first quarter of 2021, as the number of unemployed persons declined by 269 000 to 7.725 million and employment rose by 204 000 to 15.765 million. However, the labour force fell by 66 000 to 23.491 million. Among sectors to see job gains, manufacturing, trade, construction and transport saw the largest increases, with the manufacturing sector leading the charge by adding 123 000.
South Africa recorded a trade deficit of R4.3 billion in October, compared with an upwardly revised surplus of R26.2 billion in the September and defied market forecasts of a R16.85 billion surplus. This marked the first monthly trade shortfall since April of 2020, as exports tumbled 17%, month-on-month, to reach a six-month low of R159.6 billion. This was due to lower shipments across all categories, but primarily mineral products.
DOW LOSES AS FACTORY OUTPUT DECLINES
The US’s Dow Jones lost 300 points on Thursday, and the S&P 500 and Nasdaq both crossed into negative territory, as weak manufacturing data sparked concerns of a recession. This news put a dent in any of the optimism around less aggressive interest rate hikes from the US Federal Reserve (Fed). This market movement came hot on the heels of a somewhat dovish speech by Fed Chair, Jerome Powell, on Wednesday, where he signaled that it might be appropriate for the Central Bank to slow its monetary policy tightening. On the corporate side, Okta jumped almost 20% after the software company issued an optimistic full-year outlook. On the flip side, cloud-based software company, Salesforce, tumbled 10% on headlines suggesting that co-CEO, Bret Taylor, is stepping down.
Shares on the London Stock Exchange ended Thursday slightly softer, with the benchmark FTSE 100 closing around the 7 550 level, as declines in energy and financials offset gains in utilities. Investors continue to analyse the latest remarks from the US Fed. Education and learning materials company, Pearson, shed over 5%, and was the biggest lagger on the FTSE 100 after its downgrade to ‘neutral’ by investment firm, Exane. Rolls-Royce Holdings fell 4% after Barclays initiated stock coverage with an ‘overweight’ rating.
European equities rose for a second straight session on Thursday, with the regional STOXX 600 and the domestic DAX 40 index each rising around 0.5%, closing near levels last seen in early June, driven by sharp gains among technology stocks. Investors welcomed the Fed Chair’s comments and China’s softening stance on its zero-COVID policy.
The JSE FTSE All Share index traded stronger by 0.3% to close at 75 020 on Thursday, marking the second consecutive session of gains, as solid advances in luxury retailer Richemont and resource-linked stocks were outweighed by weakness in financials. Sasol shares fell nearly 5% after the company said it expects challenges at its Secunda operations to impact fuel production, although higher crude oil prices are expected to boost half-year profit by more than 20%. Market sentiment was also supported by hopes of smaller US rate hikes and optimism around China’s COVID-19 policy. Conversely, investors were digesting the news that Cyril Ramaphosa was considering his resignation as the country’s president.
SOFTER DOLLAR SEES GOLD REBOUND
Gold rose toward $1 780/ounce on Thursday, hitting its highest levels in two weeks, amid a weaker dollar, due to the Fed’s more dovish stance. The Fed confirmed market expectations that it would deliver a smaller 50 basis point rate hike this month, after raising rates by 75 basis points in the last four meetings. Market pricing also indicated that the federal funds rate will peak below 5% in May 2023.
Brent Crude futures jumped 2%, to trade near $89/barrel, extending gains for a fourth consecutive session on prospects of a recovery in demand and further supply cuts from the extended Organization of the Petroleum Exporting Countries, OPEC+. China has signaled a softening stance in the fight against the Coronavirus following massive protests earlier this week. This has sparked hopes that the world’s top crude importer could start reopening its economy while offering an upbeat outlook for oil demand. In addition, the latest Energy Information Administration (EIA) report showed that US crude inventories slumped by nearly 13 million barrels last week, the biggest drop since June 2019.
Copper futures rose above $3.60/pound from the two-week low of $3.57 touched on 21 November, as measures to stimulate construction and industrial activity coincided with looming supply concerns. Authorities in top consumer, China, lifted a ban on equity refinancing for listed property developers, shortly after the country’s top banks extended $162 billion in fresh credit lines for the sector. Additionally, the People’s Bank of China cut its reserve ratio by 25 basis points after rapidly rising COVID-19 cases in the country drove the government to trigger strict lockdowns and business curbs. Concerns of upcoming shortages also supported copper futures, which are currently hovering nearly 15% above the 20-month low of $3.20 hit in July.
GREENBACK RETREATS ON FED COMMENTS
The dollar index extended losses, falling over 1% to below 105, its lowest level in nearly five months, after fresh data showed personal consumption expenditure (PCE) inflation slowed in October and factory activity shrank for the first time in over two years, strengthening the case for the Fed to slow the pace of interest rate increases. On Wednesday, Powell said that “slowing down at this point is a good way to balance risks,” and that the Fed could moderate the size of rate hikes as soon as December. Powell, however, warned that controlling inflation “will require holding policy at a restrictive level for some time.” Traders now await the jobs report due out today, for a further update on the health of the labour market. The yield on the US 10-year Treasury note, which is seen as a proxy for global borrowing costs, consolidated around 3.6%, a level not seen since late September, as the narrative started to change from inflation and tightening to slowing growth and the likelihood of a policy pivot. The Fed’s preferred inflation measure, the US Core Personal Consumption Expenditures Price Index, eased to 5%, in line with expectations, in the latest signal that inflation could be peaking.
The euro kicked off December by topping $1.05, a level not seen since late June, and extending a 5.5% gain in November, which marked the best euro performance since September 2010. The common currency has benefited from a fall in the US dollar on the back of a dovish Fed. The European Central Bank (ECB) remains committed to raising interest rates to tame price growth, while analysts stay divided on whether the ECB will hike borrowing costs by 75 basis points, for the third time, when it meets in December or will opt for a smaller 50 basis point increase.
The British pound hovered at $1.20 after also gaining more than 5% in November, as the dollar retreated. On 29 November, the Bank of England (BoE) started selling bonds bought during the turmoil period of Liz Truss’s government, after Chancellor Jeremy Hunt restored UK fiscal credibility by outlining a £55 billion package of tax increases and spending cuts in the Autumn Budget Statement. The next BoE monetary policy decision is due on 15 December and most investors expect a 50 basis point rate hike, although some see a 75 basis point increase as likely.
The South African rand suffered significant losses, depreciating sharply to R17.90/$, its lowest level since 4 November, on the back of rumours that President Ramaphosa was considering his resignation. Further losses were capped by a weaker dollar. Locally, the South African Reserve Bank raised the key repo rate by an expected 75 basis points at its November meeting, driven by the Central Bank’s assessment that risks to the inflationary outlook remain skewed to the upside, while the risks to the medium-term domestic growth outlook are assessed to the downside. South Africa’s 10-year government bond yield climbed to a 31-month high of 11.2%, on the back of the country’s political uncertainty.
The rand is trading at R17.56/$, R18.48/€ and R21.47/£.