As the world continues to bet on a dovish United States (US) Federal Reserve (Fed) for longer than initially anticipated, the dollar continued to remain subdued, even as it approached a two-week high against the euro, and US equity markets reached record highs, before retreating on Thursday.
Key themes for the week include:
- Political tension in the US remains elevated
- Eurozone inflation hits a decade high
- European Central Bank (ECB) starts tapering asset purchases
- South Africa posts record current account surplus
- Gold trades at two-week low
US, AFGHAN RELATIONS REMAIN IN FOCUS
When it comes to economics, US politics takes centre stage, once again. The Democrats versus the Republicans being the dominant theme, with topics such as the $3.5 trillion economic stimulus package, and the recent Afghanistan debacle all topping headlines.
The Democratic Party, under the leadership of US President Joe Biden, is facing numerous challenges in their endeavour to roll out the proposed stimulus package. The upcoming days likely to be demanding for lawmakers, as they try enact Biden’s economic agenda. The focus in their proposals will likely fall on the expansion of Medicare benefits, the authorisation of new family and medical leave programmes, and the endeavour to make college and childcare more affordable and accessible.
Meanwhile, many families who lost loved ones in the recent Afghanistan violence, have chosen to not meet President Biden, who is in large part blamed for the recent flare-up that hit the country. Former Republican president, Donald Trump, took it upon himself to reach out to the families of 13 service members killed during the withdrawal. Trump and his republican colleagues see the highly contentious withdrawal from the Afghan region as a powerful political opportunity, as they eye the 2024 elections. The Washington Post reported on Thursday, that Donald Trump openly criticised the way the Afghanistan withdrawal was handled, telling at least one family that he did not understand why Biden pulled the military out of the country before getting all the civilians out.
Staying on the topic of the Afghan conflict, roughly 200 dual Afghan nationals were granted permission to leave Afghanistan on Thursday. A Qatar Airways flight manifesto, released to media, showed that 211 people were granted permission to leave Kabul, including passport holders from Britain, Italy, the Netherlands, Ukraine, Canada and Germany, and America.
Earlier this week, US Secretary of State, Antony Blinken, stated that Washington was working with the Taliban to move US citizens and its allies, out of the country safely, but that complications had arisen over some passengers’ travel documents. He was quoted saying at a press conference in Doha, Qatar, “It’s my understanding that the Taliban has not denied exit to anyone holding a valid document, but they have said those without valid documents, at this point, can’t leave.”
The world is now watching closely to see whether there will be another US-led war in the Afghan region, following years of conflict and acts of terrorism. US Defence Secretary, Lloyd Austin, told reporters on Thursday that Washington is closely monitoring whether al-Qaeda militants will attempt to use Afghanistan as a new staging ground to launch attacks against the US.
The number of Americans filing new claims for unemployment benefits declined to a new pandemic-low of 310,000 in the week ending 4 September, beating market expectations of 335,000. The reading continues to point to a continued recovery in the world’s largest economy, helped by businesses reopening and the start of the school year, despite the risks posed by the ongoing COVID-19 resurgence and labour supply shortages. Also, it is the last reading before the 6 September deadline to halt enhanced unemployment benefits including a $300 weekly supplement to regular state benefits from the government pandemic aid.
China’s annual inflation rate unexpectedly declined to a five-month low, coming in at 0.8% in August, dipping below market expectation of 1%. The sudden decline was brought on by a steeper decline in the cost of food, and specifically pork prices. In addition, the cost of non-food items slowed to 1.9% versus 2.1% in July. Inflation also eased for transportation and communication, while prices for clothing and household goods, and services increased. On a monthly basis, consumer prices rose by 0.1% in August, undershooting forecasts of 0.5%.
New car registrations in the United Kingdom (UK) declined by 22% year-on-year to 68,033 units in August, which is traditionally one of the slowest months of the year for new car registrations ahead of the important licence plate-change that always happens in September. The monthly performance was the weakest since August 2013, down 7.6% against the average recorded over the last decade. Constrained supply due to the global shortage of semiconductors continued to undermine production volumes.
Taking a look the European Union (EU), the number of employed persons in region rose by 0.7% quarter-on-quarter in the three months to June of 2021, compared to a 0.2% decline in the previous period, beating the preliminary estimate of a 0.5% increase. Among the region’s largest economies, employment went up in Germany by 0.2%, France by 0.5%, the Netherlands 1.2% and Italy 1.7%, but declined in Spain by 0.9%. Year-on-year, employment rose by 1.8%, after decreasing 1.8% in the previous year.
The ECB, on Thursday, left interest rates at record-low levels but announced it would start slowing the pace of net asset purchases, under the Pandemic Emergency Purchasing Programme (PEPP), for the rest of the year due to improved economic and financial conditions. The Bank reiterated the PEPP envelope will be maintained at €1.85 trillion until at least the end of March 2022, or until it judges that the Coronavirus crisis phase is over. Policymakers did not provide details about the tapering schedule and speed, saying the bank will purchase flexibly according to market conditions.
The South African economy advanced by 19.3% year-on-year in the second quarter, after a downwardly revised 2.6 % decline in the previous period, comfortably beating market expectations of 17.5%. It was the strongest expansion on record, coming off a low base from last year, and further assisted by the relaxation of lockdown restrictions amid the COVID-19 pandemic.
The current account surplus in South Africa increased substantially to R343 billion, from a downwardly revised R261 billion in the first quarter and substantially beating market expectations of R305 billion. It was the largest current account surplus since inception of the record keeping in 1960.
The South African RMB/BER business confidence index fell by seven points from the previous period to 43 in the third quarter of 2021, due to stricter lockdown restrictions, coupled with a wave of civil unrest and looting that swept parts of the country in July. Confidence worsened across all the sectors, except for retail and wholesale trade.
US EQUITIES TAKE A BREATHER
US stocks traded flat to marginally higher on Thursday, with both the Dow Jones and the S&P 500 attempting to recover from a three-day losing streak, after initial jobless claims fell more than expected. However, investors remain cautious about a slowing economy as the Delta variant spreads and uncertainties remain over the timeline for the Fed tapering. Meanwhile, Chinese stocks that trade in the US, including Alibaba and NetEase, were down as China intensified a regulatory crackdown on online gaming.
The FTSE 100 fell 1% to 7,030 on Thursday, its lowest level since 28 July 2021, as concerns over slowing economic growth hit commodity and financial stocks. In addition, shares of EasyJet tumbled more than 10% after the British airline said it rejected a takeover offer and would raise $1.7 billion from shareholders to fund its pandemic recovery and expand operations.
European stocks reversed some losses on Thursday afternoon, after the ECB announced it would buy fewer bonds for the rest of the year. The DAX however remained softer at the time of writing, having shed 0.14% during trade.
The Nikkei 225 shed 0.57% to finish at 30,008 on Thursday, reducing sharp losses from earlier in the session. It retreated for the first time in nine sessions, following reports that foreign investors bought net equities worth ¥664.2 billion. It was their largest weekly net purchase since 14 May 2021, amid hopes of an economic rebound following Prime Minister Yoshihide Suga’s abrupt resignation last Friday. Looking at two key movers for the week, SoftBank Group declined by 1.93% after surging on Wednesday following a $7 billion share-swap deal with Deutsche Telekom, and Fast Retailing lost 0.65%.
The FTSE/JSE All Share index dipped by over 2% to around 64,105 on Thursday, its lowest since 4 February 2021, extending losses for a second straight session. Pressure came from mining and heavyweight tech company, Naspers and its global internet arm, Prosus, after Chinese authorities reportedly instructed Tencent and other gaming companies to enforce compliance with new regulations on video gaming for minors. At the same time, investor concerns persisted about the impact of the Delta variant on global growth prospects and about a looming reduction in global central bank stimulus. On a positive note, there were reports that South African President Cyril Ramaphosa could soon announce an easing of the country’s COVID-19 lockdown restrictions to level 2, meaning an increase in gathering sizes and less restrictive curfews.
CHINA DAMPENS OIL PRICE
West Texas Intermediate (WTI) crude futures fell more than 1% to $68.20 a barrel on Thursday, after China’s State Reserves Administration said it would release crude oil reserves to the market via public auction, in an effort to alleviate pressure from rising raw material prices. According to the National Food and Strategic Reserves Administration’s statement, the decision was aimed at stabilising domestic market supply and demand, and effectively guaranteeing the country’s energy security. Meanwhile, The American Petroleum Institute’s figures on Wednesday showed that US crude inventories fell last week for a sixth straight period, but less than expected. Investors continued to assess damage to infrastructure and power outages due to Hurricane Ida, while concerns over weak oil consumption in Asia, due to rising cases of the Delta strain lingered, with Japan reportedly preparing to extend emergency COVID-19 measures in Tokyo and other regions until the end of the month.
Spot gold stood at $1,800 an ounce on Thursday, not far from Wednesday’s two-week low of $1,781, after the ECB said it would slow the pace of its pandemic bond purchases for the rest of the year. Meanwhile, the spread of the Coronavirus Delta variant and worries over the impact it will have on the economic recovery, prevented further losses in the price of the precious metal.
Platinum futures traded around $1,000 per troy ounce, hovering at their lowest levels since November 2020, amid a downbeat demand outlook, following output cut announcements by major players in the auto industry amid a global semiconductor shortage.
Copper futures fell to below $4.30 per pound in the second week of September – moving closer to a four-month low of $4.04 in the middle of August – on renewed concerns over demand from top consumer China and easing supply constraints. Trade data released this week showed imports of unwrought copper and products into China, the world’s top copper consumer, declined by 7% from July and were down 41% year-on-year. In addition, China’s factory activity contracted in August for the first time in nearly 18 months due to COVID-19 containment measures to curb rising cases of the Delta strain, supply bottlenecks, and high raw materials cost. Meanwhile, Chile’s state-owned Codelco, the world’s largest copper producer, said last week it has reached an early collective bargaining agreement with the five unions representing workers at its key El Teniente mine.
Aluminium futures extended their recent rally to trade above $2,800 a tonne in September, the highest since August 2008, as supply was further disrupted by a military coup in Guinea, the second-largest producer of bauxite and China’s largest supplier. The aluminium prices have already surged more than 40% this year, due to a rise in demand, massive global stimulus measures, production cuts in China, and shipping disruptions.
GREENBACK SUFFERS SETBACK
The dollar index retreated to 92.5 on Thursday, after touching a two-week high of 92.8 in the previous session, after the announcement by the ECB that it would slow the pace of bond purchases. Meanwhile, traders started to push back expectations for when the Fed will begin reducing bond purchases after a disappointing payrolls report. Still, Dallas Federal Reserve President, Robert Kaplan, said he would back the start of tapering from October, and Bank of New York President, John Williams, said “it could be appropriate” to begin tapering before the end of the year.
The Euro edged up to $1.185 on the back of the ECB announcement. Data last week indicated that the EU inflation rate surged to a 10-year high in August while the Union’s economy is expected to expand by 5% in 2021 and 4.6% in 2022, more than previously estimated. Still, the euro momentum may weaken as the ECB reiterated the total envelope of purchases will be kept at €1.85 trillion until March 2022 or later, if necessary, a sign the central bank is not considering removing stimulus yet, while the current Fed stance is that tapering should start before the end of the year.
The British pound rose to $1.382 Thursday, ending three straight days of losses, after UK parliament backed Prime Minister Boris Johnson’s plans to raise taxes to the highest level on record to pay for social care costs and the National Health Service (NHS). Under the proposal, the rate of National Insurance payroll taxes paid by workers and employers would increase by 1.25%. The same increase would be applied to the tax on shareholder dividends. On the monetary policy front, Bank of England (BoE) governor, Andrew Bailey, said the Bank would probably be forced to raise interest rates to combat inflationary pressures over the next two to three years, even as Britain’s economic recovery from COVID-19 is slowing; while policymaker Michael Saunders said the BoE may need to raise interest rates next year if growth continues and inflation becomes stickier.
The South African rand traded around R14.15 against the US dollar, hovering at its strongest level since early July, as the greenback remained subdued. The risk rally continues to bolster the performance of the local currency, as markets continue to position themselves for a Dovish Fed for longer than expected.
We start the day at R14.17/$ R16.77/€ and R19.63/£.