It has been a dark week for South Africa, in more ways than one. Government decisions and lack of clear policy have pushed the rand to two-year lows, while the country’s Western trade partners are less than impressed with South Africa’s position in the Russian-Ukraine war.
Key themes for this week include:
- South Africa in the spotlight for all the wrong reasons
- United States (US) inflation cools
- Oil remains suppressed under demand constraints
- Bank of England (BoE) rate hike bolsters the pound
NOWHERE TO HIDE
South Africa has had nowhere to hide this week, as it faces severe punishment in the financial markets for poor policy and equally poor decision making. While South Africans have become accustomed to many hours in the dark due to ongoing loadshedding, talks of a grid collapse and no clear way forward, has seen foreign investors dump South African assets at an alarming pace, faster than we’ve seen yet this year.
While broad-based risk-off sentiment in global markets has certainly played its part in the devaluation of the rand, the rand is underperforming its emerging market peers. The major depreciation of the rand witnessed this week, can largely be attributed to what is happening on the ground locally. Namely, no clear strategy or direction on Eskom, as ongoing power cuts continue to cripple the economy, as well as our perceived, and undisputed, backing of Russia.
The most recent backlash from the market, in terms of our relationship with Russia came shortly after the US accused South Africa of providing ammunition to Russia, by way of a Russian ship that was docked at the Simon’s Town Naval Base in Cape Town in December, with the US ambassador stating, “Among the things we noted was the docking of the cargo ship in the Simon’s Town naval base between 6 to 8 December 2022, which we are confident uploaded weapons and ammunition onto that vessel in Simon’s Town as it made its way back to Russia.” The US Embassy further added, “The arming of the Russians is extremely serious, and we do not consider this issue to be resolved.” Meanwhile, Presidents Ramaphosa’s office said it would respond “in due course.”
The South African rand weakened to a low of R19.32/$ in intraday trade on Thursday, marking its weakest level since 2020, amid deepening concerns about the economic future of South Africa given the geopolitical fracturing and the ongoing power crises. The weaker rand now, yet again, adds risks to the inflation outlook, cementing the need for the South African Reserve Bank to hike interest rates again, on 25 May. The rand also lost significant ground against other major currencies, to trade to lows of R21.13/€ and R24.34/£, before recovering some lost ground after the local market closed.
On the bond front, South Africa’s 10-year government bond yield rose to 10.78% in the second week of May, its highest level since December 2022, while recent data from the manufacturing, mining and retail sectors suggest South Africa’s economy likely entered a recession in the first quarter.
The JSE FTSE All Share index extended losses to trade around 77,060 on Thursday, marking a third consecutive session of losses.
DATA IN A NUTSHELL
The annual inflation rate in the US fell to 4.9% in April, its lowest level since April 2021, and below market expectations of 5%. Food prices grew at a slower rate, while energy costs fell further. In addition, shelter cost, which accounts for over 30% of the total CPI basket, slowed for the first time in two years, and prices for used cars and trucks declined once again. On a monthly basis, the Consumer Price Index (CPI) rose 0.4%, much higher than 0.1% in March but in line with market expectations. Meanwhile, the number of Americans filing for unemployment benefits rose by
22,000 to 264,000 in the week ending 6 May, the most since October 2021, and well above market expectations of 245,000. The result emphasised a batch of recent data that points to the softening of the US labour market, which is caving to a prolonged series of aggressive interest rate hikes by the US Federal Reserve (Fed).
The BoE raised the bank rate by 25 basis points to 4.5% on Thursday, marking its twelfth consecutive rate hike, in line with market expectations. Borrowing costs are now at highs not seen since 2008, as the central bank continues to battle double-digit inflation. The BoE expects inflation to fall to 5.1% in the fourth quarter of 2023, compared to 3.9% in the February forecast, and to only meet the 2% target by late 2024. The economy is, however, expected to have stalled in the first and second quarters of 2023, but is expected to have grown 0.25% in March 2023, compared to a 0.5% contraction seen in February. The Halifax House Price Index showed a slight increase of 0.1% year-on-year in April, marking a significant drop from the 1.6% advance the previous month. The annual growth rate for housing prices is now at its lowest level since December 2012, falling substantially from its peak of 12.5% in June 2022.
China’s annual inflation rate fell to 0.1% in April from 0.7% in the previous month, missing market estimates of 0.4%. This was its lowest print since the deflation witnessed in February 2021 amid an uneven economic recovery following the halt of the country’s zero-COVID policy, with prices of both food and non-food easing further.
Mining production in South Africa contracted by 2.6% year-on-year in March, following an upwardly revised 7.6% slump in the previous month, but less than the expected 5% decline. This marks the fourteenth consecutive month of contraction in mining activity, though much softer than in the previous month, amid smaller decreases in the prices of coal, nickel and chromium ore. In contrast, gold production in South Africa jumped 21.6% year-on-year in March of 2023, the biggest increase since June of 2021, following a downwardly revised 1.5% rise in February. Manufacturing production in South Africa fell by 1.1% from a year earlier in March, much less than the expected 6.1% drop and following an upwardly revised 5.6% slump in the previous month. It was the fifth consecutive month of decreases in industrial activity, though the softest in the current sequence.
EQUITY MARKETS LOOK TOWARDS DATA
The Dow Jones shed nearly 250 points on Thursday, the S&P 500 lost 0.4%, while the Nasdaq traded flat, as investors digested recent economic data and earnings reports. US producer and consumer prices eased more than expected in April while weekly unemployment claims unexpectedly rose to their highest levels since October 2021 raising the likelihood that the Fed may soon pause its policy tightening. On the corporate front, family entertainment company, Disney, lost more than 8% after the company reported a loss in subscribers for its digital streaming service in the first quarter. PacWest dropped almost 29% after the bank reported deposit outflows in the first week of May. Conversely, Alphabet surged 2.6% after the tech company announced new AI tools. The US’s ongoing debt ceiling impasse is also being closely monitored.
The UK’s FTSE 100 steadied on Thursday after the BoE raised rates by 25 basis points, as expected, and said inflation persistence would require further tightening, while delivering the biggest upgrade to growth projections since the BoE gained independence in 1997. On the corporate front, ITV Plc lost over 3% and hit a nearly five-month low after the broadcaster reported a 10% drop in its total advertising revenue in the first three months of 2023.
In Europe, the DAX failed to hold onto small early gains and traded largely flat Thursday afternoon, while the STOXX 600 was up nearly 0.2%, as investors digested fresh inflation data for the largest economies, along with the BoE’s monetary policy decision. Earnings season continues, with banking group, ING Group, reporting better-than-expected profits, Deutsche Telekom increasing its guidance for 2023, and multinational, Thyssenkrupp, raising guidance for free cash flow, while chemical giant, Bayer, saw earnings decrease. VW shares were down by nearly 5%, after activists interrupted the carmaker’s annual shareholder meeting to protest against alleged human rights abuses at VW’s Xinjiang plant.
The Japanese Nikkei 225 Index inched up 0.02% to close at 29,127 while the broader TOPIX Index fell 0.14% to 2,083 on Thursday, with Japanese markets struggling for direction as mixed domestic earnings results weighed on sentiment. Investors also continued to assess the economic and monetary policy outlook globally, as latest data showed that consumer inflation in the US unexpectedly slowed last month, supporting expectations that the Fed could pause its interest rate hikes soon.
WEAKER THAN EXPECTED CHINESE GROWTH WEIGHS ON COMMODITY DEMAND
West Texas Intermediate Crude futures fell over 1.5% to below $72/barrel on Thursday, following a 1.6% loss in the previous session amid persistent demand concerns and as International Energy Agency (IEA) data showed an unexpected increase in US inventories. Crude oil stocks rose by nearly three million tonnes in the week ending 5 May, according to data from the IEA, defying expectations of a 900,000-barrel decline, consistent with a previous report from the American Petroleum Institute. Additionally, trade data from China showed that crude oil imports fell 16% annually to 10.6 million barrels per day in April, adding to fears of an economic slowdown in Asia’s largest economy.
Gold prices steadied near $2,030/ounce on Thursday, remaining in the green for the week as the latest US CPI report showed that headline inflation in the US unexpectedly slowed last month. Money markets are currently pricing in a 95% chance of a pause in rate hikes next month, while 5% expect another quarter-point hike. The metal also found support from uncertainty around the US debt ceiling, as US President, Joe Biden, increased pressure on Republican lawmakers on Wednesday to raise the $31.4 trillion debt limit or risk throwing the world’s largest economy into recession.
Copper futures fell toward the $3.80/pound mark, their lowest level in four months, as signs of increasingly low demand outweighed evidence of tight supply. Economic data continues to suggest that the reopening of the Chinese economy has not lived up to expectations of a sharp recovery. As a result, low industrial demand drove the world’s second-largest economy to import 407,294 tonnes of copper during the period, a 12.5% reduction compared to the corresponding period of the previous year. Still, tight supplies saw copper prices hover slightly higher year-to-date, and significantly outperform other base metals.
STERLING IN THE POUND SEAT
The dollar index pared some gains to reach 101.7 on Thursday, after fresh data reinforced the bets that Fed will soon pause the rate hike campaign. Markets also continue to follow the banking sector crisis as well as the debt ceiling impasse. President Biden and Republican House Speaker, Kevin McCarthy, are set to meet again on Friday to further discuss raising the debt ceiling.
The euro traded to its lowest level in three weeks on Thursday, trading around $1.09/€, and below an over one-year high of $1.10/€, as investors try to interpret the latest inflation reports from the US and China. On Wednesday, the euro received a boost from a slower-than-expected US inflation rate, adding to hopes of a smaller interest rate gap between the US and the euro area. However, the lack of inflation in China has raised concerns about global growth, prompting some investors to seek safer currencies like the dollar. The euro-area policymakers are expected to continue hiking interest rates until summer, due to stubborn inflation levels, while the Fed is likely to pause its tightening cycle.
The British pound appreciated to the $1.26/£ mark, hovering near levels last seen in May 2022 after the BoE hiked its bank rate by 25 basis points. The Monetary Policy Committee expects it will take longer for UK inflation to fall to a healthy level, raising expectations of further rate hikes and thus supporting the value of the sterling. In addition, slower inflation in the US strengthened bets of a tightening pause for the Fed in its next meeting, underscoring the divergence between the US and the UK’s monetary policies.
The rand is trading at R19.42/$, R21.19/€, R24.31/£.