This year has proven to be a rather bumpy ride for markets and economies. There have been a deluge of economic woes, geopolitical tensions and market uncertainty at almost every turn.
Key themes for this week include:
- Chinese recovery is slowing down, against expectations
- South African business and government join forces
- Turkish lira falls to all-time low
- United States (US) Federal Reserve (Fed) interest rate decision in focus
After what seemed like a never-ending uphill battle for the local economy and the rand, this week saw some positives filter into the market, which helped the rand gain nearly 4%. At the time of writing, it was trading below the R19.00/$ mark. Welcome relief, after the currency’s nerve-racking flirtation with R20.00/$ just a week ago. Major financial players such as Goldman Sachs, JP Morgan and other heavy weights, expressed their appetite for “cheap” South African assets, while risks around our relationship with Russia also dissipated, as the “concrete” evidence against South Africa supplying weapons to Russia, seems not all that concrete after all.
In addition, the Presidency and key private sector players met on Tuesday, to map a way forward, that would see government and business actively work together to overcome some of the major challenges facing the South African economy, and to rebuild the country back to its potential. Some of the key focus areas for this working group include:
- Solving the electricity crises and ensuring sustainable solutions
- Addressing the transport and logistics issues across roads, railways, and harbours
- Combatting crime and corruption
The Chinese economy is not living up to expectations, following its long-awaited reopening after prolonged and intense COVID-19 restrictions. Data from the world’s second largest economy continues to underwhelm, adding pressure to commodity prices and commodity-driven currencies. While many believe that the economy is due to pick up steam, others believe that new government-stimulus is the only way to get the economy kickstarted, as data is continuously missing the mark.
In May, China experienced a 7.5% decline in exports compared to the same period last year, while imports decreased by 4.5%. These figures indicate that the economic recovery is slowing down as global demand weakens on the back of higher interest rates. According to customs data released on Wednesday, exports dropped to $283.5 billion, reversing the unexpectedly strong 8.5% growth seen in April. Imports also declined to $217.7 billion, showing a moderation from the 7.9% contraction observed in the previous month. As a result, China’s global trade surplus narrowed by 16.1% to $65.8 billion.
The decline in trading activity adds to the downward pressure on China’s economy, which has already been affected by sluggish factory production, weak consumer activity, and a surge in youth unemployment. According to Lloyd Chan, senior economist of Oxford Economics, China’s exports are expected to remain subdued, as there are concerns about a potential recession in the United States. In addition, although factory output and consumer spending initially recovered after the removal of restrictions that had previously limited access to major cities and international travel, forecasters predict that the peak of this rebound has already likely passed.
On Wednesday, the Turkish lira experienced a significant drop of over 7% against the US dollar, reaching an all-time low. This decline suggests a possible change in the government’s economic strategy. Turkish President, Recep Tayyip Erdoğan’s administration has made considerable efforts to support the value of the lira, by implementing incentives to discourage people from converting their currency and has urged the Central Bank of the Republic of Turkey to sell off its foreign exchange reserves. However, despite these efforts, the lira’s value is still depreciating sharply.
The decrease in the value of the Turkish lira on Wednesday marked its most significant drop since its crash in December 2021. Over the past two years, the lira has depreciated by 60% against the US dollar, resulting in a lira now being worth only $0.043.
This decline has had a severe impact on Turkey’s $900 billion economy. The devalued currency has led to increased costs for imported goods, including essential items like medicine and crude oil. Additionally, businesses and households that have taken loans in dollars are at risk of bankruptcy due to the currency’s devaluation. While the rising cost of living has become a global concern affecting various countries, Turkey’s situation has been aggravated by the reluctance of the President to raise interest rates to combat inflation.
DATA IN A NUTSHELL
In the week ending 3 June, the number of Americans filing for unemployment benefits rose sharply to 261,000, reaching their highest level since October 2021. This figure exceeded market expectations of 235,000 claims. The previous week’s numbers were also slightly revised upward from 232,000 to 233,000 claims. This marks the third consecutive week of increases in initial jobless claims, indicating a potential weakening of the labour market’s strength.
In April, producer price inflation (PPI) in the euro area experienced a decline, reaching 1.0% year-on-year. This figure was revised down from the previous month’s 5.5% and fell short of market expectations of 1.4%. This decline can mainly be attributed to a significant drop in energy prices, which decreased by 8.9% compared to the previous month. When excluding energy, PPI slowed to 5.1% year-on-year in April, down from 8.0% in March. On a monthly basis, there was a significant decline of 3.2% in producer prices in April, marking their largest drop on record.
The S&P Global/CIPS UK (United Kingdom) Services PMI for May was revised slightly higher to 55.2, up from the initial estimate of 55.1. This figure indicates that the services sector in the UK remains robust, holding close to the previous month’s 12-month peak of 55.9. It marks the fourth consecutive month of expansion in the sector, driven by strong growth in output and new orders, which can be attributed to resilient consumer demand. The increased output in the services sector was primarily fueled by higher consumer spending on services, particularly in the fields of tourism, leisure, and technology services. Additionally, export sales saw significant growth, benefiting from an uptick in international visitors and increased demand for business services from clients in the United States and Europe.
The South African economy experienced a 0.4% increase in gross domestic product (GDP) in the first quarter of 2023 compared to the previous quarter, successfully avoiding a technical recession, after a revised decline of 1.1% in the previous quarter, in line with market expectations. Out of the ten economic activities used in the Composite Leading Business Cycle Indicator in South Africa, eight reported positive growth rates in the first quarter. Manufacturing and finance, real estate, and business services made the most substantial contributions to growth, with manufacturing growing by 1.5% compared to a decline of 1.2% in the previous quarter, and finance, real estate, and business services growing by 0.6% compared to a decline of 1.6%. Other sectors that supported the expansion included transport, personal services, and trade, catering, and accommodation. Meanwhile, in April, manufacturing production in South Africa showed a year-on-year increase of 3.4%, marking the first annual gain in six months. This growth surpassed market expectations, which had anticipated a 2.5% increase. Several sectors made significant contributions to this positive trend, including the production of basic iron and steel, non-ferrous metal products, metal products, and machinery, which grew by 5.3%. The food and beverages sector saw a 4.6% increase, while the petroleum, chemical products, rubber, and plastics sector experienced growth of 2.8%. Additionally, the production of motor vehicles, parts, accessories, and other transport equipment rose by 5%. Compared to the previous month, manufacturing production also saw a 0.5% increase in April.
SURPRISE RATE HIKES FUEL MARKET CAUTION
Dow Jones futures experienced a decline of nearly 60 points in early trade on Thursday, but contracts for both the S&P 500 and Nasdaq 100 futures turned positive after a report revealed a larger-than-expected increase in initial claims for unemployment benefits last week. Traders in the market also continued to assess the future of monetary policy. The Fed is scheduled to make decisions regarding monetary policy in the upcoming week, and most investors anticipate that interest rates will remain unchanged. The probability of a 25 basis point increase in rates this month dropped to 28% following the release of payroll data, compared to the previous 32%. In terms of specific companies, the world’s largest retail gaming company, GameStop, saw its shares decline by nearly 18% in premarket trading due to disappointing sales and the CEO’s dismissal. Meta’s stocks also dropped by almost 1% following demands from the European Union’s (EU’s) industry chief for immediate action from the social media company to address content targeting children.
On Thursday, the UK’s FTSE 100 index showed little movement for a second consecutive session. Investors are maintaining a cautious stance, as they await significant central bank decisions from the European Central Bank (ECB) and the Fed, both scheduled for next week. The unexpected interest rate hikes in Australia and Canada added to the cautious sentiment in the market. In terms of corporate news, airline Wizz Air Holdings PLC projected a return to profitability in the upcoming financial year, which provided some positive outlook for the company. Additionally, luxury holiday accommodation provider, FirstGroup PLC, reported better-than-expected annual results, contributing to the overall market sentiment.
Major European stock exchanges traded mostly flat as investors exercised caution. Recent surprise rate hikes by Australia’s and Canada’s central banks have caught the attention of markets, as they suggest an increased likelihood that interest rates worldwide may remain elevated for an extended period. Among the sectors, technology stocks performed the poorest, with a decline of 1.2%, while energy stocks showed some gains, rising by 0.7%.
Japan’s Nikkei 225 Index declined by 0.85% to close at 31,641, while the broader TOPIX Index dropped by 0.67% to 2,192. This marked the second consecutive day of losses as investors continued to take profits following a strong rally in technology stocks. The recent surge in technology shares was driven by a combination of robust corporate profits, a weak yen, and market enthusiasm surrounding AI-related companies, which had propelled Japanese stocks to their highest levels in 33 years, making them the top performers globally in May. Additionally, Japan’s annualised gross domestic product (GDP) for the first quarter was revised upwards to 2.7%, surpassing the consensus forecast of 1.9% and the initial reading of 1.6%. This positive economic data provided some support to market sentiment. Notable declines were observed among index heavyweights such as multinational investment company, SoftBank Group, down 1.5%; factory automation company, Keyence, down 3.5%; giant clothing manufacturer and retailer, Fast Retailing, down 0.8%; electronics manufacturer, Sony Group, down 1.7%, and air-conditioning firm, Daikin Industries, down 1.5%. These losses from influential companies contributed to the overall downward movement of the indices.
The local JSE FTSE All Share index traded at 77,280, recording a gain of approximately 0.2% on Thursday. Investors were cautious as they assessed the increasing signs of a slowdown in global economic activity and uncertainties surrounding the future actions of major central banks. These factors added to overall market sentiment. At the domestic level, market participants continued to analyse the latest GDP figures for the first quarter. Despite facing challenges such as intense load-shedding and an unfavourable global environment, South Africa’s economy displayed some resilience during that period.
COPPER GAINS GROUND AS SUPPLY WOES MOUNT
On Thursday, West Texas Intermediate crude futures stabilised above $72/barrel following increased volatility earlier in the week. Traders were assessing the balance between the potential for tighter oil supplies and concerns regarding weakening global demand. Saudi Arabia, as the world’s largest oil exporter, announced a plan over the weekend to decrease output by one million barrels per day to reach nine million barrels per day in July. This move aims to support crude prices and represents the lowest output level in years. Furthermore, the latest report from the Energy Information Administration (EIA) revealed a surprise decline of 451,000 barrels in US crude inventories for the previous week. This defied expectations of a 1.022-million-barrel increase and aligned with industry data reported earlier in the week. However, market sentiment has been influenced by apprehensions regarding China’s slowing economy and the possibility of recessions in the US and Europe. These concerns have exerted pressure on oil markets. Additionally, investors have been wary of potential interest rate hikes by major central banks, which could have a negative impact on overall oil demand.
Gold prices rose by nearly 1% and approached the $1,960/ounce mark. The increase in prices was attributed to a slightly weaker dollar and concerns about the health of the US economy following a higher-than-expected initial jobless claims reading. However, despite the gain, gold prices still remain significantly below the near-record high of $2,050/ounce reached on 5 May. Traders are closely monitoring the possibility of interest rates remaining elevated for a prolonged period. Attention now turns to the upcoming Federal Open Market Committee (FOMC) meeting, where approximately 72% of traders anticipate that the Fed will keep the fed funds rate unchanged. Simultaneously, the ECB is also expected to increase interest rates in the near future. These upcoming central bank decisions play a significant role in shaping market expectations and have implications for gold prices.
Copper futures approached the $3.80/pound level, reaching their highest point in almost a month. This upward trend followed a rebound from a six-month low of $3.50/pound, which occurred on 24 May. The increase in copper prices can be attributed to mounting supply concerns and optimistic expectations of a demand recovery. Market participants have expressed concerns about potential copper supply shortages in the face of robust long-term demand. Copper is a critical raw material for the transition to renewable energy sources, adding to the metal’s significance. Inventory levels of copper at the London Metals Exchange were reported to be below 72,000 tonnes in June, marking the lowest level in a month.
RAND CLAWS BACK LOST GROUND
On Thursday, the US Dollar Index experienced a decline, dropping to as low as 103.58. This downward movement was prompted by higher-than-expected weekly jobless claims, which dampened expectations of an imminent interest rate hike by the Fed. While the unexpected rate hikes by the Reserve Bank of Australia and the Bank of Canada caused some concerns of a rate hike by the Fed, the upcoming FOMC meeting will also be influenced by the release of May’s consumer inflation data, scheduled to be published a day before the central bank’s meeting.
The euro has remained near a two-month low against the US dollar, hovering near the $1.07 mark, as investors await the ECB’s monetary policy decision. The eurozone’s economic indicators, including GDP contraction and slowing inflation, have raised concerns about the impact of higher interest rates. The forthcoming decisions of the ECB, Fed, and other central banks will continue to shape the currency markets in the coming weeks.
The British pound dropped below $1.24, approaching a two-month low of $1.2306 seen on 25 May, as investors perceive a narrowing interest rate gap between the US and the UK. The Bank of England is expected to raise interest rates to 4.75% on 22 June and potentially reaching a peak of 5.5% by the end of the year. Additionally, recent data on input costs and prices charged by British services firms, along with concerns about inflation and Saudi Arabia’s oil production cut, have added to the overall cautious sentiment surrounding the pound.
The South African rand was trading around R18.90/$, moving further away from its record low of R19.92/$ reached merely a week ago. Investors reacted positively to the latest GDP data, which indicated that South Africa’s economy managed to avoid a technical recession in the first quarter, despite facing significant challenges from ongoing load-shedding. In terms of inflation, South Africa’s annual inflation rate dropped to an 11-month low of 6.8% in April 2023, down from 7.1% in March and below market expectations of 7%. However, it still remains above the upper limit of the South African Reserve Bank’s target range of 3% – 6%, pointing to further rate hikes by the SARB. Challenges related to the power crisis and inflation dynamics continue to impact the rand, and future interest rate decisions by the Central Bank will play a crucial role in shaping its trajectory
The rand is trading at R18.85/$, R20.32/€ and R23.67/£.
*Please note the Weekly Wrap will not be published on Youth Day, Friday, 16 June 2023.