In this week’s Weekly Market Wrap, we take a closer look at the most recent International Monetary Fund, (IMF) global growth outlook, and do a deep dive into what cues the rand will take in 2024.
- IMF upgrades global growth outlooks but Sub-Saharan Africa falls short
- The rand in for yet another volatile year
- Federal Reserve maintains a hawkish tone
- Earnings take centre stage on the equity front
THROUGH THE LENS OF THE IMF
In the intricate world of global economics, 2024 unfolds as a complex and nuanced dance between the various economic factors. Growth projections, inflation dynamics, and regional challenges move together to shape the economic landscape. Let’s dissect the insights provided by the IMF.
Global growth and inflation: A delicate balance
The IMF projects global growth to reach 3.1% in 2024, slightly surpassing the October 2023 forecast of 2.9%. This optimistic outlook is attributed to the resilience of the United States (US) economy, as well as several emerging market economies, and massive fiscal support for China’s ailing economy. However, the forecast remains below the historic average of 3.47%, due to elevated central bank policy rates, reduced fiscal support (excluding China), and sluggish underlying productivity growth.
Participating in this complex economic waltz, is global inflation, which is falling faster than expected. It is predicted to hover around 5.8% in 2024, with a further decline to 4.4% expected in 2025. The IMF’s cautionary notes emphasise the need for careful monetary calibration, acknowledging the delicate balance between inflation dynamics and a less restrictive stance.
Risks and opportunities: Finding a balance
With disinflation (falling inflation) and stable growth, the likelihood of a hard landing (or a recession) diminishes, presenting a balanced outlook for global growth. On the upside, faster disinflation could ease financial conditions, while cautious fiscal policy remains crucial. Structural reforms also hold the potential to boost productivity and spur positive cross-border effects.
Conversely, geopolitical shocks, commodity-price spikes, and supply disruptions pose threats to the delicate economic balance. As markets navigate this uncertain terrain, it is reminiscent of the delicate en pointe balance required by ballet dancers, one wrong move and it could collapse. Adding to this balancing act, the IMF highlighted potential disruptions in the Red Sea, emphasising the need for global cooperation in mitigating risks.
Sub-Saharan Africa: A mosaic of challenges and growth
In Sub-Saharan Africa, growth is anticipated to rise from 3.3 % in 2023 to 3.8% in 2024 and 4.1% in 2025. However, challenges persist, with the region grappling with external headwinds such as high inflation and borrowing costs. The IMF’s downward revision for 2024 reflects Africa’s largest sub-Saharan economy, South Africa’s logistical constraints, particularly in the transportation sector.
South Africa’s economic struggles: A choreography of constraints
South Africa’s economic woes take centre stage, with the IMF slashing its growth forecast from 1.8%, to a meagre 1% in 2024. Logistical challenges, particularly in the energy and transportation sectors are weighing heavily on the country’s performance. The need to address these disruptions becomes ever more evident as calls echo for effective solutions.
The IMF Chief Economist, Pierre-Olivier Gourinchas, says the country’s frail fiscal position is exacerbated by the high public debt levels in South Africa. As Finance Minister, Enoch Godongwana, prepares for the annual budget speech, the imperative for fiscal consolidation, controlled public spending, and increased tax-revenue collection takes precedence.
NAVIGATING THE RANDS COURSE IN 2024
Now that we have an overview of the economic landscape, let’s take a pragmatic look at the South African rand, with an examination of the fundamental factors shaping its trajectory without the theatrics.
Aspects such as global interest rates, economic indicators, political stability, and market speculation serve as the backbone of the currency realm. Think of them as the reliable tools in the carefully choreographed currency dance routine: interest rates guiding, economic indicators directing, political stability anchoring, and market speculation providing the occasional breeze of change.
In the short term, the rand encounters a mix of challenges – an election year budget which is poised to adopt some populist ideals in February, upcoming South African elections with (very often empty) promises of populist policies, to win over the hearts of the most desperate in our societies and the mysterious GFECRA (Gold and Foreign Exchange Contingency Reserve Account) adding its own complexities.
Looking at the medium term, the rand’s fate intertwines with the global economy, commodity prices, the US Federal Reserve (Fed) interest rate trajectory, and a plethora of elections. It’s not an orchestrated hit but a pragmatic sequence of events, occasionally marked by unforeseen developments.
Venturing into the long term, the rand faces the intricate dance of commodity exports, the local fiscal balance, and the perpetual struggle between growth and unemployment.
Examining the current scenario, the rand grapples with multiple risks on the horizon:
- The impending budget in February with its potential populist ideals, raises concerns around additional fiscal deficits in the market.
- The upcoming election promises a display of populist policies and suppressed commodity prices cast a shadow over the rand’s prospects.
- Enter the geopolitical associations – a trio of potential challenges in the form of Iran, Russia, and China. It’s less of a dance and more of a strategic chess game where every move has significant consequences.
Amidst these risks, there are two potential factors that could support the rand. Robust Chinese stimulus, though downplayed during the WEF in Davos, remains a potential source of support. Additionally, the GFECRA, with its promise of monetising “paper gains,” could see a noteworthy strengthening in the rand in the short term.
The rand’s journey through 2024 will undoubtedly keep us on the edge of our seats yet again. So, dear readers, fasten your seatbelts… but approach the show from a pragmatic perspective!
GLOBAL MARKETS IN FOCUS
In the ever-shifting landscape of global markets, Thursday witnessed a diverse array of movements, with US stock futures bouncing back in early trade after a Fed-induced sell-off. Contracts on the S&P 500 rose by 0.6%, the Dow Jones gained 90 points, and the Nasdaq 100 jumped by 0.8%. Federal Reserve Chair, Jerome Powell’s remarks following Wednesday’s Federal Open Market Committee meeting minutes, hinted at possible rate cuts in 2024, with market bets indicating a 35% chance for a March cut and over 62% for May. On the corporate front, global healthcare company, Merck, soared 1% after beating earnings, while semi-conductor manufacturer, Qualcomm, dipped 1.5% due to concerns over Android sales in China.
Elsewhere the United Kingdom’s (UK’s) FTSE 100 climbed 0.4%, propelled by positive corporate updates and the Bank of England’s (BoE’s) monetary policy decision, which, while leaving interest rates unchanged, revealed a split decision among members. Energy and petroleum giant, Shell, rose by 2.5% after announcing increased dividends, but tech companies, Honeywell and Qualcomm faced challenges, posting losses.
In Germany, the DAX experienced a slight dip, led by sporting apparel retailer, Adidas’ 8% slump despite optimistic profit projections. Deutsche Bank reported better-than-expected net profit, with plans of a 50% increase in buybacks and dividends.
Asian markets saw mixed results, with the Nikkei 225 and TOPIX Index in Japan losing ground due to the Fed’s resistance against an imminent rate cut. Conversely, robust corporate earnings and a weak yen supported the market.
Closer to home, the JSE All Share index dipped below 74,100 for the second day, mirroring global trends. The Fed’s hawkish tone impacted resource-linked sectors and industrials, while entertainment broadcaster, MultiChoice’s shares surged by 27%, fuelled by French media and telecommunications conglomerate, Canal+’s non-binding offer, emphasising the potential for global expansion.
Oil faces steep losses amid ceasefire reports
In the intricate dance of commodities, Brent Crude futures dipped to $79 per barrel, set to face losses of nearly 5% for the week. The catalyst? The prospect of a ceasefire between Israel and Hamas, that would see a de-escalation of the tension in the Middle East, and ease concerns over oil supply disruptions. All however is not set in stone, while reports indicated ongoing evaluations of the deal by Hamas, a Qatari official refuted claims of an existing ceasefire. On the demand side, we saw a brighter outlook. International Energy Agency (IEA) executive director, Fatih Birol’s optimistic projection of a two-million barrels per day increase in global oil demand for 2024, surpassing a previous forecast. In addition, prospects of interest rate cuts in major economies and stimulus measures in China added to the positive sentiment. Yet, the shadow of geopolitical tensions, evidenced by Houthi attacks on Red Sea shipping and fears of a US-Iran confrontation, continued to cast a risk premium on oil prices.
In the set of precious metals, gold maintained its ascent, trading above $2,050/ounce, set for an almost 2% gain for the week. Investors responded positively to the latest US economic data, showcasing a rise in initial jobless claims and a surge in announced job cuts. The gold markets are now focused on the upcoming US jobs report, expected to reveal further labour market cooling. This will align with the Fed’s softer stance of potential interest rate cuts in 2024, albeit not in March, which, coupled with a dip in US Treasury yields, contributed to gold’s buoyancy.
Shifting our attention to currencies, the dollar index declined to trade around the 103 mark, but remained near seven-week highs. Jerome Powell doused expectations for a March interest rate cut, emphasizing it as “not the base case.” The market sentiment shifted swiftly, with the probability of a March cut plummeting from 89% to 38%, but the market continues to price for more rate cuts than indicated by the Fed. As investors eagerly await key reports, including the upcoming monthly jobs report, the dollar’s trajectory stands as a focal point.
On the other side of the Atlantic, the euro held steady around $1.08/€, its lowest level since mid-December. Euro Area headline inflation aligning with expectations at 2.8%, coupled with a moderate dip in the core rate to 3.3%, signalled a gradual easing of inflationary pressures. Despite the eurozone avoiding a recession at the close of 2023, with notable performances from Italy, Spain, and Portugal, Germany’s contraction by 0.3% underscored regional disparities. The European Central Bank’s (ECB’s) commitment to steady interest rates in its first 2024 meeting, with ECB President, Christine Lagarde, deeming discussions on rate cuts premature, set the tone for eurozone monetary policy.
In the UK, the British pound rebounded to $1.2668/£ following the BoE’s policy meeting. While the key Bank Rate held at 5.25%, a nuanced internal divide emerged, with two policymakers advocating for an increase and one for a reduction. The central bank acknowledged the need for continued restrictive monetary policy but removed references to further tightening, recognising more balanced inflation risks.
Amid global uncertainty, the South African rand displayed resilience, trading around R18.70/$, throughout the week, while strengthening below the R18.60 mark during trade on Thursday its strongest level since mid-January. The currency is navigating the uncertain policy terrain of major central banks, especially the US Fed. The South African Reserve Bank, in its first 2024 meeting, maintained rates, signalling a cautious approach and it is likely that South Africa will only experience rate cuts in the second half of the year.
As currencies, globally, perform their intricate dance, investors remain attuned to the nuanced shifts shaping the financial landscape.
BRENT CRUDE: $79.02
Sources: Bloomberg, Reuters, Trading Economics and International Monetary Fund – January 2024 world economic outlook update.
Written by: Citadel Global Director, Bianca Botes.