The United States (US) and five other world economic powers – China, India, Japan, South Korea and the United Kingdom (UK) – announced a coordinated effort to tap into their national oil stockpiles in an effort to drive down rising energy prices. The rising cost of energy has angered consumers around the world.
Key themes for this week include:
- COVID-19 cases soar in Europe
- US Jobless Claims at lowest level since 1969
- Energy stocks continue to rally on high oil prices
- Continued dollar strength surprises markets
POWELL TO SERVE SECOND TERM
Jerome Powell was nominated for a second term as Chair of the US Federal Reserve (Fed) by President Joe Biden on Monday. The president remarked that Powell had helped achieve a successful economic recovery from the pandemic and was confident he would be able to get inflation under control. The S&P 500 Index responded positively to the news, gaining 0.4% and hitting an intraday record high on Monday, as financial and energy stocks responded positively to the announcement. In contrast, the tech-heavy Nasdaq Composite index fell 0.4% on the same day, as technology stocks are typically sensitive to rising interest rates, and the renomination of Powell is expected to result in the Fed adopting a more hawkish tilt – meaning possible earlier and more frequent hikes in short term interest rates – than if the other front-running candidate, Lael Brainard, had been nominated.
Germany reported a massive number of COVID-19 cases on Thursday with 75 000 new infections. The country’s death toll, since the pandemic began, has reached over 100 000. This current crisis, with more than 777 000 active cases, is rocking the nation. The country’s new incoming coalition government is resisting a lockdown, for now, as outgoing Chancellor, Angela Merkel, reportedly pushed for a two-week lockdown during a meeting on Tuesday. Europe has become the epicentre of the pandemic, accounting for around half the world’s new cases and deaths, and the European Union’s (EU’s) drug regulator approved the use of Pfizer-BioNtech’s COVID-19 vaccine for children between the ages of five and eleven. According to the manufacturers, the vaccine has showed a 91% efficacy against the virus in a clinical trial of children in that age group.
DATA IN A NUTSHELL
The recovery of the US economy remains encouraging as weekly Initial Jobless Claims fell to a record low of 199 000 claims, beating expectations of 260 000. US Initial Jobless Claims is a leading economic indicator and is at its lowest since mid-November 1969. With the market-beating 1.3% month-on-month increase in personal spending in October, it seems the US economy is leading the global post-pandemic recovery.
China’s Bloomberg Economic Credit Impulse worsened to -27.5% year-on-year in October from
-26.4% year-on-year in September, implying a still deteriorating Chinese economy. Expectations are for the government to stimulate lending later this quarter and going into the first quarter of 2022. China’s retail sales, however, improved by 4.9% year-on-year in October, building on September’s momentum, while online retail sales softened by one percentage point to a year-on-year growth rate of 13.7%.
The UK’s retail sales in October were up 0.8% month-on-month; representing the first monthly rise since April this year. The Confederation of British Industry’s sales balance rose to a three-month high of +39 in November and the momentum is expected to continue into December.
In South Africa, income from the food and beverages industry increased by 23.4% year-on-year in real terms in September. Bar sales growth in September was up 7% year-on-year after three months of triple-digit growth on the back of depressed mid-year alcohol sales in 2020. Tourism accommodation data released for September showed a 74.4% year-on-year rebound in income generated from accommodation services, while seasonally adjusted month-on-month income growth of 20% suggests the leisure industry is experiencing an accelerating recovery.
ANOTHER RECORD HIGH FOR THE S&P 500 AND THE JSE ALL SHARE INDEX STAYS ABOVE 70 000
The S&P 500 Index reached an all-time high of 4 743.83 on Monday following the highly anticipated decision by the US President to nominate Jerome Powell to continue as Fed Chair for another four-year term. The S&P has subsequently cooled to the 4 700 level on Thursday, leaving it flat for the week. Upward pressure on US 10-year Treasury yields during the week favoured financials which rose 2.7%, while information technology and consumer discretionary fell 0.65% and 1%, respectively. Energy stocks rallied almost 6% on aggregate in response to crude oil prices which remain close to the $80 per barrel mark.
The Euro Stoxx 50 Index was down 1.8% for the week against a 1.3% increase in the energy sub-index. Financials and consumer discretionary indices were both down 2% for the week. European stocks traded against a backdrop of rising COVID-19 cases in eurozone countries and suggestions by governments that further lockdowns could be imposed going into the festive season.
The JSE All Share Index remained above the 70 000 points mark and managed to eke out a 0.5% gain this week. The JSE consumer discretionary and telecommunications indices rose by around 1.7% during the week while the resources index improved by 1.1%. Underperformance came from the financials index which fell 0.4%, on aggregate, over the week. Lifestyle and fashion retailer, Mr Price, released a pleasing set of results on Thursday, boasting strong interim revenue growth despite suffering a significant hit from the July unrest.
President Joe Biden has announced the release of oil from the US’s strategic reserve in an effort to lower fuel costs and put an end to a crude market boom that the administration claims is posing a threat to the global economic recovery. Fifty million barrels of oil was authorised to be released over the coming months in a move coordinated with China, India, Japan, South Korea and the UK. The effort to drive down oil prices appeared to backfire as the Brent crude oil price gained 3.3% for the week, at a spot price of $82.20 on Thursday afternoon. The extended organisation of petroleum export countries, OPEC+, who are meeting next week to decide on their immediate output policy, has resisted the US’s calls to do more, as it continues with its production cuts, which will see it reduce output by 3.8 million barrels per day, by the end of December.
China’s net gold imports via Hong Kong increased by 56% in October from the previous month to the highest level since June 2018, as buyers stock up on the metal as a cushion against rising inflation. Gold prices rose marginally on Thursday, boosted by continued inflation fears, but gains were limited by prediction that the Fed would accelerate its monetary tightening to tame its rising inflation. Even though some market participants view gold as a good hedge against inflation, interest rate hikes typically push government bond yields up, raising the opportunity cost of holding gold.
Iron ore gained for a fifth straight session on Thursday as spot prices rose above $100 a tonne on the back of improved sentiment towards the Chinese property sector. After touching 629 Yuan earlier in the day, the most-traded January iron ore contract on China’s Dalian Commodity Exchange ended daytime trading 1.8% higher at 611.50 yuan ($95.74) per tonne.
DOLLAR CALLS THE SHOTS
This week’s continued strengthening of the dollar came as a surprise to the market after last week’s equally impressive gains. The US Dollar Index (DXY) was comfortably above the 96 level for most of the week, closing on Thursday at around 96.7. The DXY started November at 94.1, however, the confluence of factors which include persistent global inflation, fears of accelerated tapering of quantitative easing by the FED, and a slower global recovery has seen the US dollar test new 2021 highs.
British pound weakness persisted this week in response to US dollar strength. At $1.331, the pound sterling is trading at levels last seen in mid-December 2020. However, the expectation that the Bank of England will raise rates during its next meeting on 16 December, may result in the pound strengthening from these levels.
The Euro was also subject to similar US dollar-led pressure, depreciating by 0.15% this week against the greenback while managing to gain 0.52% in value against the pound.
This week, the rand has weakened by 50 cents versus the US dollar. The weakness we see comes amid concerns about the new COVID-19 variant that has been discovered in South Africa and on the back of the strong dollar and broader negative sentiment around emerging market currencies. Furthermore, South Africa’s exports are coming off the boil after a stellar year of commodity sales which have provided support to the rand.
The rand is trading at R16.22/$, R18.20/€ and R21.58/£.