The address by the United States (US) Federal Reserve (the Fed) Chairman, Jerome Powell, at the Jackson Hole Economic Symposium was disappointing. It provided none of the clarity that markets were hoping for. This wait and see approach, where the Fed failed to provide any clear timelines for the start of tapering of asset purchases, resulted in the markets return to a risk appetite.
Key themes for the past week include:
- Risk sentiment turns on the back of a dovish Fed
- US initial jobless claims disappoint
- European Union (EU) producer process sees steepest rise since 1995
- Aluminium reaches the highest level since 2011
- Dollar treads water at one-month low
A VIEW FROM THE TOP
With the Jackson Hole Symposium behind us, market conditions have once again rebounded to favour risk-based assets, due to markets preparing for longer periods of accommodative monetary policy from the Fed. During the address from the Fed Chairman, Jerome Powell, the Fed reiterated their position that inflation is transitionary, and that the Fed will not take any action in terms of asset tapering or interest rate hikes until they are certain that these actions will not negatively affect the recovering US labour market.
Meanwhile, US politics, and in particular the recent withdrawal from Afghanistan, continue to make headlines, and once again, expose the clear divides between Democrats and Republicans. The Republicans called for the impeachment of President Biden, following the death of 13 US service members and 170 Afghans in a bomb explosion at Kabul’s airport. While there is much to be said about the failures of the withdrawal from the war-ridden Afghanistan, many have lauded the US military for their swift and efficient rescue of 122,000 people. The Taliban was also quick to declare their victory after the withdrawal by the US, as images of the Taliban showing off dozens of US armoured vehicles and weapons during their victory parade in Kandahar.
Global investors are also continuing to keep a concerned eye on China, as the world’s second largest economy shows signs of an economic slowdown, while worries over the State crackdown on private businesses adds fuel to the fire. Adding to these concerns, Evergrande, one of China’s largest property developers continues to face severe financial pressure, warning that it could potentially default on its debts. The effects of such a default, will be felt across the Chinese banking system. The Chinese property sector has been in risky terrain for some time now, with concerns that defaults by companies such as Evergrande could be a significant blow to an already fragile environment.
The EU is also making headlines. Disagreements between member states on key issues is nothing new, however, with increased geopolitical and socioeconomic tension, the divides are clearly showing. The legitimacy of the EU Parliament has been put into question, as many politicians within the Union are refusing to enact certain rulings. Last week, for example, EU Commission president, Ursula von der Leyen, wrote to the president of the EU Parliament, David Sassoli, stating she was declining to act on a resolution – that had been passed by a huge majority in the EU’s legislature – to cut off central funding for Hungary and Poland. The reasoning behind this resolution, relates to what is deemed a “violation of the EU’s rule of law” by the two countries for “violating the independence of the judiciary” and “discriminating against lesbian, gay, bisexual, transgender and queer or questioning (LGBTQ) communities”. However, many believe that these acts of ignoring the calls from the Parliament have very little to do with principle but are rather an act of self-promotion by power-hungry politicians who are driving their own agenda.
US jobless claims fell to their lowest level since the start of the pandemic, with the number of Americans filing new claims for unemployment benefits dropping to 340,000 in the week ending 28 August, its lowest level since March 2020 and below market expectation of 345,000.
US non-farm labour productivity, however, missed the mark, gaining an annualized 2.1% during the second quarter, falling below market expectations of 2.3%. Output increased 8.1% and hours worked increased 6%.
Meanwhile, US-based employers announced 15,723 job cuts in August of 2021 – the lowest number since June 1997 – led by companies in the healthcare products sector. Hospitals have struggled with costs since the beginning of the pandemic as revenue-generating elective procedures continue to be cancelled on the back of COVID-19. Other medical providers are closing skilled nursing units due to a shortage of talent.
Moving over to the EU, producer prices in the eurozone rose by their largest monthly increase since January 1995, increasing by 2.3% in July, well above market expectations of 1%, adding to concerns around inflationary pressure. Costs rose for all categories, with producer prices jumping 12.1% in July on a year-on-year basis, the steepest climb on record.
The economic sentiment indicator in the eurozone dropped to 117.5 in August, from an all-time high of 119.0 in the previous month, falling short of market expectations of 117.9. Sentiment deteriorated for the first time since January’s slight decline, amid concerns over the Delta variant. Morale amongst service providers decreased from a 14-year high, down 2.1 points to 16.8, while sentiment among manufacturers fell from its highest level on record, down 0.8 points to 13.7. Sentiment among consumers also dropped 0.9 points to -5.3. Meanwhile, there was an improvement in confidence in the retail and construction sectors.
EU unemployment edged down to 7.6% in July of 2021 from an upwardly revised 7.8% in June, matching market forecasts. It is the lowest reading since May last year as the number of unemployed people declined by 430,000 to 14.613 million.
The Caixin China General Manufacturing PMI fell to 49.2 in August from 50.3 in July, below market expectations of 50.2. This was the first contraction in factory activity since April 2020 and was caused by containment measures to limit the rising number of Delta variant cases, supply bottlenecks, and the high cost of raw materials. Output shrank for the first time in 17 months, while new orders dropped for the second consecutive month, at the steepest rate in 16 months.
The South African trade surplus contracted to R36.96 billion in July, compared to a downwardly revised R54.5 billion in June and below market expectations of R45 billion. This was the smallest trade surplus since February, as exports slipped by 11.2% to a five-month low of R145.01 billion, weighed down by fewer shipments of precious metals & stones, which dropped by 16%, chemical products which declined by 21%, base metals fell by 9% and vehicles & transport equipment were down by 20%. Among the country’s top trading partners, exports to Europe fell by 26.5%, while sales to Asia gained 1.9%. South Africa’s imports decreased by 0.7% to a five-month low of R108.04 billion, with a decline of wood pulp & paper which fell by 30%, and base metals which declined by 21%. Imports from Asia fell by 1.5%
EQUITIES: STEADY DOES IT
US futures extended gains on Thursday following the release of initial jobless claims. Investors now await the key payrolls report due today, which could provide clues on Fed policy tightening. According to a survey done by Trading Economics, the US Stock Market Index is expected to trade at 34,588.15 points by the end of the year, declining from its current level of 35,422 points.
The FTSE 100 was little changed on Thursday, after a 0.4% gain in the previous session as upbeat corporate results offset declines in commodity-based stocks, due to concerns that global growth momentum is fading, especially in China. On the corporate front, Britain’s biggest homebuilder Barratt Developments Plc forecast robust forward sales.
European equities traded flat to high on Thursday, helped by gains in travel companies and automobile manufacturers as investors assess the monetary policy outlook. Jens Weidmann, the Head of the Bundesbank, warned on Wednesday that upside risks to the outlook for prices prevail. Investors are keeping a keen eye on the European Central Bank (ECB) as they assess the monetary policy outlook and direction in the upcoming months.
The Nikkei 225 was up 0.33%, to trade at near seven-week highs at 28,543 points, climbing for the fourth consecutive trading session, after Japan announced efforts to boost its long-term economic growth by promoting labour productivity, green technology, and digitalisation. According to Reuters, the outline will likely serve as a reference for any new stimulus package that the government may compile later this year. Meanwhile, Bank of Japan board member, Goushi Kataoka, noted on Thursday that the pandemic may weigh on the economy longer than initially expected. On Wednesday, Japan confirmed 20,031 new infections, bringing the total tally to 1.5 million. Looking at individual stocks, sauce maker, Kikkoman Corp, gained 4.19%, while video gaming company, Nexon Co Ltd, rose 2.8%.
The FTSE/JSE All Share shed around 0.7% on Thursday, led by slump of over 4% in Discovery. The South African insurer announced a surge in profits but scrapped its annual dividend, saying it may have to raise equity capital over its investment in Chinese insurer Ping An. Shares of Impala Platinum also declined nearly 4% even as the miner announced a 123% rise in annual profits, boosted by higher prices of platinum group metals and increased output, as the mining giant noted that near term platinum prospects remained muted.
ALUMINIUM AND COAL LEAD THE CHARGE
Aluminium futures surged past $2, 700 a ton for the first time since May 2011 on growing demand, shipping disruptions and tight supply. China suppressed smelting to reduce pollution and meet green targets while in India, the second-biggest producer of the energy-intensive metal, inadequate coal supply threatens local production. Adding to shortages, is the short supply of containers used to move industrial metals from Asia to the US and Europe. Meanwhile, global aluminium consumption this year has risen by 8% on the back of climate change investment.
Coal futures traded around $175 per metric ton, the highest level on record, amid soaring electricity demand, infrastructure woes and a surge in global gas prices. A heat wave in Zhejiang, Jiangsu and Guangdong, China’s biggest industrial provinces, and a rebound in industrial output pushed demand higher despite government’s pledge to cut carbon emissions. Meanwhile, China authorised the restart of production for a year at 15 coal mines across northern provinces including Shanxi and Xinjiang region as inventories declined to near-historic lows since August, due to peak summer electricity demand and transportation bottlenecks, exacerbated by last month’s severe floods and typhoon. Elsewhere, a trade spat with Australia has curbed imports while global supplies remain limited due to a closed mine in Colombia, and flooding in Indonesia and Australia.
West Texas Intermediate (WTI) crude futures rebounded from early losses to trade above $69 a barrel on Thursday, as investors digest the extended Organisation of Petroleum Exporting Countries’ (OPEC+) latest decision and a gradual recovery in US Gulf of Mexico production. On Wednesday, the alliance pledged to add 400,000 barrels per day each month until the end of December, despite pressure from the US to pump more oil. Meanwhile, 80% of US Gulf of Mexico oil production remains shut-in, as Hurricane Ida passed over the area. Many companies however escaped major damage and could return to work in the next few weeks.
Gold remained steady around the $1,815 an ounce level this week, as traders await the US non-farm payrolls release due today. Gold recovered some lost ground, following the dovish statements by Fed Chair Powell last week at the Jackson Hole Symposium.
Platinum futures traded around $1,000 per troy ounce, hovering at levels last seen during November 2020, as the demand outlook worsened. The decline in expected demand followed announcements on output cuts by major players in the auto industry amid a global semiconductor shortage. Volkswagen stated its plant in Wolfsburg, the world’s largest car manufacturing plant, planned to restart production with only one shift, while its subsidiary Audi decided to extend the summer break by one week. Earlier, Toyota had already announced the suspension of operations at 14 of its Japanese factories for the month of September. Platinum, used in catalytic converters, has already been under pressure, due to a spike in COVID-19 cases across the globe and as US Fed officials talked about removing stimulus as early as this year.
DOLLAR ON THE BACKFOOT
The dollar index remained near four-week lows of 92.5 on Thursday, as initial jobless claims fell more than expected to a new pandemic-low and the ADP National Employment Report, released on Wednesday, disappointed. Market participants look forward to Friday’s payroll report for a clearer direction of the labour market as the Fed is still looking to set the timeline to monetary policy tightening in the US, which will ultimately provide new direction for the US currency.
The euro changed hands at $1.185 for a large part of the week, hovering around its strongest level in nearly a month, as investors continued to sell the dollar. At the same time, ECB Governing Council member, Robert Holzmann, said on Tuesday that the Central Bank should start considering scaling back emergency bond purchases and focus on tools that would help achieve its 2% inflation target sustainably, while ECB Vice President, Luis de Guindos, told a Spanish newspaper that the bloc’s economy is growing quicker than the ECB expected, paving the way for the eventual withdrawal of excessive stimulus.
The British pound held above $1.375 this week, its strongest level for over two weeks, after posting an over 1% monthly loss against the greenback in August, as the dollar remains subdued. Meanwhile, the Bank of England signaled “some modest tightening” of monetary policy over the next two years was likely to be necessary if the economy continues to improve.
The South African rand appreciated towards R14.30 to the dollar, hovering around its strongest level since early August, as investors turned to riskier currencies on the back of a dovish Fed. This follows the rand’s five-month low witnessed on 20 August. The rand continues to bear the fruit of the week-long risk rally.
We start the day at R14.44/$ R17.15/€ and R19.98/£.