With the focus remaining squarely on the United States (US) Federal Reserve (Fed) interest rate expectations for the coming months, it is easy to forget about other factors that impact the market.
Key themes for this week include:
- China continues to battle with COVID-19 outbreaks
- Federal Open Market Committee (FOMC) minutes point to slower pace of rate hikes
- South African equities soar to seven-month high
- US dollar licks its wounds
Over the past year, as the rest of the world returned to ‘normal’, China remained intent on combatting COVID-19 head on. Its zero-COVID policy saw the country enforcing stringent lockdowns and other restrictive measures. Mention of this policy sends shivers down the spine of supply chains and emerging markets, as the ripple effects of these measures on the global economy cannot be discounted.
By way of numbers, the population in China exceeds 1.4 billion people, and the country has a Gross Domestic Product (GDP) of $17.74 trillion, according to 2021 World Bank data. According to the US Geological Survey, BP’s Statistical Review of World Energy, the Food and Agriculture Organization of the United Nations, the International Monetary Fund (IMF) and the United States Department of Agriculture, China is by far the worlds largest consumer of commodities. The country, alone, consumes 59.2% of the world’s steel, 54.4% of all iron ore, 54.3% of all coal and 53.6% of all cement. This makes the Chinese economy vital for commodity driven economies like South Africa and Australia.
But its contribution doesn’t end there, China is also vital to the global supply chain. The country exported a whopping $3.36 trillion worth of goods in 2021 and was ranked first on the list of global exporters, accounting for 12.72% of total global exports, during 2020.
These numbers highlight why China needs to remain top of mind. The country’s recent easing of restrictions not only assisted risk appetite, but also led to improved sentiment. However, the risks of renewed restrictions cannot be ignored when evaluating the global economic recovery trajectory, especially when we weigh China’s contribution to supply chains, and consider the disruptions these types of restrictions can have on not only the local Chinese economy, but the global economy as a whole.
Meanwhile, The People’s Bank of China kept its key lending rates unchanged for the third consecutive month at the November fixing, amid continued downward pressure on the yuan and a slowdown in economic activity, due to rising COVID-19 cases and restrictions or lockdowns in several cities. The one-year-loan prime rate, which is used for corporate and household loans, was kept at 3.65%; while the five-year rate, a reference for mortgages, was maintained at 4.3%. Lowering interest rates to revive the slowing economy could further widen China’s monetary policy stance against other major economies, especially the US. A move which could trigger capital outflows from China, as investors look for more attractive returns.
DATA IN A NUTSHELL
The consumer confidence index in the euro area rose by 3.6 points to -23.9 in November, beating market expectations of -26. Preliminary estimates showed consumer confidence in October was revised to -27.5, up from the -27.6 previously reported. Consumer confidence remains at concerningly low levels, well below the long-term average. In the European Union, as a whole, consumer sentiment rose by 2.8 points to -25.8.
US Durable Goods Orders, which measures the cost of orders received by manufacturers for goods that have a lifespan of three years or more, jumped 1% month-on-month in October, following a downwardly revised 0.3% increase in September and beating market forecasts of a 0.4% increase. It is the biggest increase in four months, led by transportation equipment, which was up 2.1%, and military aircraft sales which grew by 21.7%. The number of Americans filing new claims for unemployment benefits rose by 17 000 to 240 000 for the week ending 19 November, its highest increase since August and well above expectations of 225 000. The figure was likely boosted by the wave of layoffs in technology companies.
The South African composite leading business cycle indicator increased by 1.4% month-on-month in September, rebounding from a 2.3% decline in August. It marked the first increase in the leading business index in three months, and the highest increase since May 2021, as five of the nine available component time series increased, while the remaining four decreased. The largest positive contributors were an acceleration in the six-month smoothed growth rate of job advertisement space and an increase in the number of residential building plans approved. Meanwhile, the local annual inflation rate ticked up to 7.6% in October, from 7.5% in the previous month, above market expectations of 7.4% and well above the upper limit of the South African Reserve Bank’s target range of 3%-6%.
STOCKS SOAR AS RISK RALLY GAINS MOMENTUM
The Dow Jones closed more than 100 points up on Wednesday, and the S&P 500 and the Nasdaq traded stronger by 0.6% and 1%, respectively, on the back of the FOMC meeting minutes. The minutes also showed that policymakers were growing increasingly concerned about the economy’s health but hinted at a higher terminal rate. Meanwhile, since that meeting, a slew of economic data that reinforced the view of a 50-basis point hike in December has been released. On the corporate side, Deere & Co jumped 5% after the farm equipment company reported a higher-than-expected quarterly profit. On the flip side, fashion retailer, Nordstrom dropped over 3% after it offered weak guidance. The US stock market was closed on Thursday for the US’s annual Thanksgiving holiday.
London equities were trading flat on Thursday, with the blue-chip, FTSE 100, hovering around the 7 450 level, as losses among technology companies offset gains in energy and materials stocks. The minutes of the Fed’s November meeting showed that the substantial majority of policymakers agreed that it will soon be appropriate to slow the pace of interest rate hikes, with investors now looking for new cues from the European Central Bank (ECB). On the corporate front, telecoms company, Vodafone Group was among the biggest laggards in the index, down roughly 4%, while multinational energy and services company, Centrica gained 2%.
In Japan, the Nikkei 225 Index climbed 0.95% to trade at an over two-month high of 28 383 while the TOPIX Index jumped 1.21% to an 11-month high of 2 019 in post-holiday trade on Thursday, as Japanese shares played catch-up with global peers, amid hopes for a less aggressive US Fed. Technology stocks led the charge, with strong gains from Lasertec, up 4.7%, Tokyo Electron, up 3.6%, and Keyence, up 2.4%.
The JSE FTSE All Share index edged higher, to trade around the 73 200 level on Thursday, soaring to its highest level since late April. The index was largely supported by gains in tech shares, amid optimism around fresh economic stimulus in China. Resource-linked stocks and industrials also advanced. State-owned oil company, PetroSA, has made 50 million litres, a two-week supply, of diesel available to Eskom.
COMMODITIES REMAIN CHINA FOCUSSED
Brent Crude futures held near $85/barrel on Thursday, after closing at a two-month low in the previous session. Oil prices remain under pressure as surging COVID-19 cases in China could hurt energy demand in the world’s top crude importer, as restrictions in movement are put in place. Investors also weighed a larger-than-expected build in US gasoline stocks. The US saw a jump of 3.058 million barrels of gasoline last week, far more than the forecasted 383 000-barrel gain. Markets are also evaluating the impact of the G7’s proposed price cap of $65-$70/barrel for Russian oil. However, investors remain cautious as The Organisation of the Petroleum Exporting Countries could further intervene in markets, to manage a recession-driven demand downturn.
Gold rose above $1 750/ounce on Thursday, gaining for the third consecutive session after the latest Fed meeting. Gold remains decidedly sensitive to the Fed’s rate outlook, as higher interest rates raise the opportunity cost of holding non-yielding bullion.
Steel rebar futures hovered around ¥3 730/ton, closing in on the one-month high of ¥3 757 touched on 17 November, as major banks in China agreed to provide $38 billion in fresh credit lines for private developers, ramping up the battle against the liquidity crunch in the sector. The move followed the national bond regulator expanding a major financing support program by $35 billion for private developers, as it aimed to counter the debt woes hampering investments. The sector is facing a period of record defaults. Besides private construction, building starts by non-developers were 30% higher in the first nine months of the year, further supporting demand for steel. However, cautious trade on the back of the country’s pandemic woes remains, as hopes that steel-intensive sectors would rebound in 2023 have been dampened.
DOLLAR TREADS WATER AT THREE-MONTH LOWS
The US Dollar Index weakened below 106 on Thursday, sliding for the third straight session toward its lowest levels since mid-August, following the release of the FOMC meeting minutes. The Fed will now move to assess the impact of its historic tightening campaign on the economy, with recent softness in US economic data supporting the case for more moderate moves. The dollar slipped across the board, with the most pronounced slide against the euro and the yen.
The euro traded around $1.04, a level not seen since early July, prompted by a weakening dollar. Earlier in the session, the euro benefitted from fresh economic data, while investors awaited further clues on the ECB’s next interest hikes. Recent PMI (purchasing managers’ index) figures showed the contraction in eurozone business activity eased slightly in November but continued to point to a fall in demand, a sign that a recession is looming. Meanwhile, investors are currently betting on a 50-basis point hike next month, despite mixed signals that have been sent by ECB policymakers in recent days.
The British pound rose to above $1.2, a level not seen in over three months, and was bolstered by the dollar’s depreciation. The sterling also benefitted from recent economic data and welcomed, United Kingdom Prime Minister, Rishi Sunak, and Chancellor of the Exchequer, Jeremy Hunt’s economic plans. Meanwhile, the Bank of England is seen raising interest rates by 50 basis points next month, below the 75-basis point hike in November.
The South African rand appreciated further to an intra-day high of R16.90/$ on Thursday, its strongest level since 30 August, amid a softer dollar and expectations of a prolonged aggressive hiking cycle by the South African Reserve Bank (SARB). Both headline and core inflation in South Africa surprised on the upside in October, suggesting persistent inflationary pressures. SARB delivered another big rate hike of 75 basis points on Thursday, following its November meeting, despite heightened risks to South Africa’s economic outlook, including global headwinds and record power outages. SARB Governor, Lesetja Kganyago, continued to cite the urgent need to get inflation expectations anchored around the midpoint of SARB’s target range of 3%-6%.
The rand is trading at R16.97/$, R17.69/€ and R20.57/£.
Please note that the final release of the Weekly Wrap for 2022 will be 9 December. The publication will resume 20 January 2023.