Tomorrow marks the start of the first G20 summit since Russia began its war of aggression against Ukraine and the first fully fledged physical leaders’ meeting since the COVID-19 pandemic began. The meeting comes at a time when geopolitical tensions are running high, and the global economic environment faces numerous challenges.
Key themes for this week include:
- G20 in the spotlight
- A pause in the European Central Bank’s (ECB’s) hiking cycle on the cards
- Chinese ban on iPhone usage weighs on tech stocks
- Oil remains near its highest levels since November 2022
- Expectations of a hawkish Fed drives dollar higher
Navigating a rocky path towards global collaboration The G20, comprised of the world’s most influential economies, is taking place in New Delhi, India, from 9 to 10 September. The Summit aims to address a spectrum of pressing global issues, ranging from climate change and economic development to debt challenges in low-income countries and the repercussions of the conflict in Ukraine. While the G20 has played a pivotal role in international cooperation, it often encounters an array of challenges, including a history of producing joint statements with limited real-world impact. This year’s event, however, also faces the conspicuous absence of key leaders, such as Chinese President, Xi Jinping, and Russian President, Vladimir Putin.
The agenda set for the G20 meeting in India stresses the urgency of tackling global issues that transcend borders. Climate change, pitted as one of the most pressing challenges of our time, necessitates concerted efforts to mitigate its effects and transition to sustainable practices. Simultaneously, economic development and alleviating the debt burdens of low-income countries are crucial for fostering global stability and prosperity.
CHALLENGES AND CRITICISMS: GRAPPLING WITH EFFICACY
While the notion of world leaders working in unity to overcome global challenges is one to be commended, it does not come without flaws. One of the perennial criticisms facing the G20 is its perceived inability to translate joint statements into tangible actions. Many contend that these statements often lack clear consequences when member nations fail to follow through. The challenge lies in aligning the diverse interests of the member countries, especially at a time marked by heightened geopolitical tensions, economic nationalism, and conflicting priorities.
The conspicuous absence of pivotal leaders also raises pertinent questions regarding the G20’s efficacy. Xi’s decision to forego the meeting reflects China’s evolving foreign policy agenda, which places a premium on engagement with developing nations. Conversely, Putin’s non-attendance is linked to an International Criminal Court arrest warrant over alleged war crimes in Ukraine. These absences curtail the potential for high-level dialogue and could impact the G20’s ability to comprehensively address global challenges.
Despite its perceived shortcomings, the G20 retains its significance as a diplomatic forum for engagement and consensus-building. It provides world leaders with a unique opportunity to share ideas, foster relationships, and explore solutions to global issues. While immediate and concrete outcomes may remain elusive, the G20 serves as a foundation for future actions and collaborations.
This year’s summit in India emerges at a critical juncture for global cooperation on an array of pressing economic and political issues. The G20’s role in fostering international cooperation remains indispensable. Although it may not yield immediate and tangible results, it serves as a platform for leaders to engage, build relationships, and collectively address the intricate challenges confronting our inter-connected world. The outcomes of this G20 meeting will undoubtedly shape the trajectory of international efforts to address pressing global concerns.
A LOOK AT THE DATA
The S&P Global US Composite PMI for August was revised slightly lower to 50.2, down from the preliminary estimate of 50.4 and the previous month’s reading of 52.0. This adjusted figure indicates the slowest rate of business activity increase among US private sector firms since February. The deceleration was attributed to a weaker expansion in the service sector and a renewed decline in manufacturing output. While there was a marginal decrease in total new business, it marked the first decline since February. For the week ending 2 September, the number of Americans filing for unemployment benefits dropped by 13,000, reaching 216,000. This figure, significantly below market expectations of 234,000, represents its lowest level since February. Additionally, continuing claims declined by 40,000 to 1,679,000 during the previous week, well below market expectations of 1,715,000 and marking the lowest level in six months since mid-July. This data underscores the tightness of the US labour market and signals significant resilience in the face of the United States (US) Federal Reserve’s (Fed’s) aggressive tightening measures, despite earlier indications of a slight softening.
According to the minutes from the recent ECB meeting, while the possibility of a rate hike in September was discussed when interest rates were raised in July, some ECB members now suggest it may not be necessary. In the past year, the ECB has increased rates significantly to combat inflation, but there’s growing support for a pause. The view is that previous rate hikes have had a substantial impact on curbing inflation. The minutes also indicate that future decisions will depend on data and be made on a meeting-by-meeting basis as policymakers aim to strike a balance between addressing high inflation and managing an economic-growth slowdown.
Meanwhile, in July, producer prices in the euro area fell by 7.6% year-on-year, aligning with market expectations and accelerating from the 3.4% decrease in the previous month. This marked the third consecutive decline and the steepest drop since 2009, primarily due to base effects from the surge in energy prices following Russia’s invasion of Ukraine. Energy prices notably sank by 24.2% compared to the previous month’s 16.4% decline.
The S&P Global South Africa PMI (Purchasing Managers’ Index) increased to 51 in August, pointing to the first expansion in private sector activity in six months, and its largest in a year, compared to 48.2 in July. Business activity grew for the first time in a year and stabilising demand conditions helped firms to boost output, although high inflation and load shedding remain obstacles to growth. The recovery in output encouraged businesses to increase their staffing and purchasing to the greatest degree since last year, despite sharp increases in both material prices and salaries. Cost pressures remained sharp, but softened to a seven-month low, leading to a weaker increase in overall selling charges. Meanwhile the South African economy displayed promising growth, expanding by 1.6% year-on-year. This growth rate significantly outpaced the modest 0.2% rise observed in the preceding period and exceeded market expectations, which had anticipated a 1.1% increase. This quarter marked the most substantial expansion since the third quarter of 2022. The impressive growth can be attributed in part to a reduction in power outages and a decreased reliance on power utility, Eskom, for electricity supply in sectors like manufacturing and mining.
In August, the Caixin China General Composite PMI dipped slightly to 51.7, down from 51.9 in July. This marked the eighth consecutive month of growth in private sector activity, albeit at a slower pace compared to January. The deceleration primarily resulted from a less robust expansion in the services sector, partially offset by a mild increase in factory production. While new orders showed modest growth, they were at the fastest rate since May. Chinese employment also saw gains, with the most significant increase, since February, observed in both manufacturing and service sectors. Input price inflation rose to a five-month high but remained relatively controlled, and selling prices remained broadly stable. Dr Wang Zhe, an economist at Caixin Insight Group, noted that seasonal effects would diminish over time, but concerns about weak domestic demand and low expectations could create an ongoing challenge.
STOCK MARKETS TRACK WALL STREET LOWER
US stock futures saw extended losses on Thursday, as Dow Jones contracts dropped roughly 70 points, the S&P 500 fell nearly 0.6%, and the Nasdaq 100 declined about 1%. These losses followed lower-than-expected initial jobless claims data, which hit their lowest level since February. This data also led to an increase in US Treasury yields, adding pressure on tech shares, as expectations, that the Fed will maintain higher interest rates due to the robust US economy, increase. Earlier news of a Chinese ban on iPhone usage in various agencies and state-owned companies had already been affecting the tech sector, with Apple shares falling approximately 3.5% in premarket trading. Meanwhile, electric car manufacturer, Tesla, and computer chip manufacturer, Nvidia, both experienced around a 2.7% decrease. In contrast, fast food giant, McDonald’s, saw a nearly 1% increase in premarket hours after financial services company, Wells Fargo, upgraded its rating on the stock to “overweight” from “equal weight.”
European stocks reversed their earlier gains on Thursday afternoon, as both the DAX and the STOXX 600 dipped by about 0.3%. This decline mirrored the weakness observed in US markets, triggered by concerns that the Fed might prolong elevated interest rates due to a smaller-than-expected initial jobless claims figure. The technology sector was the most significant underperformer in the pan-European index, experiencing a 1.5% drop, followed closely by basic materials, which fell by 1.4%. Investors were also grappling with weak economic data and attempting to gauge the monetary policy outlook in Europe. Revised euro area gross domestic product figures indicated smaller-than-anticipated growth in the second quarter, while industrial production figures for Germany disappointed. These developments reinforced expectations that the ECB will maintain interest rates at their current levels next week, as signs of a looming recession in Europe became more evident. In contrast, utilities and healthcare shares, which are generally considered less susceptible to economic cycles, emerged as the top performers.
The United Kingdom’s (UK’s) FTSE 100 rebounded on Thursday, recovering from its early decline to advance by 0.4%, reaching the 7,450 level. This upturn aimed to break a three-day streak of losses as global markets continued to scrutinise recent economic data for insights into global growth and central bank policies. Stocks with significant exposure to commodities displayed mixed performance, with a decrease in trade turnover from China offsetting the dollar’s sharp rise. The stronger dollar favoured export-oriented industries based in London. Furthermore, the market received support from Bank of England (BoE) Governor, Andrew Bailey’s dovish comments, expressing doubts about the need for further rate hikes in the face of deflationary trends in Britain. Additionally, significant drops in house prices highlighted that restrictive policies were already having an impact. Meanwhile, shares of investment firm, Melrose, surged by over 6% following the company’s strong financial results and updated guidance.
On Thursday, Japan’s Nikkei 225 Index dropped by 0.75% to close at 32,991, while the broader TOPIX Index declined by 0.38% to 2,383. This marked the end of an eight-day winning streak for Japanese shares and mirrored losses on Wall Street, driven by stronger-than-expected US services sector data that heightened concerns about inflation and potential interest rate hikes. Investors also considered data indicating that Japan’s leading and coincident indexes had decreased to multi-month lows in July. Regarding monetary policy, Bank of Japan board member, Junko Nakagawa, emphasised the necessity of maintaining the Central Bank’s ultra-loose monetary policy for the time being, as uncertainties persist regarding the achievement of the 2% inflation target. Notable declines were observed among index heavyweights, including Advantest, Tokyo Electron, SoftBank Group, Toyota Motor, Sony Group, and Nippon Steel.
On Thursday, the JSE All Share index experienced its third consecutive day of decline, slipping below the 74,000 level for the first time in almost two weeks. This downturn was primarily driven by sectors linked to resources, as well as tech giants Naspers and Prosus, along with industrials. Investors remained attentive to economic data from major global economies, seeking insights into the future path of interest rates. Meanwhile, domestically, South Africa’s troubled power utility, Eskom, encountered Stage 7 load-shedding on Wednesday evening, marking the most severe level recorded, even though there was no official announcement.
OIL SOARS AMID SUPPLY CUTS
West Texas Intermediate Crude futures shed some value, dropping to approximately $87/barrel on Thursday. This marked the end of a nine-day streak of gains and was attributed to a likely technical correction and concerns regarding potential weakening energy demand amidst a slowdown in global economic growth. Notably, data revealed that China’s trade surplus narrowed in August due to a decline in exports driven by softer external demand, coupled with losses in imports caused by weak domestic consumption. Despite this correction, the US oil benchmark remains near its highest levels since November of last year. This resilience can be attributed to the expanded Organization of the Petroleum Exporting Countries, OPEC+ leaders, Saudi Arabia and Russia, extending supply cuts until the end of this year. Additionally, American Petroleum Institute data indicated that US crude stockpiles fell by approximately 5.5 million barrels in the previous week. This marked the fourth consecutive weekly decline and surpassed expectations for a 1.429-million-barrel draw.
On Thursday, the price of gold remained below the $1,920/ounce mark, maintaining a recent decline and facing pressure from a strengthening dollar. The dollar gained momentum following stronger-than-expected US services sector data, which heightened concerns about inflation and the possibility of interest rate hikes. Market sentiment is now leaning toward a potentially hawkish stance from the Fed in its upcoming meeting. Furthermore, ECB officials have cautioned that additional rate hikes are still under consideration. The BoE Governor also remarked on Wednesday that the UK’s central bank is approaching the end of its tightening cycle, even though inflationary pressures continue to persist.
Copper futures continued their upward climb, surpassing the $3.80 threshold and reaching their highest level since 7 August. Investors responded positively to Beijing’s efforts to support the property market, which include measures such as reducing the existing mortgage rate for first-time homebuyers and adjusting the down payment ratio in select cities. This optimism is further fueled by China’s robust PMI data, raising expectations for increased demand. In a surprising turn, a recent private-sector survey revealed that China’s factory activity returned to an expansionary mode in August, with improvements in supply, domestic demand, and employment. Looking beyond China, the global demand for copper is anticipated to receive a boost from the electric vehicle market and the rapidly growing Indian economy, further contributing to the metal’s positive trajectory.
DOLLAR INDEX DANCES AT SIX-MONTH HIGHS
On Thursday, the US Dollar Index surged above the 105 mark, reaching its highest point in six months. This rise was attributed to robust economic data, which has provided room for the Fed to maintain a hawkish stance for an extended period. Notably, new unemployment claims in the US dropped to their lowest level in over six months during the final week of August, defying market expectations of a modest increase, while the ISM Services PMI in the US unexpectedly reached a six-month high in August, highlighting the resilience of major US firms in the face of high borrowing costs. In contrast, weakening economic data in Europe and Asia raised expectations that central banks in those regions may pause their tightening measures to accommodate slower growth. This contrast in economic performance pressured exchange rates between the dollar and major currencies in the US Dollar Index.
In the first week of September, the euro traded at approximately $1.07/€, marking its lowest level in three months. Traders are closely monitoring the ECB’s upcoming plans. Presently, there is a nearly 64% probability that the ECB will opt to maintain interest rates during its monetary policy decision scheduled for 14 September. This decision is influenced by recent data that continues to highlight the substantial risk of a recession, particularly in Germany.
The British pound dipped below the critical $1.25/£ mark, reaching its lowest level since early June. This decline was triggered by comments from the BoE Governor during his appearance before the UK Parliament. Bailey indicated that the central bank was nearing the end of its series of interest rate hikes, despite the looming possibility of further rate increases due to persistent inflationary pressures. Additionally, another BoE member, Swati Dhingra, expressed concerns that interest rates have already reached a level that could potentially harm the economy if raised further. Notably, the BoE has implemented rate hikes in each of its past 14 meetings, driven by the need to combat elevated inflation levels, despite signs of economic weakening. Meanwhile, investors shifted their focus toward the US dollar following the release of robust economic data, particularly in the US labour market and services sector.
The offshore yuan experienced a depreciation, slipping below the ¥7.32/$ mark, inching closer to multi-month lows. This decline followed data indicating that China’s trade surplus narrowed in August. Simultaneously, imports also suffered losses amid weak domestic consumption. Earlier data revealed that China’s services sector growth slowed to an eight-month low in August, although there was an unexpected expansion in manufacturing activity. In response to these developments, the People’s Bank of China initiated the first reduction this year in the foreign exchange reserve requirement ratio, lowering it by 200 basis points to 4%, starting on 15 September. This move is aimed at curbing further declines in the yuan and supporting a struggling economic recovery. Investors are now closely watching Chinese inflation figures for further insights into the outlook.
The South African rand remained well above the R19.00/$ threshold, reaching its lowest point in nearly three months to tip above the R19.20/$ mark. This decline is attributed to the dollar’s strength and renewed concerns regarding the domestic economy, primarily due to power cuts. Eskom has escalated power cuts across the country, following a period of alternating between Stage 1 and Stage 3 load shedding due to improved energy conditions during the winter. These extended power disruptions have had detrimental effects on economic activity and have contributed to ongoing inflationary pressures in South Africa.
The rand is trading at R19.13/$, R20.50/€, R23.90/£.
Sources: Trading Economics, Refinitiv and News 24.