Policy rates rose further across the G10 (ex-Japan) as central banks ramped up efforts to quash resilient inflation. Rate hikes of 100bp in Sweden, 75bp in the U.S. and Switzerland and 50bp in the U.K and Norway were implemented this week, amplifying recession fears. The Bank of Japan left its ultraloose policy unchanged on Thursday, setting off a rise in the dollar to its highest level versus the yen since 1998. In response, the Finance Ministry bought yens for the first time in 24 years to stem the yen’s depreciation. Japan is now the only country in the world with negative rates. 

Focussing on the U.S., a more hawkish than expected Federal Reserve (Fed) meeting was held on Wednesday. The September meeting resulted in the Fed hiking the funds rate by 75bp, while Jerome Powell laid out a hawkish path for further rate hikes, one that would take the policy rate to 4.6% in 2023. The latest Fed dot plot implied that a 75bp hike is the default for November too. In addition, officials cut growth projections, raised their unemployment outlook and Powell repeatedly spoke of the painful slowdown that’s needed to curb price pressures running at the highest levels since the 1980s.

In response to Wednesday’s Fed meeting, U.S. bond yields rose sharply, with the two-year Treasury note reaching a yield of 4.20%, the highest since 2007, and the benchmark 10-year note touching 3.82%, its highest level since 2011. The U.S. dollar strengthened, with the Dollar index reaching a 20-year high. 

In somewhat of a surprise this week, Russia’s Putin announced a partial military mobilization on Wednesday, calling up 300 000 reservists to fight in Ukraine. The announcement comes at a time when a sudden counteroffensive from Kyiv resulted in the recapture of thousands of square miles of territory, putting Russia on the backfoot. Following the announcement, protests erupted across Russia. At least 1,300 people were detained on Wednesday for participating in nationwide anti-war protests – with some directly conscripted into the military. 

New U.K chancellor Kwasi Kwarteng announced the biggest package of tax cuts in half a century and other regulatory reforms on Friday – which was poorly received by the market. Investors fear a looser fiscal stance may worsen the current inflation backdrop. In the wake of the announcement, the British pound fell close to $1.10, the lowest it’s been since 1985, while the FTSE 100 slumped nearly 2%. 

Global stocks recorded a second week of losses as investors reacted to global monetary tightening efforts. All three major U.S. indices ended the week lower, the S&P 500 fell -4.65%, the Dow Jones dropped -4.00% while the tech heavy Nasdaq fared worst, tumbling -5.07%. European shares fell sharply for a second week, the Euro Stoxx 50 declined by -4.34%, while the FTSE 100 dropped -3.01%. Asian markets continue to tumble; China’s Hang Seng suffered a -4.48% drop, while the Nikkei 225 fell by -1.50%. Brent oil prices continued to decline this week, dropping -5.27%, while gold dropped by -1.85%. 

Market Moves of the Week:

In South Africa (SA), softer fuel prices took the edge off of inflation in August. Headline inflation declined from 7.8% y/y in July to 7.6% y/y in August as expected, while core inflation fell from 4.6% y/y to 4.4% y/y. Food prices jumped by 11.5% y/y, which is the highest rate of increase since February 2017 and well above a five-year average of 5.0%. Petrol price inflation started to moderate, owing to a decline in the oil price and crack spreads on refined products. Petrol inflation decelerated to 43.2% (from 56.2% in July), a R1.30/l reduction in the fuel price.

A front-loaded approach to the rate cycle continues, with the South African Reserve Bank delivering a 75 basis point hike on Thursday. The decision resulted from a split 3-2 vote (with 2 members in favour of 100bp), indicating an incremental hawkish policy shift. The repo rate now sits at 6.25%, with the market expecting a terminal 6.75% policy rate by year end.

Load shedding continued to impact SA this week, following severe stage 5 and 6 blackouts. Eskom issued a statement on Friday stating that “The capacity constraints will persist throughout next week, and current indications are that load shedding will be implemented at stage 3 for most of the week.” The power utility has also cautioned that if diesel supplies remain constrained, higher stages of load shedding may be required.

Sticking with the electricity theme, SA has signed deals to buy power from three EDF Wind Plants – EDF now has 60 days to reach financial close and the projects could be online by Dec 2024. The Cape Town municipality has issued a tender to build its first grid-connected solar plant in Atlantis, one of a series of measures aimed at ending reliance on Eskom. The facility would start generating electricity in 2024. 

The JSE fell -4.76% over the week, driven by significant selloffs in the mining (-8.32%) and property (-5.27%) sectors. The rand fell almost 2% on Friday as the U.S. dollar extended gains after receiving a boost from a very hawkish Federal Reserve policy announcement and rising Treasury yields. The rand ended the week at R17.94/$. 

Chart of the Week:

The following chart shows the course, since the end of May, of the fed funds futures market’s implicit prediction for rates as of this coming February’s FOMC meeting. It took investor’s an awful inflation print last week to finally believe Powell’s message and price in a 4.5% fed funds rate by Feb 2023. Source: Bloomberg 

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

Inflation remains at the centre stage of financial markets this year. U.S. inflation release this week, triggered the biggest daily decline in the S&P 500 in over two years and drove interest rate expectations higher. The road to the Fed’s 2 percent inflation target appears increasingly long and could include some economic pain along the way.

Although headline inflation continues to decline from its June peak of 9.1%, coming in at 8.5% in July and 8.3% now in August, the reading was ahead of the market’s expectation of 8.1%. More importantly, U.S. core consumer inflation which excludes food and energy, accelerated from 5.9% in July to 6.3% in August and was ahead of market expectations, highlighting broader price pressures and challenging the Fed to keep hiking interest rates. U.S. Federal Reserve Chair, Jerome Powell will now feel justified in taking even bigger steps with interest rate hikes to tamp down prices.

The World Bank released a statement this week that it estimates global GDP growth will slow to 0.5%, and contract 0.4% in per capita terms, meeting the technical definition of a downturn. The global economy may face a recession next year due to policy tightening that could yet prove inadequate to curb inflation, the World Bank said.

The British Pound closed at 0.88 to the U.S. Dollar this week, its lowest level since 1985 as fears of a looming U.K. recession and concerns that the Bank of England might deliver an interest rate hike of 50 basis points at its next meeting, smaller than what the Fed is expected to deliver.

U.K. inflation came in at 9.9% (year-on-year) in August, down from 10.1% in July, whilst core inflation (excluding fuel and energy) advanced from 6.2% to 6.3% in August. The U.K. economy also marginally expanded by 0.2% (as measured by GDP) in July, after contracting by 0.6% in June. Meanwhile, the unemployment rate unexpectedly fell to 3.6% in July from 3.8% in the prior month.

Economic sentiment in Europe declined to -60.7 in September, worse than expectations for a decline to -52.0 and the previous month’s reading of -54.9. Germany’s economic sentiment reading was the lowest since October 2008.

China reported better-than-expected industrial production numbers and retail sales for August. Industrial production rose by 4.2%, ahead of market expectations for a 3.8% increase; and retail sales climbed by 5.4%, also more than the market forecast for an increase of 3.5%. However, the property sector extended its slump. New home prices in 70 cities fell in August for the 12^th straight month. New housing starts slumped 46% in August from a year ago compared with July’s 45% drop, reflecting a collapse in land sales and poor sentiment among property developers.

Chinese President, Xi Jinping held a bilateral meeting with Russian President Vladimir Putin this week. Putin began by blasting those who had attempted to “create a unipolar world” and expressed appreciation to Xi for “the balanced position of our Chinese friends in connection with the Ukrainian crisis”. President, Xi Jinping surprising response focused on bringing stability and positivity to a world in disarray. “China is willing to work with Russia to play a leading role in demonstrating the responsibility of major powers, and to instil stability and positive energy into a world in turmoil,” Xi told Putin. Putin has increasingly been seen as a junior partner to China.

In commodity news, a potentially catastrophic strike of railroad workers across the U.S. was averted this week after U.S. railroads and unions reached a tentative deal early Thursday morning, a breakthrough that risked adding supply-chain strains to the world’s largest economy. Prior to the deal, natural gas futures surged 10% on Wednesday, driven by fears that an extended strike will curb deliveries of coal, which generates about 22% of U.S. electricity.

Global equities remained under pressure this week. In the U.S., the Dow Jones (-4.13%), S&P 500 (-4.77%) and Nasdaq (-5.48%) suffered large drawdowns. Similarly, the Euro Stoxx 50 (-1.95%), FTSE 100 (-1.56%), Nikkei 225 (-2.29%), Hang Seng (-2.93%) and Shanghai Composite Index (-4.16%) were all weaker.

Market Moves of the Week:

Eskom chief executive, Andre de Ruyter said on Friday that a final decision on the power utility’s new $476 million World Bank loan to repurpose its Komati coal-fired power plant into a renewable station will be concluded before November’s COP27 climate summit. The World Bank loan is separate from the $8.5 billion financial package to help South Africa move away from its reliance on coal-fired power plants.

At the same time, U.S. President Joe Biden on Friday discussed relations with Russia in a White House meeting with South Africa’s Cyril Ramaphosa, who has resisted joining Washington’s campaign against Moscow for the war in Ukraine. The two leaders spoke privately in the Oval Office for more than an hour on topics that included trade, climate and energy, the White House said. South Africa was one of 17 African countries to abstain from the U.N. vote condemning Russia’s assault.

National Treasury pushed back against the extension of the R350 per month grant this week, into the Medium-Term Budget Policy Statement (MTBPS) later this year, saying that the only way to raise the R50bn needed would be to increase taxes.

The JSE All-Share Index ended the week down -3.09%, with all three of the major indices including Industrial (-3.66%), resource (-2.96%) and financial (-3.64%) shares weaker. By Friday close, the rand was trading at R17.60 to the U.S. Dollar, weakening by 1.64% over the week, as markets priced in a higher probability of the U.S. Federal Reserve hiking rates by 75 basis points or more next week.

Chart of the Week:

U.S. mortgage rates have topped 6% for the first time in almost 14 years. The average for a 30-year loan jumped to 6.02% from 5.89% last week, Freddie Mac said. The last time rates were above 6% was in November 2008. Source: Bloomberg

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

On Thursday the ECB increased its key interest rates from 0% to 0.75% in a bid to curb inflation which stood at an annual 9.1% in August. This large move shows the ECB is following in the Fed’s footsteps. “This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the ECB’s 2% medium-term target,” the ECB stated in its official statement. European inflation is forecasted to fall from an average of 8.1% this year to 5.5% next year and 2.3% in 2024.

New British Prime Minister Liz Truss announced that the government would intervene to help reduce soaring energy costs for British households and businesses. Under the £150 billion plan, a typical household will pay no more than £2500 a year on energy bills. In Germany, Chancellor Olaf Scholz said the government would also spend EUR 65 billion to shield households and businesses from soaring energy costs.

Shares in Europe rose for the week, in local currency terms, the pan-European STOXX Europe 50 Index ended the week 0.72% higher, while the UK’s FTSE 100 Index increased 0.96%. Earlier in the week the British pound depreciated further against the U.S. dollar before retracing some of its losses, while the euro rose above parity with the U.S. dollar after the ECB hiked its key interest rate.

Great Britain’s longest-serving monarch, Queen Elizabeth II, died at the age of 96 on Thursday at Balmoral Castle in Scotland. Prince Charles, the eldest of the Queens four children, is now King Charles III. At 73, he is the oldest person to accede to the throne in British history. The King pledged “lifelong service” in his first televised address to the UK as monarch, in which he paid tribute to his late mother Queen Elizabeth II.

U.S. equities were also higher this week, with both the S&P 500 (+3.65%) and Nasdaq (+4.14%) making strong gains. Investor sentiment grew more confident over the week with moderating inflation fears as intra-week oil prices briefly hit their lowest level since Russia’s invasion of the Ukraine. Investors will be closely watching the U.S. consumer price index report for August, which is scheduled to be released on Tuesday. The report is especially important as it will be one of the last data points Fed leaders will see before the central bank announces its rate hike decision at its September meeting. Markets strongly expect the central bank to take up its benchmark borrowing rate by another 0.75%.

In Asia, Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 2.04%. The Japanese government announced new measures to cope with rising inflation. China’s stock markets also rose on expectations of further policy support with the broad, capitalization-weighted Shanghai Composite Index advancing 2.37%.

Market Moves of the Week:

South Africa’s balance on the current account of the balance of payments fell back into a deficit of R87-billion in the second quarter (Q2) from a surplus of R157-billion in Q1, South African Reserve Bank data showed on Thursday. Falling prices of SA commodity exports, and rising prices of the commodities imported, namely oil, were key factors adding to the rands recent weakness.

South African manufacturing output rose by 3.7% in the year to July, Statistics South Africa said on Thursday. The gain was off a low base as manufacturing was down 4.1% a year earlier given riots and violence in Durban after the jailing of former President Zuma. Compared with June, output declined marginally by 0.2%, loadshedding and logistical bottlenecks continue to be the main challenges for the sector.

Co-operative governance minister Nkosazana Dlamini-Zuma announced that she will once again challenge President Cyril Ramaphosa for the ANC leadership when the party holds its national conference in December.

The JSE all share index tracked global peers to end the week up 1.97%.  The resources sector led the gains (+5.04%), followed by the SA listed property sector (+2.41%), industrials (+1.59%), while the financial sector ended marginally down (-0.42%) over the week. The rand ended the week at R17.31/$ after blowing out to above R17.50/$ on Thursday, it started the week around R17.30/$.

Chart of the Week:

For the first time in two years, US consumers expect home prices to fall over the next 12 months due to higher mortgage rates and recent home price gains. An August survey by the Fannie Mae Economic and Strategic Research (ESR) Group expects total home sales to decrease 16.2% in 2022. This decline represents a further downward revision from last month’s forecast of a 15.6% drop, as recent incoming data points to a faster slowdown in near-term sales than previously expected.

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

U.S. stocks closed lower for the week as investors continued to digest hawkish messages from the Fed and a mixed U.S. payrolls report, released Friday. The report showed that monthly job gains in the U.S. (+315 000) were lower than July’s figure of +526 000, but still strong. The headline data was close to expectations of a gain of 300 000, while the unemployment rate rose to 3.7% from 3.5%, disappointing forecasts. Odds of a three-quarter-percent hike at the September Federal Reserve Open Market Committee meeting receded slightly in the wake of the report, to about 65%. 

U.S. consumer confidence rose by more than expected in August to the highest level since May, as Americans grow more optimistic about falling gas prices. “Looking ahead, August’s improvement in confidence may help support spending, but inflation and additional rate hikes still pose risks to economic growth in the short term,” said Lynn Franco, senior director of economic indicators at the Conference Board.

The Federal Reserve’s (the Fed) quantitative tightening program will ramp up in September as part of a broader plan to reduce a $9 trillion portfolio. The Fed is set to drain $95 billion from the economy each month, through rolling off mortgage-backed securities and treasuries from its balance sheet. The tightening program is expected to put upwards pressure on interest rates and reduce liquidity in the U.S. financial system.

In the U.K., credit card borrowing in July rose at the quickest annual pace since 2005. Individuals borrowed an additional £1.4 billion in consumer credit, on net, following £1.8 billion worth of borrowing in June. The average interest rate on credit card borrowing swelled to 21.7% in July, marking the highest level since late 1998. 

Eurozone inflation hit a fresh high in August, rising 9.1% y/y from 8.9% y/y a month earlier. Inflation in the area is expected to reach double digits in the coming months if historically high natural gas prices don’t subside. The recent spike was driven by a rise in gas prices and a double digit jump (+10.6% y/y) in food, alcohol and tobacco prices. Money markets are now putting the probability of a 75 basis-point European Central Bank hike at more than 60%. 

China’s economic outlook worsened over the week as coronavirus outbreaks in major cities triggered fresh lockdowns. Bloomberg’s quarterly survey of economists saw the country’s 2022 GDP estimate cut to 3.5% from 3.9% previously, falling short of the government’s 5.5% target. On the equities front, U.S. regulators are expected to begin inspecting the audit papers of US-listed Chinese companies this month.

Global equities ended a turbulent week lower as risk-off appetite increased. U.S. equities struggled over the week, with the Nasdaq (-4.21%) the S&P 500 (-3.29%) and the Dow Jones (-2.99%) all ending lower. Shares in Europe (Euro Stoxx 50) declined by -1.65% while the FTSE 100 dropped -1.97%. China’s Shanghai Composite suffered a -1.54% drop, while the Nikkei 225 fell by -3.46%. Brent oil prices declined by -7.34% – a trend that could lighten the inflation picture if it continues, while gold dropped by -1.46%.

Market Moves of the Week:

In South Africa (SA), Absa’s Purchasing Managers Index (PMI) rebounded in August after a dip in July. The index rose to 52.1 from 47.6 last month, beating estimates of 48.2. Absa also reported that the business activity index rose back above the neutral 50-point mark for the first time since March. An easing in the severity of load-shedding as well as the return of production at Toyota’s flood-affected factory supported domestic demand across the value chain.

Shell’s bid to search for oil and gas in South Africa was blocked this week after a court declared that the company didn’t follow fair procedure and failed to take relevant considerations into account. The company will therefore be barred from going ahead with its planned oceanic seismic survey along the country’s east coast. The Minister of Mineral Resources and Energy, Impact Africa and BG International were ordered to pay the costs of the court application.

On the electricity front, the SA government is pushing ahead with its plan to create a new state-owned power company. The proposed new company, called Generation 2, will be formed by converting three coal-fired plants, that were set for decommissioning, into gas-burning generators. 

Walmart, the U.S. retail giant, has signed an agreement to begin buying the 47% stake in South African retailer Massmart it does not own. Massmart had said on Monday that its majority owner Walmart had offered it 6.4 billion rand to purchase the remaining shares and to delist the company from the Johannesburg Stock Exchange. The move will allow Walmart to invest more capital in the struggling Massmart business and enhance operations.

The JSE (-3.98%) followed global peers lower this week after a strong selloff across all sectors. Resources (-6.57%) faired worst following declining commodity prices and disappointing results from the likes of Impala Platinum. The rand weakened over the week to end at R17.28/$.

Chart of the Week:

The U.S. market has taken to heart the “stern talking to” it got from Jerome Powell last week Friday, with major indices selling off – exacerbated by a rise in bond yields. Source: Bloomberg.

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

Global equity markets came under pressure on Friday, after Federal Reserve Chair Jerome Powell signalled that the Fed is going to keep raising rates to control the highest inflation in decades, regardless of what Wall Street thinks. The comments were made during the Kansas City Fed’s annual policy forum in Jackson Hole, confirming the Fed’s perceived taming of inflation as the bedrock of the U.S. recovery.

Meanwhile, the 2^nd estimate of annualised U.S. GDP for the 2^nd quarter of 2022 was revised upwards to -0.6% compared to the 1^st estimate which measured GDP at -0.9%. Despite the upward revision, the U.S. remains in a technical recession after reporting two consecutive quarters of negative growth (1^st quarter annualised GDP was -1.6%).

At the same time, July new-home sales fell to the slowest pace since early 2016, with properties available for sale now at the highest level since 2008. Business activity contracted again in August, with the S&P Global flash composite PMI falling to 45, the weakest reading since early in the pandemic. One out of six American households (20 million households) have also fallen behind on their utility bills, as electricity prices have surged.

President Joe Biden announced the cancellation of $10,000 in student loan repayments for anyone earning less than $125,000 per year, impacting millions of Americans. Those that received Pell Grants (given to people in financial need) will get $20,000 written off. Importantly, borrowers will also not have to repay more than 5% of their monthly income. Wednesday’s announcement comes after months of deliberations over the exact structure of the debt forgiveness scheme.

China stepped up its economic stimulus with a further $146 billion of measures to bolster growth and curb the fallout of repeated Covid lockdowns and the crisis in the property market. The State Council, China’s cabinet, outlined a 19-point policy package. In addition, the People’s Bank of China (PBOC) cut two key interest rates, including the five-year loan prime rate (LPR), by 0.15% to 4.30% and trimmed the one-year LPR by 0.05% to 3.65%.

U.S. and Chinese authorities have reached a preliminary deal to allow American officials to review audit documents of Chinese businesses that trade in the U.S. It’s a first step towards avoiding the delisting of about 200 firms from New York exchanges.

The Composite Purchasing Managers Index (PMI) fell to an 18-month low in the eurozone, with a reading of 49.2 in August from 49.9 in July (PMI readings below 50 signal a contraction). Activity in the services industry also stalled as consumers cut spending, while manufacturing activity contracted due to supply constraints.

The Euro Stoxx 600 Index’s valuation has dropped to the lowest level since 2005 against the S&P 500, trading at a discount of more than 30% to U.S. stocks. While both regions are suffering from the impact of soaring inflation and hawkish central banks, Europe also faces additional headwinds including a weaker currency, energy shortages and political uncertainty in Italy and the UK. European benchmark natural gas prices settled at a record high this week, while German power surged to above €700 a megawatt-hour for the first time.

UK business activity also stagnated in August, with a sharp fall in the manufacturing sector. The Composite PMI fell to an 18-month low of 50.9 in August from 52.1 in July. The services sector expanded at the slowest pace in 18 months. The UK regulator announced an 80% increase in household energy bills to GBP 3,549 per year, effective from the end of September, as natural gas imports have become more expensive.

Office availability in central London is at its highest level in more than 15 years, the latest sign of how the pandemic-driven shift to remote working is upending demand for commercial property. Availability was close to 31 million square feet in August 2022, according to real-estate data and information company CoStar. That’s the equivalent of about 60 Gherkin skyscrapers and is up 51% from the 20 million square feet that was available at the end of 2019.

Global equities were under pressure this week. In the U.S., the Dow Jones (-4.22%), S&P 500 (-4.04%) and Nasdaq (-4.44%) were all sharply negative. Similarly, the Euro Stoxx 50 (-3.39%), FTSE 100 (-1.63%), Nikkei 225 (-1.00%) and Shanghai Composite Index (-0.67%) were all weaker.

Brent crude oil advanced above $100 per barrel again after Saudi Arabian Energy Minister Prince Abdulaziz bin Salman said “extreme” volatility and lack of liquidity mean the futures market is increasingly disconnected from fundamentals and OPEC+ may be forced to cut production.

Market Moves of the Week:

South African inflation (CPI) increased to 7.8% in July, in line with market expectations and ahead of June’s 7.4% print. Food inflation hit double digits at 10% across all categories, except fruit and the largest increases were in bread and cereal. Electricity and fuel tariffs increased over 7%. Meanwhile, public transport costs rose 6.3% MoM (22% YoY).

Standard Bank’s CEO, Sim Tshabalala said this week that South Africa will very likely be grey listed despite efforts by the Treasury to prevent the country from joining the ranks of nations deemed to have inadequate protections against money laundering and terrorist financing.

The JSE All-Share Index ended the week up +0.65%, with resource (+3.80%) and financial (+0.39%) shares stronger, whilst the industrial sector (-0.73%) ended the week softer. By Friday close, the rand was trading at R16.87 to the U.S. Dollar.

Chart of the Week:

Economic activity has weakened from the U.S. to Europe and Asia, reinforcing concerns that soaring prices and the war in Ukraine will tip the world into a recession. U.S. business activity contracted for a second-straight month in August, falling to the weakest level since May 2020. Activity in Asia slumped, and output in the euro zone also fell as record energy and food inflation impacts demand. Source: Bloomberg, S&P Global.

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

Official data Wednesday showed UK inflation rising at an annual pace of 10.1% in July, as soaring food and energy prices saw inflation hit double digits for the first time in 40 years. UK money markets responded by pricing in a 50 basis-point hike at the next central bank meeting on September 10.

Inflation has soared worldwide this year primarily on surging energy prices, fuelled by the invasion of Ukraine by major oil and gas producer Russia. Higher inflation in the UK has also seen massive strike action in the railway and postal sectors as higher prices continue to erode the value of wages.

US stocks ended the week lower as investors assessed the latest economic earnings data against the outlook for interest-rate hikes. The midweek release of the Federal Open Market Committee (FOMC) July policy meeting minutes saw policymakers reiterate that ongoing rate hikes remain appropriate. Officials also noted that a slower pace of hikes will become appropriate at some point. The markets await Fed Chair Jerome Powell’s address at the annual Jackson Hole Symposium on Friday for updated views.

Shares in Europe pulled back amid renewed fears that central banks would need to be more aggressive in combatting inflation. In local currency terms, the pan-European STOXX Europe 50 Index ended the week 1.2% lower while the UK’s FTSE 100 Index added 0.66%, as the pound weakened against the U.S. dollar.

In his latest nightly address, Ukrainian president Volodymyr Zelensky, has warned Ukrainians to be vigilant in the coming week as they prepare to celebrate their independence day on Wednesday. This week marks six months since Russia invaded Ukraine with neither side able to make material gains of late, with Western officials seeing the war at a near standstill.

China’s Xi Jinping and Russia’s Vladimir Putin are expected to attend the G-20 Summit in Indonesia in November, Indonesian President Joko Widodo said this week.

In the U.S. the three major equity indices ended lower, the S&P 500 ended the week down 1.21%, the Dow Jones closed marginally down 0.16% while the Nasdaq ended the week 2.6% in the red. In Asian markets, the Nikkei 225 ended the week higher up 1.3% on improved economic data. The People’s Bank of China unexpectedly cut the rate on its Medium-term Lending Facility to 2.75% on Monday amid a slump in residential property sales. This week, China also reported that industrial production, retail sales and fixed asset investment were all weaker than expected in July. China’s benchmark Shanghai Composite Index ended the week lower (-0.57%).

On the commodities front, Brent Crude oil ended the week at $95.76 while Gold Spot ended at $1747, down 3% for the week.

Market Moves of the Week:

The South African Reserve Bank’s (SARB) Prudential Authority this week issued guidance to confirm that banks in the country can work with crypto exchanges. The note advises banks that risk assessment does not necessarily mean avoiding risk entirely by, for example, terminating client relationships with crypto asset service providers.

In corporate news, Just Eat Holding has agreed to sell 33.3% stake in iFood, a leading food delivery service in Brazil and Colombia, to Naspers division Prosus. Prosus has been in talks to increase its stake in iFood since 2020. The deal is expected to close in the fourth quarter of 2022.

The JSE all share index ended the week down 1.4%, in line with global markets. The resources sector led the decline (-2.96%), followed by financials (-2.25%), industrials (-0.55%), and the South African Listed Property index also ending down 1.8% over the week.

The U.S. dollar was stronger over the week as Fed’s minutes pointed to U.S. interest rates staying higher for longer, boosting the dollar and hurting emerging market currencies like the rand. This coupled with the uncertainty around the fate of Finance Minister Enoch Godongwana, who’s battling allegations of sexual assault saw the rand ending the week weaker at R17,00/$, R20.08 against the Pound, and R17.06 against the Euro.

Chart of the Week:

The Bank of England has come under growing criticism that the central bank has been to slow in raising rates to tackle surging inflation. The consumer price index rose 10.1% annually as at end of July, according to estimates published by the Office for National Statistics on Wednesday. Rising food and energy prices made the largest contribution to the annual inflation rate. The Bank of England now expects inflation to top 13% in October.

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

The July U.S. inflation report provided some market respite, after consumer price inflation (CPI) fell from 9.1% y/y to 8.5% y/y in July while the month-on-month print showed consumer prices were unchanged from June. Core CPI rose 5.9% y/y, replicating June’s gain. The decline in headline CPI was driven mainly by a 4.6% drop in energy prices, along with a 0.1% fall in apparel prices and a 0.4% decline in used vehicle prices. However, other areas of the index remained hot, with food prices increasing by 1.1%. On Thursday, the Fed funds futures curve showed expectations for the Fed to start cutting interest rates as soon as Q2 next year.

Should future CPI prints confirm that U.S. inflation peaked at the end of Q2 and signs of a weakening economy continue, the market will gradually start to position for a less hawkish Fed outlook. However, for now, the consensus view is that the Fed will continue to hike rates into the end of the year. A view which was recently echoed by Chicago Fed President Evans and Minneapolis Fed President Kashkari on Wednesday. 

U.S. consumer sentiment (as measured by the University of Michigan sentiment index) climbed to a three-month high as energy prices abated. The index rose to 55.1 from 51.5, beating expectations, while consumer inflation expectations declined for the year ahead. 

In political news, former U.S. President Donald Trump’s Mar-a-Lago home in Florida was raided by the FBI, reportedly in connection with an investigation into Trump’s handling of classified material. 

The U.K economy (GDP) contracted -0.6% in June, the first decline since the pandemic as household spending softened. The print was better than expected, with economists forecasting a -1.3% contraction. The Bank of England (BoE) expects a recession to begin at the end of the year.

The Eurozone faces fresh woes, after months of drought across Europe have started to severely affect energy production, agriculture and river transport. Germany’s Rhine River, its main transport artery and critical commercial corridor, may soon become unnavigable due to low water levels caused by a record-breaking hot, dry summer in the region. 

China’s July CPI was the fastest in two years, with the index rising 2.7% y/y, short of the 2.9% consensus, while factory-gate inflation slowed more than expected. China’s trade surplus rose to a record USD 101.26 billion in July, beating the USD 90 billion consensus forecast. That’s the highest in data compiled since 1987. Over the week, officials in China reiterated their commitment to reaching the 5.5% gross domestic product (GDP) growth target set for 2022. GDP rose 2% in the first six months of the year, which implies the Chinese economy will need to expand around 9% or more in the second half of 2022 to reach the full-year goal, according to Bloomberg calculations.

Global equities have come back in recent weeks, despite recession fears and signs of slowing growth. The MSCI All Country World Index is up nearly 10% since June, with U.S. technology stocks leading the advance. U.S. equities rose sharply over the week, with the Nasdaq (+3.08%), the S&P 500 (+3.26%) and the Dow Jones (+2.92%) ending higher. Shares in Europe (Euro Stoxx 50) rose +1.38% while the FTSE 100 managed a +0.82% increase. China’s Shanghai Composite gained +1.55%, while the Nikkei 225 rose by +1.32%. Brent oil managed a weekly gain of +3.70% – a trend that could darken the inflation picture if it continues, while gold increased by +1.57%.  

Market Moves of the Week:

In South Africa (SA), both mining and manufacturing production fell more than expected in June. SA June mining production fell -8% y/y (est. -5.0%), down from May’s -7.2% y/y decline, with the biggest contributors being Platinum Group Metals (-9.8% y/y) and Gold (-28.6% y/y) production. This marked the fifth consecutive month of a downturn in mining activity, dragged down by higher input costs, load-shedding and labour disputes in the gold sector. A deteriorating global economic outlook and lower commodity prices have also weighed on mining revenue.

SA June manufacturing dropped by -3.5% y/y following a decline of -1.8% y/y in May. This decline surpassed estimates of -2.9% and notably excludes the impact of July’s crippling load-shedding.  The underperformance of both industries suggests that second-quarter GDP could come in weaker than anticipated.

The rand jumped 2% against the U.S. dollar on Wednesday, along with other emerging market currencies, after news broke out that U.S. inflation rose less than expected in July. By Friday, the rand had strengthened to R16.19/$. The JSE gained 1.74% this week, with Industrials (+1.94%) and Financials (+2.45%) leading the market. Insurers boosted Financials, while Industrials benefited after Mondi plc surged +11.06% after it announced the sale of its most significant facility in Russia.

Chart of the Week:

The July CPI report was cooler than expected and much better than recent reports. The drop in both the blue and orange lines may be signalling that inflation has “peaked”, however, inflation pressures persist and remain near their highest levels since the early 1980s. Source: Bloomberg.

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

Global equity markets were mixed this week, as a stronger-than-expected U.S. jobs report revived concerns that the Federal Reserve will need to maintain its aggressive pace of interest rate hikes to stem inflation. Employers added more than double the number of jobs forecast, with nonfarm jobs increasing by 528,000 in July, compared to estimates of 250,000 jobs. The unemployment rate also fell to 3.5%.

The strong jobs report contrasts with growing concerns of an economic slowdown, after the U.S. economy shrank in the first two quarters of 2022. It is however worthwhile noting that the U.S. unemployment rate was at 3.5% in December 1969, just before an 11-month recession began.

U.S. House Speaker Nancy Pelosi’s visit to Taiwan sparked geopolitical tensions this week, ignoring Chinese threats of reprisals if her trip took place, given China’s long-held stance that Taiwan is its territory. China has retaliated, announcing an array of military tests and halted some imports from Taiwan. China implemented provocative military drills and cut off defence talks with the U.S., firing missiles suspected to have flown over Taiwan and sent warships across the Taiwan Strait’s median line. The Chinese army also sent waves of warplanes across the U.S.-defined boundary.

Chinese economic data continues to highlight the cost of Beijing’s zero-tolerance approach to Covid-19, with the official manufacturing purchasing managers’ index (PMI) falling to 49.0 in July from 50.2 in June (below 50 marks a contraction), the lowest in three months. The non-manufacturing business activity index fell to 53.8 from 54.7 in June. New home prices and sales volumes also fell in July from a month earlier, as a growing nationwide movement among homebuyers to stop paying mortgages on unfinished projects weighed on sentiment. China’s economic growth target of 5.5% continues to look less likely for 2022.

The Bank of England (BoE) hiked interest rates by 50 basis points to 1.75% this week, the biggest increase in 27 years. The central bank expects UK inflation to peak at 13.3% in October and will remain “elevated” through 2023. It also forecasts a recession for the UK lasting five quarters.  

European unemployment remained unchanged at 6.6%, in line with market expectations of an unchanged reading of 6.6%, but the number of job seekers increased by 25,000 to just under 11 million.

Global equity markets posted mixed returns this week. In the U.S., the Nasdaq (+2.15%) and S&P 500 (+0.36%) Indices were stronger, against a weaker performance from the Dow Jones (-0.13%). Shares in Europe (Euro Stoxx 50) rose by +0.47% including the UK’s FTSE 100 Index (+0.22%). The Nikkei 225 (+1.35%) was stronger, whilst the Shanghai Composite ended -0.81% lower for the week.

Brent crude oil tumbled by -8.95% after Russia undercut the price of oil from its OPEC+ ally Saudi Arabia. Russian barrels were cheaper than Saudi crude during April through June, with the discount widening to almost $19 a barrel in May, according to Bloomberg calculations based on Indian government data. Russia surpassed Saudi Arabia as the second-biggest supplier to India in June. India and China have become willing consumers of Russian crude whilst most other buyers shunned its barrels following the invasion of Ukraine.

Market Moves of the Week:

U.S. investors with more than $1 trillion of assets under management are currently in South Africa to look for investment opportunities. The visit has been facilitated by USAID and Prosper Africa, the U.S. government’s initiative to increase trade and investment between African nations and America. South Africa is the world’s 13th-biggest source of greenhouse gases and will require $250 billion over the next three decades to fund the closing down of coal-fired plants and development of replacement green energy such as wind and solar, according to a report released in May.

South Africa’s parliament will appoint an independent panel that will recommend whether to initiate a process to impeach President Cyril Ramaphosa. The decision comes as Ramaphosa is under increasing pressure from opposition parties to step aside over a burglary two years ago at a game farm he owns. The president faces allegations that he concealed the crime. He has refused to answer opposition lawmakers’ questions about the incident.

In economic news, South Africa’s manufacturing PMI recorded a decrease to 47.60 in July, compared to the prior month’s reading of 52.20. At the same time, annual new vehicle sales increased by 13.92%. Meanwhile, the National Union of Metalworkers of South Africa (Numsa) has threatened strike action in the motor industry over wages, demanding a 12% increase across the board.

The JSE All-Share Index ended the week up +0.85%, with industrial (+1.09%) and financial (+2.73%) shares stronger. Resource shares (-0.34%) were mildly softer after strong gains in the prior week. By Friday close, the rand was trading at R16.62 to the U.S. Dollar.

Chart of the Week:

China’s top leaders told government officials that this year’s economic growth target of “around 5.5%” should serve as guidance rather than a hard target. Leaders held meetings with ministerial and provincial-level officials last week, during which they were told the target won’t be used to evaluate their performance and there won’t be penalties for failing to achieve it. The leaders also acknowledged that the chances of meeting the target were low. Source: Bloomberg.

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

U.S. stocks rallied over the week despite another significant 75-basis-point rate hike from the Federal Reserve (Fed) and news that the U.S. economy contracted for a second straight quarter. Better-than-expected earnings reports and a view of a potentially less aggressive Fed helped the market catch a sought-after bid. July turned out to be the best month for the S&P 500 and Dow Jones since November 2020, while the Nasdaq’s 12.3% gain was its strongest performance since April of that year.

On Wednesday, the Fed held its Federal Open Market Committee meeting, which concluded with policymakers announcing a widely expected 75-basis-point rate hike. The federal funds target range is now between 2.25% and 2.5%. Fed Chair Jerome Powell said that demand remains strong and the economy is still on track to continue to grow this year. Powell also said that the Fed will be much more data-dependent going forward, given that interest rates are now broadly in line with their estimates of neutral levels. Swaps are now indicating a 3.25% Fed funds rate peak before year-end.

U.S. gross domestic product (GDP) fell by -0.9% y/y in the second quarter, following a decline of -1.6% in Q1. The decline came from numerous factors, including decreases in government spending, inventories and residential and nonresidential investment. While two consecutive quarters of negative GDP growth is informally called a technical recession, the National Bureau of Economic Research ultimately declares recessions and expansions and is unlikely to make a decision on this past period until later in the year. Market participants are now speculating that the deteriorating economic outlook may lead Fed officials to adopt a more dovish stance in the coming months to avoid a significant economic downturn. 

Technology giants such as Amazon.com, Apple and Microsoft delivered earnings beats this past week, sending their stocks higher. Around 56% of the constituents of the S&P 500 Index have reported Q2 earnings, with 75% of firms beating estimates. Meta Platforms and Intel were amongst the stocks that missed estimates, with both firms also lowering their forecasts, resulting in downward moves in their share prices. 

Euro-zone inflation hit a fresh high, coming in at 8.9% in July, up from 8.6% in June. The rise in headline inflation was mainly driven by food and energy prices. The data puts added pressure on the ECB to hike rates by half a percentage point in September. Despite raging inflation in the area, the eurozone economy expanded by 0.7% in the second quarter, more than three times the amount economists expected. 

China is planning to categorize its U.S. stock listings into three broad categories, those with secret data, those with sensitive data and those with non-sensitive data in an attempt to avoid the delisting of many of its companies from U.S. exchanges for failing to comply with audit requirements. However, U.S. regulators said they will not accept any restriction of their access to Chinese audit papers. Alibaba Group, the largest U.S.-listed Chinese company, was recently added to the list of firms that could be delisted if American inspectors are unable to access their financial results. 

U.S. stocks posted solid gains this week, with the Nasdaq (+4.70%), the S&P 500 (+4.26%) and the Dow Jones (+2.47%) ending in the green. Shares in Europe (Euro Stoxx 50) rose +3.10% while the FTSE 100 managed a +2.02% gain. The tone was more somber in Asia, as a tumble in Chinese tech shares dragged Hong Kong towards a correction of more than 10% from a June high. The Shanghai Composite ended -0.51% lower for the week, while the Nikkei 225 dipped by -0.40%. Brent oil (+0.03%) edged higher while Gold rose by +2.26%. 

Market Moves of the Week:

Positive news flowed out of South Africa over the week, as much-needed electricity reforms were announced, lifting the country’s outlook. On Monday, South African President Cyril Ramaphosa embraced the private sector and announced that companies will be allowed to build power plants of any size without a license to meet their own needs, scrapping the 100-megawatt limit on plants that needed a license. These firms, along with households and building owners that utilise solar panels, will now be able to sell excess energy to the grid. Several other significant steps were announced, providing hope that the 14-year-old power crisis may soon be coming to an end. 

Staying in line with the energy theme,  South Africa’s Treasury is finalising a plan to take over part of Eskom’s R396 billion debt. This move is aimed to better position the company and place it on a more sustainable foundation, a top official said. More information on the deal is expected to be announced in the Mid-Term Budget Speech in October. 

On the economic front, South Africa’s June Producer Price Index rose 16.2% y/y, the fastest rate in 14 years. The print came in above expectations of +15.6% and May’s +14.7% figure, according to Statistics South Africa. The coke and petroleum basket of products saw inflation of 37.2% in the year to June, while food, beverage and tobacco products cost over 10% more. 

The JSE climbed +1.27% this week, in line with global peers. Resource stocks surged +5.86%, led by Impala Platinum (+14.6%), as the price of platinum group metals rose over the week. The rand strengthened to end the week at R16.62/$, however, U.S. Dollar strength still remains a threat to the volatile rand.

Chart of the Week:

The most investors since the Global Financial Crisis (GFC)/Lehman think that inflation will be lower in the next year…lower inflation expectations mean lower interest rates. Source: BofA Global Fund Manager Survey.

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

The European Central Bank (“ECB”), the central bank of the 19 nations that share the euro currency, raised its benchmark rate by 50 basis points on Thursday, traders had expected a smaller hike of 25 basis points. The move was broadly well received and comes against the backdrop of slowing growth in the region as the impact of the war in Ukraine and associated energy supply concerns has seen inflation running at record highs.

There was renewed political instability in Italy following the resignation of Prime Minister Mario Draghi, giving way to another national election on September 25. The Italian Prime Minister resigned his post on Thursday after failing to secure the backing of three of Italy’s four largest parties, which declined to back his reform agenda.

European shares rose for the week as market sentiment remained strong despite the ECB decision to raise interest rates and the political instability in Italy. In local currency terms, the pan-European STOXX Europe 50 Index ended the week 3.43% higher, while the UK’s FTSE 100 Index also gained 1.64%. The contest to replace Boris Johnson as leader of the Conservative Party and prime minister has come down to former British Chancellor of the Exchequer Rishi Sunak and Foreign Minister Liz Truss following a series of rounds of voting by Conservative members of Parliament. On September 5^th, the U.K.’s new prime minister will be revealed.

In the U.S. all three major averages slipped on Friday, but managed to record a positive week with the Dow Jones (+1.95%), S&P 500 (+2.55%) and the Nasdaq (+3.33%) all ending firmly in the green. In a busy week ahead the Federal Reserve’s interest rate setting committee meets Tuesday and Wednesday and is expected to deliver another three-quarter point rate hike, while on the earnings front two of the largest U.S. companies — Microsoft and Apple — report Tuesday and Thursday, respectively. Google parent Alphabet releases results Tuesday, and Amazon reports Thursday. Meta Platforms, formerly Facebook, reports Wednesday. With about 21% of the constituents of the S&P 500 Index having reported actual results for Q2 2022 to date, 68% have reported actual EPS above estimates, which is below the five-year average of 77% according to FactSet.

On Thursday morning the White House announced that US President Joe Biden tested positive for COVID-19 but is apparently in good health and experiencing only mild symptoms.

Russian President Vladimir Putin said that Russian energy company Gazprom plans to fulfill its contractual obligations to deliver gas to Germany but that capacity may be reduced due to equipment repairs. On Thursday, Gazprom resumed gas shipments through the pipeline at 40% capacity, the level at which the pipeline was operating at before the 10 day shut down earlier this month for scheduled maintenance. The Nord Stream 1 pipeline delivers 55 billion cubic meters of gas per year, or nearly 40% of the European bloc’s total pipeline imports from Russia.

In Asia, Japan’s stock markets rose over the week, with the benchmark Nikkei 225 Index gaining 4.20%, with the Bank of Japan (BoJ) maintaining its ultra-loose monetary policy to support the country’s still-fragile economic recovery. In China, the broad capitalization-weighted Shanghai Composite Index added 1.3% as Premier Li Keqiang tempered expectations of excessive stimulus and indicated flexibility on China’s annual growth target.

Market Moves of the Week:

South Africa’s repurchase rate was pushed sharply up, by 75 basis points (bps) this week – the steepest hike since September 2002. The rate hike was announced by South African Reserve Bank (Sarb) Governor Lesetja Kganyago on Thursday, moving to front-load a more hawkish increase to rein in surging inflation (7.4% published on Wednesday). The repurchase interest rate was raised to 5.5% from 4.75%. This means SA’s prime lending rate (of commercial banks) will increase to 9%. Of the five members on the panel, three voted for the 75 basis-point increase, one preferred a 100-basis-point hike and the other 50 basis points. The central bank also raised its GDP forecast for 2022 to 2% from 1.7%.

South Africa’s annual inflation rate reached 7.4% in June, from 6.5% in May, the highest level since the global financial crisis, Stats SA reported on Wednesday. Fuel prices were 45.3% higher in June than the year before while food prices and non-alcoholic beverages surged by 8.6% year-on-year.

The JSE All-Share Index ended the week up 4.58%, mirroring the gains in global equities over the week with all three of the major sectors including resource (5.64%), industrial (5%) and financial (3.11%) shares all ending stronger. The rand firmed to end the week at R16.82 to the U.S. dollar finding support from the central banks surprise 75 basis point rate hike.

Chart of the Week:

Federal Reserve Chair Jerome Powell is likely to slow the pace of interest-rate increases after front-loading policy with a second straight 75 basis-point hike next week. A survey of economists sees a big July increase, then a lift in rates by a half percentage point in September, and then shifting to quarter-point hikes at the remaining two meetings of the year. Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.