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Weekly market wrap

20 August 2021 Bianca Botes, Director at Citadel Global

TIME TO TAPER

After months of speculation as to when the United States (US) Federal Reserve (the Fed) might start looking at tapering their asset purchases, the Bank’s comments on Wednesday night made waves in markets as it was suggested that the tapering may start as early as this year.

Key themes for the past week include:

• Afghanistan – back to square one
• Tapering of asset purchases by the Fed likely to start this year
• Johannesburg Stock Exchange (JSE) closes for half a day after record trading volumes
• Dollar hits a nine-month high

A FAILED MISSION

We all remember 9 September 2001 when we witnessed two passenger jets fly into the World Trade Centre in New York. The number of lives lost, and the ensuing fallout, left the world reeling. Now, almost 20 years later, with billions of dollars spent on a war to combat terrorism, America is withdrawing its troops from Afghanistan.

The US-Afghan war, that was aimed at removing the Taliban footprint and rule in the region, while training of Afghan security forces, quickly exposed its failures as the US military started to withdraw from the region. Although US President Joe Biden, who gave the withdrawal orders, was made aware of the potential implications, the Pentagon did not anticipate exactly how quickly the Afghan army would be overrun by the Taliban. The Afghan army is beset with a myriad of issues including deep rooted corruption, the failure by the government to pay Afghan soldiers and police officers, defections, and soldiers being sent to the front lines without adequate food and water, let alone arms. However, President Biden defended the withdrawal by noting that these issues aided his decision by bolstering his belief that the US could not prop up the Afghan forces indefinitely. Biden told ABC News in an interview, that the turmoil in Kabul was unavoidable, but many are arguing that the region is back to the exact same position it was in 20 years ago.

With the decision made to withdraw, the fallout is now front and centre on the global stage, with many blaming the Biden administration for the humanitarian crisis facing many Afghans. On 18 August, a joint statement by Albania, Argentina, Australia, Brazil, Canada, Chile, Colombia, Costa Rica, Ecuador, El Salvador, European Union, Honduras, Guatemala, North Macedonia, New Zealand, Norway, Paraguay, Senegal, Switzerland, the United Kingdom (UK), and the US, expressed deep concern for the safety of Afghan woman and girls, as well as their right to education, work and freedom of movement (read the statement here).

As the US looks to have its forces out by the end of this month, up to 15,000 US citizens are stranded in the country. Global leaders are joining forces to ensure the safety of the vulnerable left behind. Foreign governments are ramping up the airlift of Western citizens and Afghans who worked with them, while Washington has pledged to evacuate all remaining American citizens, along with around 50,000 to 65,000 Afghans – such as former translators for the US military. In total, America has evacuated more than 7,000 people to date. Meanwhile, on Thursday afternoon, the IMF took decisive action to weaken the Taliban, by freezing all Afghan funds.

With outrage is directed at the US government, it is not only the reputation of the Biden presidency that hangs in the balance, but many are also concerned about the spill over effects of the conflict, and what that instability could mean for the rest of world. While some speculate that the Taliban might form an official government to rule the region, others speculate that a joint mission by Western countries will yet again be launched, that could lead to yet another war. Whichever way the cards fall, the instability and violence are not only causing a dire humanitarian situation in the region, but the ripples are also being felt across the financial markets as investors and analysts try to predict the next course of action and what the future might hold.

GLOBE IN A NUTSHELL

The Fed minutes are always watched with a keen interest by market participants, and the minutes on Wednesday evening were no different. While markets have largely anticipated that the Fed would start looking at tapering its asset purchases, there has been little confirmation of when, up until now. The Fed, on Wednesday, indicated that tapering may start as soon as this year, subject to certain employment and growth benchmarks being met. While more details of the exact nature of the tapering will likely only be discussed at the upcoming Jackson Hole Symposium, the minutes were sufficient to boost the dollar to a nine-month high.

US retail sales continue to improve, gaining 15.8% year-on-year in July, beating market expectations of 11.5%. Meanwhile, manufacturing production gained 7.4% year-on-year, and industrial production advanced by 6.6%. It was the fifth consecutive month of rising industrial activity, reflecting a low base year and ongoing economic recovery.

The number of Americans filing new claims for unemployment benefits fell for a fourth straight period to a new pandemic low of 348,000 in the week ending 14 August, beating market expectations of 363,000 and signalling a continued recovery in the US labour market, even as many US states struggle to contain rising Coronavirus cases amid the spread of the Delta variant. Still, new weekly claims remained elevated compared with an average of 200,000 seen before the pandemic.

Chinese industrial production data disappointed this week, increasing by 6.4% year-on-year in July, missing market forecasts of 7.8%. This was the weakest growth in industrial output since August 2020, due to the rapid spread of the Delta strain of COVID-19 cases, higher raw materials, and supply bottlenecks, amongst others. Chinese retail sales also missed the mark, gaining 8.5% year-on-year in July, undershooting market expectations of 11.5% by a large margin.

The UK unemployment rate fell to 4.7% in the second quarter of 2021, from 4.9% in the January to March period, and slightly below market expectations of 4.8%, indicating that the labour market continues to recover following the relaxation of many Coronavirus restrictions. Still, the rate remained 0.8 percentage points higher than it stood before the pandemic.

The consumer price inflation rate (CPI) in the UK eased to 2% year-on-year in July, from a near three-year high of 2.5% in the previous month and below market expectations of 2.3%.

Taking a look at the local market, South African annual CPI eased for the second straight month to 4.6% in July, from 4.9% in June, in line with market expectations and slightly above the 4.5% midpoint of the South African Reserve Bank’s monetary policy target range of 3 to 6%. Local retail sales grew 10.4% in June year-on-year, following an upwardly revised 16.3% rise in May and beating market expectations of a 9.6% gain. It was the third straight month of increases in retail activity, reflecting low base effects from the pandemic and the ongoing economic recovery.

EQUITIES – FED UP?

Weaker US retail sales numbers along with Asia-Pacific tech stocks falling on Tuesday, due to Chinese regulators issuing draft rules for unfair competition within the tech sector, saw US equity indices starting to show relative sensitivity to external factors while trending along all-time-high levels. This is a situation that could slowly turn worse, if not monitored closely. With the slowdown in ongoing stimulus, coupled with COVID-19’s Delta variant starting to hit the US economy, third quarter consumption numbers could be seen coming in lower with sectors like the restaurant and airline passenger industries already taking a knock as we move through August. Turning to second quarter earnings, the retail sector saw companies like Macy’s, T.J Maxx, Lowes, Kohl’s, Walmart, Home Depot and Target all announcing stronger-than-expected earnings numbers. The tech sector, Nvidia, Tencent, and Cisco announced better than expected earnings, while trading application Robinhood warned of a slowdown in trading activity. By Thursday’s open the Nasdaq and S&P500 were both down around 3.5% for the week.

Turning to the European Union (EU) and UK equity markets, both trended lower this week. The EU market was primarily being hit by news that the Fed is looking to slow down their bond purchases by the end of the calendar year and that their interest rate hikes might not be linked to the tapering. Confusion over these statements saw the French CAC40 dipping by 2.3% by Thursday afternoon, while the German DAX slid 1.7%. The UK’s FTSE 100 was also dragged down, dropping around 1.9% on Thursday, lead mainly by the industrial mining sector being pulled down to a two-month-low. Some of the bigger losers this week were seen from the likes of BHP, South32 and Antofagasta. UK Gambling and Casino company, Rank, was seen beating expectations which saw their share price moving 1% higher for the week. Marshall’s paving also saw strong returns for the first half of 2021, with large growth in their outdoor and gardening paving division. Marshall’s share price went against the grain and traded almost 3% higher for the week.

Sticking to the theme, Asian markets were also all down on Thursday, following the Fed’s vague announcement. By Thursday’s close, daily figures for the region came in as follows: Japan’s Nikkei was down 1.10%, South Korea’s Kospi fell 1.93%, and China’s Shanghai Composite and Hong Kong’s Hang Seng lost 0.57% and 2.13% respectively. Singapore, Taiwan, and Indonesia also suffered market-wide losses on the day, losing 1.42%, 2.68% and 2.06% on their respective exchanges. China’s recent tech policy clampdown also added fuel to the fire, with policymakers tightening rules around anticompetitive behaviour regarding faking sales, order and product review statistics, while also clamping down hard on online marketing algorithms used to draw customers away from competition and locking customers into operating systems and mobile applications which prevent them moving over to competitors.

South Africa’s Top 40 suffered a 5.57% loss during the week, while the overall All Share Index had dropped by 4.86% by Thursday afternoon. History was made this week on the JSE, due to the Naspers/Prosus share swap corporate action which was implemented on Tuesday. The action saw an overall daily trading value of R154.08 billion on the All Share; Naspers, alone, moved R85.21 billion through the market on Tuesday, while Prosus saw R39.96 billion exchanging hands. To put this in perspective, the historic average value traded daily through the All Share Index tends to be in the region of R23 billion. The massive amount of volume coursing through the JSE by Tuesday’s market close unexpectedly stifled the bourse’s software systems, causing a three-hour-delayed market open on Wednesday. The JSE has announced that it will be working on bettering their systems to cater for these kinds of corporate actions in future. While Naspers and Prosus were in the spotlight this week, BHP also made a brief appearance announcing that it will now be stepping away from older fossil fuels and moving towards “future-facing commodities”. BHP will be looking to sell its oil and gas divisions as well as its thermal coal division. BHP will look at focussing more-closely on green-energy alternatives which will include its iron, copper and nickel divisions. The company also announced that $5.7 billion will be spent on building a large fertilizer company in Canada, while also looking to move their primary stock exchange listing over to Australia.

SEEKING SAFE HARBOURS

Although conditions are currently looking favourable for stronger oil prices due to oil demand almost reaching pre-pandemic levels, the threat of the COVID-19 Delta variant flare up in China, coupled with the country’s lower-than-expected vaccination numbers, oil prices have come under strain since early-July 2021. Brent Crude and US West Texas Intermediate (WTI) oil both saw relatively big moves to the downside this week, in fact the worst week in four months, even though the global economy seems to be on track to being fully operational again. Another factor which added to the correction in oil prices was the number of oil rigs coming back online over the last week. From falling to below 200 operational oil rigs at the height of global pandemic lockdowns, the US has gradually been switching on more oil rigs since October 2020, with 397 operational oil rigs now back online to meet the recovering global oil demand. From August, the expanded Organisation of the Petroleum Export Countries (OPEC+) have agreed to start implementing an increased output in oil production by 400,000 barrels per day monthly, which is expected to get us back to pre-pandemic output levels by the end of 2022. Trading 7% lower for the week, Brent Crude hovered around the $66.30 per barrel level on Thursday, while WTI traded near $63.25 per barrel.

Gold prices remained largely flat this week, at levels of around $1,783 per fine ounce, as global equity markets started showing signs of weakness by Thursday afternoon. The Chicago Board Options Exchange (CBOE) Market Volatility Index moved more than 50% higher this week, as the tremors in the greater equity market start to become more pronounced. Should market volatility remain, and the US dollar weaken from current levels, we could see a gentle swing back into gold, with levels of $1,820 being the next target level. The 1% strengthening of the underlying US Dollar Index (USDX) this week helped suppress any upward volatility that may have been experienced by gold, with investors starting to potentially eye out safe-haven refuges again.

Platinum prices took a 5% dive this week, while palladium took a double knock, as car manufacturers slowly turn to using platinum in vehicle production rather than palladium which carries a more expensive price per ounce. Concerns around increased COVID-19 infection rates in the Asia-Pacific region saw both palladium and platinum sliding 5.6% and 10.56% respectively during the last week, with palladium hitting its lowest levels, around $2,360, since June 2021. By Thursday, platinum traded near $974.50 per ounce and Palladium at levels of around $2,371.56.

DOLLAR SKYROCKETS

The USDX strengthened to 93.4 on Thursday, the highest level on a closing basis since November 2020, after minutes from the last FOMC meeting indicated that Fed officials are likely to reduce stimulus this year, provided that the economy evolves as broadly as they are anticipating. A reduction in asset purchases usually boosts the dollar as there will be less cash injected into the financial system.

Following the Fed minutes and on the back of the rising dollar, the euro depreciated below $1.17, hovering around its weakest level since November 2020. At the same time, the European Central Bank is remaining dovish after policymakers pledged last month to keep interest rates at record-low levels for even longer, in an effort to bring inflation back to its 2% target. Elsewhere, prospects of slower global growth due to Coronavirus outbreaks also hit risk appetite.

The British pound also weakened on the back of the stronger dollar, to trade below $1.37 in mid-August. Meanwhile, concerns over the pace of global growth due to the worldwide spike in COVID-19 infections weighed in on risk appetite, while the Bank of England's hawkish turn helped to curb the losses.

The South African rand felt the pinch of the stronger dollar, starting the day off on Thursday slightly above R15/$. its lowest since early March. The rand continued its depreciation throughout Thursday, shedding an additional 1.48% at the time of writing, to trade at R15.15. Locally, traders continued to assess the impact of President Ramaphosa's recent Cabinet reshuffle, including the new finance minister, along with the long-term effects of a massive explosion of a generator at Eskom's new Medupi power station. On the pandemic front, there are concerns about a potential fourth wave of COVID-19 infections in November, fuelled by the fast-spreading Delta variant and insufficient vaccination numbers.

The rand starts the day at R15.23/$ R17.80/€ and R20.77/£.

Quick Polls

QUESTION

Do you believe this is the toughest period for financial advice in many years?

ANSWER

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50/50. I just feel like whether we like it or not, we have to ready ourselves for change… be resilient and scale for the future. It’s not about survival of the fittest anymore but survival of the quickest. We just have to move on with life.
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