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In our continued efforts to give our readers a broad number of views, opinions and information, we provide readers with Peregrine Treasury Services weekly market wrap below.
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Peregrine Treasury Services Weekly Wrap as at 14 June 2019
Much like our Blue Planet’s crust starting to show its cracks, through the recent eruptions of Mount Sinabung (Indonesia) and Russia’s Bolshaya Udina volcano, the same kind of super-heated cracks and tears are slowly appearing throughout the world’s global and political landscape. With the pressure taps being left alone to drip, it’s becoming harder and harder to predict how the current state of the global economy may look in a year, especially with Iranian angst potentially starting to rear its ugly head in the Gulf of Oman. Although the last trading week was rather sluggish, a new and potentially dangerous dynamic has started to work its way into the ‘economic machine’.
GLOBAL DATA AND POLITICS
Thus far, the never ending theme of trade wars, Brexit and a global growth slowdown continues to fade in and out of the spotlight. The trade war between the US and China seems to have escalated yet again, with President Donald Trump and Xi Jinping set to engage at the G20 Summit taking place later this month in Osaka, Japan. The outcome of these engagements will determine whether tariffs will be imposed on the remainder of Chinese exports to the US. Until then however, the landscape remains uncertain, and while developed markets rage on with their own economic wars, fuel continues to be splashed onto the fire when it comes to the growing pressure faced by emerging markets in the undertow.
It’s largely known that the trade war continues to negatively weigh in on the Chinese economy and its forward-looking growth prospects. The Chinese government has however made it clear, following renewed tariff threats by the US, that they have sufficient room to maneuver around, with regards to both market interest rates and regulatory reserve requirements, and take the necessary steps to support their economy, should the trade war linger on or escalate in any manner. The commitment from the Chinese government to withstand the economic fallout, by means of monetary intervention, did little to appease markets. Imports by China declined by 8.50% year-on-year (YoY) in May, while exports grew by 1.10% during the same period. Annual consumer price index (CPI) rose from 2.50% to 2.70%, YoY, while retail sales, industrial production and unemployment figures are all due for release later today.
Speculation that the Federal Reserve (the Fed) will move to cut interest rates in July has now become more of a realistic expectation, given the growth concerns and decreased inflation. CPI released on Wednesday indicated a drop in inflation from 2.0% to 1.8%, YoY, in May. Producer price index (PPI) numbers decreased in comparison to previous figures of 2.20%, expanding by 1.80%, YoY, in May, while initial jobless claims increased slightly to 222,000. Retail sales numbers, as well as manufacturing and production data is due for release on later today.
It was a quiet week on the events calendar for the European Union (EU), with the most prominent event being the release of industrial production numbers that saw a decline of 0.40%, YoY, in April.
The United Kingdom seems to have found a new favorite for Prime Minister (PM), with the majority leaning toward Boris Johnson to replace Theresa May. Regardless of the new PM, his popularity and vision of an ideal Brexit, concluding the task of leaving the EU will be no easy feat. Manufacturing production data saw a steep decline, dropping by 3.90% month-on-month (MoM) in April. Gross domestic product also declined YoY from 1.80% to 1.30%. Construction output and industrial production both came under pressure during April, sliding by 0.40% and 2.70% respectively. Unemployment remained flat at 3.80%.
Local data released this week hinted toward better growth for the second quarter (Q2), a welcome relief, following the dismal growth figures witnessed for Q1. Manufacturing production increased by 2.80% MoM during April, while retail sales spiked by 2.40% YoY. Gold and mining production however remains embattled, contracting 19.50% YoY in April and 1.50% MoM respectively. While manufacturing and retail data are both important economic indicators, and an increase is in every sense of the word good news, there is by no means sufficient economic activity to turn the South African growth story around in any significant manner in the short-to-medium term, and calls for a rate cut by the South African Reserve Bank are becoming more and more prominent.
US EQUITIES
US markets remained stable for the last five trading days largely trading within tight ranges, albeit to the up side of their respective ranges. With rumours of the Fed taking a dovish stance in the upcoming interest rates announcement, markets started to slowly price in the positive effects of a potential rate cut. Thursday’s news of a potential Iranian attack on two oil tankers sent some safe-haven confidence flowing toward US shores again, as markets closed slightly stronger on Thursday.
Yet another initial public offering in the tech space was seen this week in CrowdStrike, a cloud-based software company providing services to the likes of Amazon and Credit Suisse. Unlike the recent upsets seen in IPOs like Uber, Lyft and Pinterest, CrowdStrike listed at $34.00 a share and closed the first trading day 97.00% up at $63.50. Although the company still generates an overall loss when looking at their bottom line, their revenue is growing at a rate which could see them turning a profit within the next two years. Having said this, the upcoming IPOs of Slack and Palantir are to be watched with a keen eye.
The NASDAQ clawed back some losses following the recent anti-trust probe placed on the larger FAANGs companies, while the pricing in of a dovish Fed announcement also played its part.
FAANGs performance, for Thursday’s trading day:
In South African rand-terms, add 3.62% against each of these return-figures to see what the South African investor could be up in 2019, with the currency-effect added.
COMMODITIES
After reaching levels of around $64.00 per barrel on Friday last week, Brent Crude and West Texas Intermediate (WTI) oil took a slight dip during the course of the week, mainly on the back of continued uncertainty around the political ‘tug of war’ between the United States and Iran, as well as an unexpected rise in oil stockpiles on US soil. In the early hours of Thursday morning, a suspected torpedo attack on two Japanese-related oil tankers unfolded in the Gulf of Oman, jolting oil prices up by over 4.00% immediately following news of the suspicious incident – this, after oil prices briefly hit five-month lows at levels of around $59.60 on Wednesday evening, due to larger US stockpiles.
Brent Crude opened Friday’s trading day at $61.80 per barrel, while US West Texas Intermediate (WTI) opened at $52.50. In the precious metal front, gold remained relatively stable over the last five trading days – more than likely held up by concerns around a global economic slowdown and a generally wavering political landscape. Some fund managers (Paul Tudor Jones – Tudor Investment Corp) have even gone so far as saying that gold could be headed toward the $1,700.00 level within 12 months, should the US China trade war and, more recently, Iranian and other Middle-East concerns continue to boil over.
Platinum remained flat for the week, as investors continue to try and build an investment case for the battered metal within a heavily progressive and changing world. Palladium, on the other hand, showed yet another break upward after correcting over the last few weeks. This precious metal was seen surging over 5.00% this week. On Friday morning, gold, platinum and palladium were trading at levels of around $1,346.03, $813.90 and $1,448.38 per fine ounce respectively.
SOUTH AFRICAN FUNDAMENTALS
The South African political landscape remains in a fragile state as members of the governing party (African National Congress – ANC), and the Economic Freedom Front (EFF) took to violence against each other in parliament. During the induction session of the sixth democratic parliament, the opportunity was ceased by EFF MP, Makoti Khawula, to provoke and taunt the ANC, accusing them of appointing criminals to parliament and enabling the advancement of corruption.
The EFF however is not the only challenge that the ruling party faced during the week, as rumours of Secretary General, Ace Magashule’s, involvement in the establishment of opposition party ATM (African Transformation Movement) came under scrutiny. The ruling party has set up a commission to investigate the allegations against Magashule, however it remains unclear of exactly what the consequences would be, should the speculation prove to ring true. The ‘proof in the pudding’ in the longer term however, lies in the subsequent action taken against those exposed during these enquiries and investigations. Without decisive disciplinary and legal action taken against those involved in state capture, corruption and other forms of misconduct, these enquiries will remain nothing more than an exaggerated and expensive Q&A session.
While many South African’s know that most of their politicians serve as cabinet members and members of parliament, as an act of self-advancement rather than patriotism, the resignation from Parliament by majority of the previous cabinet members, who did not make the cut this time around to preserve cabinet pensions (which is significantly higher than MP pensions), once again reaffirmed the notion. With the State of the Nation address around the corner, analysts and credit ratings agencies are sure to zoom in on some of the key issues that require further clarification and acting-on by President, Cyril Ramaphosa. Some of these elements will include:
SOUTH AFRICAN EQUITY
South African equity markets have held up surprisingly well over the last five trading days, with a material amount of support being gifted by Naspers and many of the other larger dual-listed companies on the local securities exchange. Cigarette maker, British American Tobacco (BTI), gave guidance on their expectation of cigarette sales numbers, which they expect to slow down by around 3.50% globally. Cigarette sales in the US dropped 5.00% alone, while the actual market price of BTI dropped around 5.00% during the course of the week. BTI opened Friday’s trading day at R548.91
Tsogo Sun saw the unbundling of their hotel business which will now be called Tsogo Sun Hotels Limited and trade under the ticker TGO. Tsogo Sun’s share price dipped by around 18.00%, but this was mainly attributed to the unbundling of their hotel business, which ended its first solo trading day at R4.00, valuing the new hotel business at around R4.20 billion. Tsogo Sun (TSH) will now be known as Tsogo Sun Gaming and will look after the casino side of the business along with other alternative forms of gaming. The whole idea of the unbundling the hotel business from the gaming business may potentially bring in more interest and liquidity, from the likes of Shariah funds, to the hotel side of the business.
Naspers saw their core headline earnings (HEPS) coming in up to 31% - 32% stronger than the previous period, while HEPS, excluding MultiChoice, came in between 24% and 26% stronger. Naspers look to list on the Amsterdam stock exchange in July in order to create further liquidity and easier access for its European investors. Naspers opened Friday’s trading day at R3,485.00 – over 3.00% up for the week. Going into Thursday’s closing auction, the general feel was that foreign investors may be stepping in to add some pressure on SA Inc. companies, along with the rand. One will have to see what happens today on local markets, but the feel is relatively sombre.
Here’s some of the bigger movers on the JSE for the 2019 year so far, as at Friday morning:
THE WEEK AHEAD
The week ahead will set off slowly, as South Africa celebrates Youth Day on Monday, 17 June. Setting the tone for the next Monetary Policy Committee interest rate decision, due to take place in July, consumer price index numbers, for South Africa, are due for release on Wednesday next week. The Federal Reserve is also due announce the US interest decision on Wednesday, and while many expect that the Fed will not cut rates this time around, the tone and anticipated interest rate cut trajectory depicted by the Fed will prove to be crucial. A cut by the Federal Reserve, or a clear indication that rates will be cut in future, should have a positive effect on emerging market currencies however, given the global backdrop and the expectation of the SARB also moving toward cutting interest rates during 2019, the positive effects of an interest rate cut may be short-lived within the currency market.
With severe fluctuations in the local unit, and its sensitivity to the global backdrop, short term retracements should be used as a buying opportunity, as biases still lean toward a weaker rand by the end of 2019. On Friday morning the rand would’ve set investors back R14.87 per Greenback, R16.76 a euro and R18.85 a British pound.
GLOBAL DATA AND POLITICS
Thus far, the never ending theme of trade wars, Brexit and a global growth slowdown continues to fade in and out of the spotlight. The trade war between the US and China seems to have escalated yet again, with President Donald Trump and Xi Jinping set to engage at the G20 Summit taking place later this month in Osaka, Japan. The outcome of these engagements will determine whether tariffs will be imposed on the remainder of Chinese exports to the US. Until then however, the landscape remains uncertain, and while developed markets rage on with their own economic wars, fuel continues to be splashed onto the fire when it comes to the growing pressure faced by emerging markets in the undertow.
It’s largely known that the trade war continues to negatively weigh in on the Chinese economy and its forward-looking growth prospects. The Chinese government has however made it clear, following renewed tariff threats by the US, that they have sufficient room to maneuver around, with regards to both market interest rates and regulatory reserve requirements, and take the necessary steps to support their economy, should the trade war linger on or escalate in any manner. The commitment from the Chinese government to withstand the economic fallout, by means of monetary intervention, did little to appease markets. Imports by China declined by 8.50% year-on-year (YoY) in May, while exports grew by 1.10% during the same period. Annual consumer price index (CPI) rose from 2.50% to 2.70%, YoY, while retail sales, industrial production and unemployment figures are all due for release later today.
Speculation that the Federal Reserve (the Fed) will move to cut interest rates in July has now become more of a realistic expectation, given the growth concerns and decreased inflation. CPI released on Wednesday indicated a drop in inflation from 2.0% to 1.8%, YoY, in May. Producer price index (PPI) numbers decreased in comparison to previous figures of 2.20%, expanding by 1.80%, YoY, in May, while initial jobless claims increased slightly to 222,000. Retail sales numbers, as well as manufacturing and production data is due for release on later today.
It was a quiet week on the events calendar for the European Union (EU), with the most prominent event being the release of industrial production numbers that saw a decline of 0.40%, YoY, in April.
The United Kingdom seems to have found a new favorite for Prime Minister (PM), with the majority leaning toward Boris Johnson to replace Theresa May. Regardless of the new PM, his popularity and vision of an ideal Brexit, concluding the task of leaving the EU will be no easy feat. Manufacturing production data saw a steep decline, dropping by 3.90% month-on-month (MoM) in April. Gross domestic product also declined YoY from 1.80% to 1.30%. Construction output and industrial production both came under pressure during April, sliding by 0.40% and 2.70% respectively. Unemployment remained flat at 3.80%.
Local data released this week hinted toward better growth for the second quarter (Q2), a welcome relief, following the dismal growth figures witnessed for Q1. Manufacturing production increased by 2.80% MoM during April, while retail sales spiked by 2.40% YoY. Gold and mining production however remains embattled, contracting 19.50% YoY in April and 1.50% MoM respectively. While manufacturing and retail data are both important economic indicators, and an increase is in every sense of the word good news, there is by no means sufficient economic activity to turn the South African growth story around in any significant manner in the short-to-medium term, and calls for a rate cut by the South African Reserve Bank are becoming more and more prominent.
US EQUITIES
US markets remained stable for the last five trading days largely trading within tight ranges, albeit to the up side of their respective ranges. With rumours of the Fed taking a dovish stance in the upcoming interest rates announcement, markets started to slowly price in the positive effects of a potential rate cut. Thursday’s news of a potential Iranian attack on two oil tankers sent some safe-haven confidence flowing toward US shores again, as markets closed slightly stronger on Thursday.
Yet another initial public offering in the tech space was seen this week in CrowdStrike, a cloud-based software company providing services to the likes of Amazon and Credit Suisse. Unlike the recent upsets seen in IPOs like Uber, Lyft and Pinterest, CrowdStrike listed at $34.00 a share and closed the first trading day 97.00% up at $63.50. Although the company still generates an overall loss when looking at their bottom line, their revenue is growing at a rate which could see them turning a profit within the next two years. Having said this, the upcoming IPOs of Slack and Palantir are to be watched with a keen eye.
The NASDAQ clawed back some losses following the recent anti-trust probe placed on the larger FAANGs companies, while the pricing in of a dovish Fed announcement also played its part.
FAANGs performance, for Thursday’s trading day:
- Facebook: up around 1.39%
- Amazon: up around 0.81%
- Apple: down around 0.02%
- Netflix: down around 0.62%
- Alphabet: up around 1.09%
In South African rand-terms, add 3.62% against each of these return-figures to see what the South African investor could be up in 2019, with the currency-effect added.
COMMODITIES
After reaching levels of around $64.00 per barrel on Friday last week, Brent Crude and West Texas Intermediate (WTI) oil took a slight dip during the course of the week, mainly on the back of continued uncertainty around the political ‘tug of war’ between the United States and Iran, as well as an unexpected rise in oil stockpiles on US soil. In the early hours of Thursday morning, a suspected torpedo attack on two Japanese-related oil tankers unfolded in the Gulf of Oman, jolting oil prices up by over 4.00% immediately following news of the suspicious incident – this, after oil prices briefly hit five-month lows at levels of around $59.60 on Wednesday evening, due to larger US stockpiles.
Brent Crude opened Friday’s trading day at $61.80 per barrel, while US West Texas Intermediate (WTI) opened at $52.50. In the precious metal front, gold remained relatively stable over the last five trading days – more than likely held up by concerns around a global economic slowdown and a generally wavering political landscape. Some fund managers (Paul Tudor Jones – Tudor Investment Corp) have even gone so far as saying that gold could be headed toward the $1,700.00 level within 12 months, should the US China trade war and, more recently, Iranian and other Middle-East concerns continue to boil over.
Platinum remained flat for the week, as investors continue to try and build an investment case for the battered metal within a heavily progressive and changing world. Palladium, on the other hand, showed yet another break upward after correcting over the last few weeks. This precious metal was seen surging over 5.00% this week. On Friday morning, gold, platinum and palladium were trading at levels of around $1,346.03, $813.90 and $1,448.38 per fine ounce respectively.
SOUTH AFRICAN FUNDAMENTALS
The South African political landscape remains in a fragile state as members of the governing party (African National Congress – ANC), and the Economic Freedom Front (EFF) took to violence against each other in parliament. During the induction session of the sixth democratic parliament, the opportunity was ceased by EFF MP, Makoti Khawula, to provoke and taunt the ANC, accusing them of appointing criminals to parliament and enabling the advancement of corruption.
The EFF however is not the only challenge that the ruling party faced during the week, as rumours of Secretary General, Ace Magashule’s, involvement in the establishment of opposition party ATM (African Transformation Movement) came under scrutiny. The ruling party has set up a commission to investigate the allegations against Magashule, however it remains unclear of exactly what the consequences would be, should the speculation prove to ring true. The ‘proof in the pudding’ in the longer term however, lies in the subsequent action taken against those exposed during these enquiries and investigations. Without decisive disciplinary and legal action taken against those involved in state capture, corruption and other forms of misconduct, these enquiries will remain nothing more than an exaggerated and expensive Q&A session.
While many South African’s know that most of their politicians serve as cabinet members and members of parliament, as an act of self-advancement rather than patriotism, the resignation from Parliament by majority of the previous cabinet members, who did not make the cut this time around to preserve cabinet pensions (which is significantly higher than MP pensions), once again reaffirmed the notion. With the State of the Nation address around the corner, analysts and credit ratings agencies are sure to zoom in on some of the key issues that require further clarification and acting-on by President, Cyril Ramaphosa. Some of these elements will include:
- State owned enterprises with majority of the focus falling on Eskom, followed shortly by SAA;
- Employment strategies;
- Economic growth strategies; and
- Policy certainty surrounding land expropriation without compensation
SOUTH AFRICAN EQUITY
South African equity markets have held up surprisingly well over the last five trading days, with a material amount of support being gifted by Naspers and many of the other larger dual-listed companies on the local securities exchange. Cigarette maker, British American Tobacco (BTI), gave guidance on their expectation of cigarette sales numbers, which they expect to slow down by around 3.50% globally. Cigarette sales in the US dropped 5.00% alone, while the actual market price of BTI dropped around 5.00% during the course of the week. BTI opened Friday’s trading day at R548.91
Tsogo Sun saw the unbundling of their hotel business which will now be called Tsogo Sun Hotels Limited and trade under the ticker TGO. Tsogo Sun’s share price dipped by around 18.00%, but this was mainly attributed to the unbundling of their hotel business, which ended its first solo trading day at R4.00, valuing the new hotel business at around R4.20 billion. Tsogo Sun (TSH) will now be known as Tsogo Sun Gaming and will look after the casino side of the business along with other alternative forms of gaming. The whole idea of the unbundling the hotel business from the gaming business may potentially bring in more interest and liquidity, from the likes of Shariah funds, to the hotel side of the business.
- TGO opened Friday’s trading day at R4.43
- TSH opened up Friday’s trading day at R16.20
Naspers saw their core headline earnings (HEPS) coming in up to 31% - 32% stronger than the previous period, while HEPS, excluding MultiChoice, came in between 24% and 26% stronger. Naspers look to list on the Amsterdam stock exchange in July in order to create further liquidity and easier access for its European investors. Naspers opened Friday’s trading day at R3,485.00 – over 3.00% up for the week. Going into Thursday’s closing auction, the general feel was that foreign investors may be stepping in to add some pressure on SA Inc. companies, along with the rand. One will have to see what happens today on local markets, but the feel is relatively sombre.
Here’s some of the bigger movers on the JSE for the 2019 year so far, as at Friday morning:
- Impala Platinum: up 84.43% (8.07% in the last five trading days)
- Kumba Iron Ore: up 69.66%
- Tongaat Hulett: down 76.32%
- Rebosis Property Fund: down 67.66%
- Delta Property Fund: down 53.78%
THE WEEK AHEAD
The week ahead will set off slowly, as South Africa celebrates Youth Day on Monday, 17 June. Setting the tone for the next Monetary Policy Committee interest rate decision, due to take place in July, consumer price index numbers, for South Africa, are due for release on Wednesday next week. The Federal Reserve is also due announce the US interest decision on Wednesday, and while many expect that the Fed will not cut rates this time around, the tone and anticipated interest rate cut trajectory depicted by the Fed will prove to be crucial. A cut by the Federal Reserve, or a clear indication that rates will be cut in future, should have a positive effect on emerging market currencies however, given the global backdrop and the expectation of the SARB also moving toward cutting interest rates during 2019, the positive effects of an interest rate cut may be short-lived within the currency market.
With severe fluctuations in the local unit, and its sensitivity to the global backdrop, short term retracements should be used as a buying opportunity, as biases still lean toward a weaker rand by the end of 2019. On Friday morning the rand would’ve set investors back R14.87 per Greenback, R16.76 a euro and R18.85 a British pound.
Our highlight for the week:
The latest trade sales numbers (for wholesale, retail and motor trade) for April 2019 were published this week. And its the first indication regarding where South Africa's second quarter 2019 economic activity is heading, after the shockingly bad first quarter 2019 numbers.
Motor Trade sales released yesterday by Statistics South Africa showed the following growth for the various motor trade categories:
Read the full article here
Motor Trade sales released yesterday by Statistics South Africa showed the following growth for the various motor trade categories:
- Fuel sales: 11.65%
- Sales of accessories: 11.65%
- Total: 10.38%
- New vehicle sales: 10.17%
- Used vehicle sales: 9.95%
- Workshop income : 8.16%
- Convenient store sales: 1.48%
Read the full article here