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Peregrine Treasury Services Weekly Market Wrap 17 May 2019
Date: 17 May 2019 Category: Stock Market |
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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 17 May 2019
With the world’s two largest economies once again facing-off in the trade war, Donald Trump moved toward imposing new tariffs on some $200 billion worth of imported goods from China, which was swiftly followed by a retaliation by China. The US however continued to flex its muscles as the week progressed, imposing sanctions on one of China’s largest technology companies - Hauwei. The sanctions imposed means that Hauwei will be unable to trade with any US company without prior approval from the US government. From where we’re standing, it seems as though a mutually beneficial, amicable resolution to the continuous trade dispute remains out of reach.
GLOBAL DATA AND POLITICS
Chinese data reaffirmed the global slowdown this week, as retail sales declined to 7.20% year-on-year, for April, while industrial production also fell by just over a percentage point to a 5.40% growth level during the same period. The unemployment rate remained fairly flat, with a marginal decrease from 5.20% to 5.00% reported.
When looking at the emerging market sector, industrial production in Turkey decelerated by 2.20% year-on-year in March, while retail sales declined by 3.80%. Turkey’s year-end consumer price index (CPI) forecast remains at worrisome levels at around 16.68%. Argentina had little to report back on this week, with CPI figures coming in at 3.20% for April, indicating a slight decline, month-on-month, compared to March. Russia is set to release quarterly gross domestic product (GDP) numbers today, with markets largely anticipating growth in the region of 2.60%. Industrial production in the Eurozone decreased by 0.60% year-on-year in March while GDP for quarter one (Q1) remained flat 1.20%. Friday will also see the euro region release their most recent CPI data. This is also expected to remain flat at 1.70% year-on-year.
The unemployment figures for the United Kingdom indicated a slight strengthening in the job market, dropping to 3.80% in March from the previous 3.90%. The British Sterling came under significant pressure this week, weakening against its peers, as the Brexit debacle, once again, demands the attention of global market participants. Theresa May seems to be barely hanging on to political-significance, as she once again enters the battlefield, in an effort to have the deal with European Union (EU) approved by Parliament - she is likely to, once again, be met with substantial resistance.
US POLITICS
While the United States is locked in a standoff against China, the Eurozone was met with a bit of relief this week as President, Donald Trump, postponed the implementation of tariffs on imported vehicles.
The mighty US, who over the past few weeks seemed to be immune to most global economic woes, felt its fair-share of pain this week as key economic data tended to disappoint. Retail sales came under pressure in April, indicating negative growth of 0.20% month-on-month, while manufacturing and industrial production both contracted by 0.50%. Positivity made its way back on to the data calendar on Thursday as initial jobless claims dropped to 212 000 from 228 000, while housing-starts for April increased to 1.23 million.
Although attention should be focused primarily on the US/China trade war, a keen interest should also now be aimed at the rising tensions, and the threat of war, in the Middle East that could impact oil supply and subsequently the price of this liquid gold. There is certainly no shortage of conflict in the US at the moment, and one cannot help but wonder how much of it is driven by an ulterior motive as Donald Trump zooms in on 2020 elections.
US EQUITIES
Mostly governed by the ebb and flow of the US China trade war, US equity markets remained relatively flat this week, with the NASDAQ shaving off around 0.50% over the last five trading days.
After having an extremely rusty initial public offering (IPO), Uber’s share price rose around 16.00% over the course of the week to levels initially suggested as a fair valuation price and listing price of $45.00 per share.
FAANGs performance, for the month of May-to-date:
In South African rand-terms, subtract 0.08% against each of these return-figures to see what the South African investor could be up in 2019, with the currency-effect added.
COMMODITIES
Brent Crude finally broke through the $72.50 a barrel mark on Thursday afternoon, as tensions in the Middle East continue to heat up. After four ships were attacked in the Arab Emirates this week, the US issued a travel warning to any US citizens and diplomats in the region. A confident break and hold above the $72.80 level for Brent Crude oil, may trigger the next small move upward.
Brent Crude opened Friday’s trading day at $72.64 per barrel (up around 3.17% for the week), while WTI opened at $62.92 (up 1.37% for the week).
Precious metals took a small knock on Thursday afternoon, as confidence was yet again breathed back into US equities. As long as the equity and jobs market remain strong on western shores, precious metals will continue to remain under downward pressure.
On Friday morning, gold, platinum and palladium were trading at levels of around $1,287.00, $829.13 and $1,326.40 per fine ounce respectively.
SOUTH AFRICAN POLITICS
The resilience of the rand is often highlighted, especially in turbulent times. After experiencing some pressure last week on the back of the reignited trade war, the rand quickly gained respectable ground against most major currencies this week, as market participants seeking yield gravitated to local bonds, post-election. The selloff experienced during the uncertainty leading up to what was highlighted as the most important South African election since 1994 was quickly reversed, as Cyril Rampahosa and the African National Congress (ANC) remained unbeaten securing 57.00% of the national vote.
While markets anticipated rand strength on the back of a strong ANC win, the effect was more lethargic than anticipated, as global events such as the trade war overshadowed the election result. This week, however, the rand started to perform as expected. The confidence driving the current rally is largely vested in President Cyril Ramaphosa rather than the ruling party- the reality however remains that the president and the ruling party are two sides to the same coin. Market participants and ratings agencies will be keeping a watchful eye on the president in the coming weeks, as he gears up to announce his cabinet. The market is expecting strong leadership from the president as tall orders such as a reduction of cabinet, prosecution of ANC officials implicated in state capture and corruption, and of course the turnaround of Eskom all hangs over the president’s head.
The rally that the rand experienced did eventually bring some relief to the local currency, however the sustainability of this strength lies in the balance. While the right moves by Ramaphosa will certainly assist in driving this rally in the short term, the structural issues faced by South Africa will remain long after the shine of the election has faded. Key issues such as Eskom, unemployment and slow economic growth will be a hard and time-consuming task to manage. South Africa will need to find a way to keep its head above water until a material turnaround is on the cards.
An increase in fuel is yet again a harsh blow to the strained local consumer, that will see inflation, once again, come under pressure as consumers, manufacturers and distributors all gear up to pay up to 30 cents more, per liter, from June. Dismal unemployment statistics highlighted just how dire the situation is in South Africa, with unemployment rising to a new record high of 27.60% in Q1 of 2019, while youth unemployment shot to 55.20%. Retail sales undershot expectations, indicating a rise of 0.20% year-on-year in March.
SOUTH AFRICAN EQUITY
With many local investors having pinned their hopes on another ‘Ramaphoria’ type-of scenario, following the recent national elections, a definitive direction of both SA stocks and the rand alike didn’t seem to come to fruition in any convincing manner this week. An underwhelming interest in the rand and SA equity market was shown over the last few trading days, while it’s fair to say that the US China trade war also put a dampener on the trajectory of our local currency and equity market, following the elections.
Some of the bigger highlights this week were seen coming out of the pharmaceutical sector, namely Dis-Chem and Aspen Pharmacare. Aspen assured that they are on track to meet their 31 May 2019 deadline when it comes to the sale of their New Zealand based infant-formula business. Investor confidence was once again breathed into the stock, assisting the share’s at least 9.00% rise over the course of Wednesday and Thursday.
On Thursday morning, Dis-Chem released their provisional reviewed annual condensed consolidated results for the 12 months ended 28 February 2019. Although the stock’s share price seemed to shudder almost 5.00% downward on the back of the news, the negative sentiment was defused after investors swallowed the fact that the miss in earnings was primarily influenced by unforeseen once-off events, such as strikes and legislation restrictions. In general, Dis-Chem did alright.
Here’s some of the bigger movers on the JSE for the 2019 year so far, as at Friday morning:
THE WEEK AHEAD
The rand ends the week around 1.00% stronger against the US dollar, after starting the week off on the back foot. The broader range remains intact, with the rand struggling to muster enough momentum for a substantial break below the R14.15 mark. As carry trade continues to support the local unit, the right moves from government and, more specifically, President Ramaphosa, may see the rand head back toward its rally-targeting levels of around R13.80 against the US dollar- an opportunity that should be taken advantage of, given the view that the rand will come under pressure in the longer term as the structural woes weigh in.
On Friday morning the rand would’ve set investors back R14.33 per Greenback, R16.01 a euro and R18.33 a British pound.
GLOBAL DATA AND POLITICS
Chinese data reaffirmed the global slowdown this week, as retail sales declined to 7.20% year-on-year, for April, while industrial production also fell by just over a percentage point to a 5.40% growth level during the same period. The unemployment rate remained fairly flat, with a marginal decrease from 5.20% to 5.00% reported.
When looking at the emerging market sector, industrial production in Turkey decelerated by 2.20% year-on-year in March, while retail sales declined by 3.80%. Turkey’s year-end consumer price index (CPI) forecast remains at worrisome levels at around 16.68%. Argentina had little to report back on this week, with CPI figures coming in at 3.20% for April, indicating a slight decline, month-on-month, compared to March. Russia is set to release quarterly gross domestic product (GDP) numbers today, with markets largely anticipating growth in the region of 2.60%. Industrial production in the Eurozone decreased by 0.60% year-on-year in March while GDP for quarter one (Q1) remained flat 1.20%. Friday will also see the euro region release their most recent CPI data. This is also expected to remain flat at 1.70% year-on-year.
The unemployment figures for the United Kingdom indicated a slight strengthening in the job market, dropping to 3.80% in March from the previous 3.90%. The British Sterling came under significant pressure this week, weakening against its peers, as the Brexit debacle, once again, demands the attention of global market participants. Theresa May seems to be barely hanging on to political-significance, as she once again enters the battlefield, in an effort to have the deal with European Union (EU) approved by Parliament - she is likely to, once again, be met with substantial resistance.
US POLITICS
While the United States is locked in a standoff against China, the Eurozone was met with a bit of relief this week as President, Donald Trump, postponed the implementation of tariffs on imported vehicles.
The mighty US, who over the past few weeks seemed to be immune to most global economic woes, felt its fair-share of pain this week as key economic data tended to disappoint. Retail sales came under pressure in April, indicating negative growth of 0.20% month-on-month, while manufacturing and industrial production both contracted by 0.50%. Positivity made its way back on to the data calendar on Thursday as initial jobless claims dropped to 212 000 from 228 000, while housing-starts for April increased to 1.23 million.
Although attention should be focused primarily on the US/China trade war, a keen interest should also now be aimed at the rising tensions, and the threat of war, in the Middle East that could impact oil supply and subsequently the price of this liquid gold. There is certainly no shortage of conflict in the US at the moment, and one cannot help but wonder how much of it is driven by an ulterior motive as Donald Trump zooms in on 2020 elections.
US EQUITIES
Mostly governed by the ebb and flow of the US China trade war, US equity markets remained relatively flat this week, with the NASDAQ shaving off around 0.50% over the last five trading days.
After having an extremely rusty initial public offering (IPO), Uber’s share price rose around 16.00% over the course of the week to levels initially suggested as a fair valuation price and listing price of $45.00 per share.
FAANGs performance, for the month of May-to-date:
- Facebook: down around 2.49%
- Amazon: down around 0.81%
- Apple: down around 5.71%
- Netflix: down around 2.97%
- Alphabet: down around 0.06%
In South African rand-terms, subtract 0.08% against each of these return-figures to see what the South African investor could be up in 2019, with the currency-effect added.
COMMODITIES
Brent Crude finally broke through the $72.50 a barrel mark on Thursday afternoon, as tensions in the Middle East continue to heat up. After four ships were attacked in the Arab Emirates this week, the US issued a travel warning to any US citizens and diplomats in the region. A confident break and hold above the $72.80 level for Brent Crude oil, may trigger the next small move upward.
Brent Crude opened Friday’s trading day at $72.64 per barrel (up around 3.17% for the week), while WTI opened at $62.92 (up 1.37% for the week).
Precious metals took a small knock on Thursday afternoon, as confidence was yet again breathed back into US equities. As long as the equity and jobs market remain strong on western shores, precious metals will continue to remain under downward pressure.
On Friday morning, gold, platinum and palladium were trading at levels of around $1,287.00, $829.13 and $1,326.40 per fine ounce respectively.
SOUTH AFRICAN POLITICS
The resilience of the rand is often highlighted, especially in turbulent times. After experiencing some pressure last week on the back of the reignited trade war, the rand quickly gained respectable ground against most major currencies this week, as market participants seeking yield gravitated to local bonds, post-election. The selloff experienced during the uncertainty leading up to what was highlighted as the most important South African election since 1994 was quickly reversed, as Cyril Rampahosa and the African National Congress (ANC) remained unbeaten securing 57.00% of the national vote.
While markets anticipated rand strength on the back of a strong ANC win, the effect was more lethargic than anticipated, as global events such as the trade war overshadowed the election result. This week, however, the rand started to perform as expected. The confidence driving the current rally is largely vested in President Cyril Ramaphosa rather than the ruling party- the reality however remains that the president and the ruling party are two sides to the same coin. Market participants and ratings agencies will be keeping a watchful eye on the president in the coming weeks, as he gears up to announce his cabinet. The market is expecting strong leadership from the president as tall orders such as a reduction of cabinet, prosecution of ANC officials implicated in state capture and corruption, and of course the turnaround of Eskom all hangs over the president’s head.
The rally that the rand experienced did eventually bring some relief to the local currency, however the sustainability of this strength lies in the balance. While the right moves by Ramaphosa will certainly assist in driving this rally in the short term, the structural issues faced by South Africa will remain long after the shine of the election has faded. Key issues such as Eskom, unemployment and slow economic growth will be a hard and time-consuming task to manage. South Africa will need to find a way to keep its head above water until a material turnaround is on the cards.
An increase in fuel is yet again a harsh blow to the strained local consumer, that will see inflation, once again, come under pressure as consumers, manufacturers and distributors all gear up to pay up to 30 cents more, per liter, from June. Dismal unemployment statistics highlighted just how dire the situation is in South Africa, with unemployment rising to a new record high of 27.60% in Q1 of 2019, while youth unemployment shot to 55.20%. Retail sales undershot expectations, indicating a rise of 0.20% year-on-year in March.
SOUTH AFRICAN EQUITY
With many local investors having pinned their hopes on another ‘Ramaphoria’ type-of scenario, following the recent national elections, a definitive direction of both SA stocks and the rand alike didn’t seem to come to fruition in any convincing manner this week. An underwhelming interest in the rand and SA equity market was shown over the last few trading days, while it’s fair to say that the US China trade war also put a dampener on the trajectory of our local currency and equity market, following the elections.
Some of the bigger highlights this week were seen coming out of the pharmaceutical sector, namely Dis-Chem and Aspen Pharmacare. Aspen assured that they are on track to meet their 31 May 2019 deadline when it comes to the sale of their New Zealand based infant-formula business. Investor confidence was once again breathed into the stock, assisting the share’s at least 9.00% rise over the course of Wednesday and Thursday.
On Thursday morning, Dis-Chem released their provisional reviewed annual condensed consolidated results for the 12 months ended 28 February 2019. Although the stock’s share price seemed to shudder almost 5.00% downward on the back of the news, the negative sentiment was defused after investors swallowed the fact that the miss in earnings was primarily influenced by unforeseen once-off events, such as strikes and legislation restrictions. In general, Dis-Chem did alright.
- Revenue up to R21.4 billion (10% increase)
- Earnings per share and headline earnings per share up 7.40% to 85.4cents. (expected 87 cents)
- National strike cost the company around R75 million
- Retail revenue growth to R19.6 billion (9.70% increase)
- Wholesale revenue growth to R14.5 billion (11.20% increase)
- Comparable store revenue growth only up 3.40%.
Here’s some of the bigger movers on the JSE for the 2019 year so far, as at Friday morning:
- Impala Platinum: up 52.75%
- Kumba Iron Ore: up 47.96%
- Lonmin: up 30.99%
- Tongaat Hulett: down 61.7%
- Rebosis Property Fund: down 52.42%
- Delta Property Fund: down 38.67%
THE WEEK AHEAD
The rand ends the week around 1.00% stronger against the US dollar, after starting the week off on the back foot. The broader range remains intact, with the rand struggling to muster enough momentum for a substantial break below the R14.15 mark. As carry trade continues to support the local unit, the right moves from government and, more specifically, President Ramaphosa, may see the rand head back toward its rally-targeting levels of around R13.80 against the US dollar- an opportunity that should be taken advantage of, given the view that the rand will come under pressure in the longer term as the structural woes weigh in.
On Friday morning the rand would’ve set investors back R14.33 per Greenback, R16.01 a euro and R18.33 a British pound.
So we will provide this weekly summary from Peregrine Treasury services, together with our Daily Investment Updates from PSG and we will continue to update our JSE Calendar Tracker Page daily with specific market and economic events readers should take note of.
Yesterday, Dis-chem published their results for the financial year, and according to the group, industrial action towards the end of 2018 had a significant impact on their financial results. They had the following to say regarding the industrial action in their financial results.
The industrial action that affected the Group for close to a third of the financial year, had both a direct and indirect impact on the financial performance of the Group. R50.4 million of additional direct costs were incurred, the primary contributing costs include:
- Increased investment in security at all our distribution centres, our head office and certain targeted stores to ensure our consumers, our employees and our assets were protected;
- Employment and training of temporary staff in our distribution centres to fill the void in the wholesale segment left by striking employees;
- Relocating head office staff to other premises to ensure their safety;
- Inability to invoice logistic fees as certain suppliers had to deliver inventory straight to stores and not through our distribution centres; and
- Related legal costs incurred. Indirect costs were estimated between R22.3 million and R26 million.
In December, which was the most impacted trading month, retail revenue growth was only 6.2% with comparable store revenue of negative 2.5%, which was well below our expectations. Although contingency plans were in place to ensure minimal disruption at our retail stores, we experienced lost opportunity sales primarily due to stock supply challenges.
Read our financial review of Dis-chem's latest results here
Yesterday, Dis-chem published their results for the financial year, and according to the group, industrial action towards the end of 2018 had a significant impact on their financial results. They had the following to say regarding the industrial action in their financial results.
The industrial action that affected the Group for close to a third of the financial year, had both a direct and indirect impact on the financial performance of the Group. R50.4 million of additional direct costs were incurred, the primary contributing costs include:
- Increased investment in security at all our distribution centres, our head office and certain targeted stores to ensure our consumers, our employees and our assets were protected;
- Employment and training of temporary staff in our distribution centres to fill the void in the wholesale segment left by striking employees;
- Relocating head office staff to other premises to ensure their safety;
- Inability to invoice logistic fees as certain suppliers had to deliver inventory straight to stores and not through our distribution centres; and
- Related legal costs incurred. Indirect costs were estimated between R22.3 million and R26 million.
In December, which was the most impacted trading month, retail revenue growth was only 6.2% with comparable store revenue of negative 2.5%, which was well below our expectations. Although contingency plans were in place to ensure minimal disruption at our retail stores, we experienced lost opportunity sales primarily due to stock supply challenges.
Read our financial review of Dis-chem's latest results here