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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 20 September 2019
For a week that held major event risk – several interest rate decisions – the outcome was rather uneventful, with policymakers both locally and abroad acting in line with market expectations.Rather, the standout event for the week, completely diverting attention away from the central banks, was the drone attack on Saudi Arabian oil plants by Iranian terrorists, which wiped out 5% of global oil production. The strike has raised numerous questions, from whether the act could lead to a full blown war, all the way to what the effect on local and global inflation could be. And then on Thursday night, Trump upped the ante in the trade war, threatening additional tariffs of 50% and even 100% should an agreement with China not be reached soon.
GLOBAL DATA AND POLITICS
Tensions are understandably high in the Middle East, and where there is potential for military action, the US is never far away. While Saudi Arabia is trying to establish who ordered the drone strike from within the borders of Iran, and if the Iranian government is at all involved, President Trump is fighting his own battle with the Iranians. There is heightened risk of military action between the US/Saudi and Iran after the US blamed Iran for the attack on the oil plant.
A meeting, set to take place between President Trump, Taliban leaders and the Afghan President at Camp David was cancelled following the death of yet another US soldier during an attack initiated by the radical Islamist group. On Wednesday, the Federal Reserve cut interest rates by 25bps after divisions amongst not only policymakers but also market participants made their way to the fore. The cut had been largely priced in and the effect on markets was muted as a result.
Given the uptick in positive data from the US, subdued trade tensions (at the time) and the inflationary effect of rising oil prices due to the Saudi attack, the Federal Reserve gave no inclination of rate hikes for the rest of 2019. US manufacturing production rose by 0.5% month-on-month in August, while industrial production gained 0.6% during the same period.Turning towards the world’s second largest economy, Chinese unemployment remains steady at 5.2%, while retail sales marginally declined from previous periods to 7.5% year-on-year in August. Fixed asset investment grew by 5.5% during the same period while industrial production undershot expectations coming in at 4.4%.
It was a rather uneventful week on the European front. CPI remained flat at 1% year-on-year in August, while the current account surplus rose to 20.6bn in July. CPI from the UK remained largely in line with expectations rising 0.4% month-on-month in August, while reaching 1.7% year-on-year. Retail sales undershot the target, but still gained 2.7% year-on-year, while the BOE kept interest rates on hold on Thursday.
US EQUITIES
US equity markets were seen coming under pressure this week, within the turmoil of the global political chess game being played. If it’s not the Chinese trade war, its Trump picking on Iran. To make things slightly more interesting this week, the Fed’s decision to cut rates saw US equity market futures retreating on Thursday. The Fed’s 0.25% interest rate decision, along with an uncertain future interest rate timeline and trajectory, also helped European markets and currencies take a strong step forward against the US. The US dollar index (strength of the US dollar) was seen dipping around 0.20% on the back of the announcement.
This week saw actively managed US equity funds being overtaken by the new wave of exchange traded products like ETFs and ETNs (index trackers). Currently actively managed US Equity funds have a rough $4.25 trillion under management. The ‘new kids on the block’, index trackers, have around $4.27 trillion under management. With the cost of actively vs passively managed funds being on average priced around 0.76% and 0.08% respectively, it’s easy to see how the passive alternative has taken the industry by storm.
Equity-wise, it was indeed a quiet week with all three major equity indices grinding in a sideways direction. The only relatively interesting news to come out of one of the larger firms was the announcement that Microsoft will be rolling out a new share buyback program which will look at raising $40 billion from its shareholders. At the same time, Microsoft’s raised its dividend by $0.05 to $0.51 a share. It’s interesting to see the amount of share buybacks happening in 2019, given the economy is not entirely rosy.
Since last Friday morning, equity markets have attempted to scrape back some losses with performance for the week currently around:
COMMODITIES
Probably the most prominent highlight for the week has been the flurry of news headlines released surrounding the automated drone attacks on Saudi Arabia’s Abqaiq oil processing facility, managed by Aramco, in the early hours of Saturday morning (14 September). Crippling around 5% of the world’s oil production in an instant, the ‘calculated drone attack’ sent oil prices soaring more than 12% in a moment – this, being the quickest move seen in Brent Crude and WTI oil in over 10 years. The moves were as follows:
The majority of the week seemed to be a finger-pointing contest between the allies and their opponents, with many unfounded assumptions and blame being pinned on Iran. One surely has to consider that this could’ve possibly been a US tactic implemented through one of its ‘silent partners’ in order to keep oil prices up? Or is it genuinely a terror attack rolled out by Yemen's Houthi rebels, as they profess to have done? These days, no one seems to really know, although it’s getting easier for the public to see through the media noise, albeit influenced by ‘conspiracy’.
Although many analysts initially expected that the Abqaiq oil processing facility would only be restored and back into full working operation in over a month’s time, Saudi energy minister Prince Abdulaziz bin Salma softened the drama by announcing that almost 40% of the facility was already back online by Thursday afternoon, while the remaining facility would be fully operational within the next two-to-three weeks. This positive news saw oil prices retreating again by over 5% on Thursday’s trading day.
The most immediate events effected by these bombings were the delivery timelines of Saudi’s lighter Crude oil to PetroChina, which had around a 10-day delay added onto pre-attack delivery times, while Aramco’s much-awaited IPO on Saudi’s domestic stock exchange now has the chance of being held up slightly. Aramco’s listing is set to raise around $20 billion which will be deployed into non-oil related revenue generating streams for the country. This $20 billion float would only represent around 1% of Aramco’s value.
For now, investors can more-than-likely expect one-or-two more punches being thrown, in terms of political threats, before this particular saga lays to rest.Brent Crude closed Thursday’s ’s trading day at $62.66 per barrel, while US West Texas Intermediate (WTI) closed at $58.24.For the last five trading days, gold seemed to err towards the side of showing relative strength, however most of the gains produced by the precious metal were seen dipping right back to last Friday’s levels, shortly after the announcement of the US Fed’s decision to cut US interest rates by 0.25% to a target range of between 1.75% and 2.00% was made. It wasn’t necessarily the adjustment to the interest rate that created a drag on gold, but rather the mixed signals veiling the forward-looking guidance when it comes to the next rates adjustment. Although gold managed to keep it steady for the week, both palladium and platinum were seen dipping by just under 2% for the week.
On Thursday evening, gold, platinum and palladium were trading at levels of around $1,499.67, $942.60 and $1,472.01 per fine ounce respectively.
SOUTH AFRICAN FUNDAMENTALS
The violence in metropoles in the country has finally started to subside, while attention is still being paid to abuse against woman and children. From a political perspective, there have not been many key developments. However concern for Eskom’s ongoing power supply remains, with some confusion regarding planned load shedding over the next six weeks. What is certain is that the risk of unplanned outages remains high with SA’s electricity supply vulnerable.
The SARB monetary policy committee (MPC) kept interest rates unchanged this week, in line with market expectations, while CPI ticked up to 4.3% in August (4%). Retail sales from the local economy disappointed, reaching only 2% growth year-on-year for July, compared to the expected 2.6%.
SOUTH AFRICAN EQUITY
An ultimately negative week was witnessed on local shores, as the only positive day seemed to be Monday which tended to be largely influenced by the MSCI rebalancing implemented on the day. With the oil price ‘going through the roof’ over the weekend, while the South African rand held relatively steady against most major countries, there was really no other reason for local equity markets to have been so strong on Monday. So what happened with regard to the rebalancing?
Major moves seen with regard to the rebalancing was Prosus (recently unbundled from Naspers) taking Sappi’s seat on the JSE Top 40 index. Sappi was seen dropping around 7% on the day, with R250 million being traded through it.
After a strong Monday, seeing most local indices delivering more than 1%, Tuesday took the role of the ‘Big Bad Wolf’, quickly wiping the smiles off of investor’s faces. On Tuesday, local markets were battered relatively hard. Some of the numbers were as follows:
EOH continues to fight an uphill battle, as a trading statement released on Wednesday alluded to further loss expectations, which came as quite a surprise to the market. The potential extent of the loss per share, over the last financial period, starts to point towards a more fundamentally dire situation within EOH. Although the general investor knows that EOH has been trying to carve a new way forward, given the investigations into potentially corrupt historical transactions, the weight of losing client confidence and trust may now start to take effect more materially, should such bitter-tasting announcements continue to be released.
Even though the share price reacted with a swift 13.00% drop on the announcement, it actually recovered back to the day’s opening price of around R12.70 relatively quickly. The 15 October release of the financial results may provide investors with a more certain idea of “where-to next” for EOH, given that the legal team investigating the potentially questionable transactions may provide more transparent insight to the company’s past. Until then, not much action should be expected from the share price. On Friday morning, EOH opened the trading day at R12.35 per share.
Comair (COM) released a surprisingly strong set of results, for the year ended 30 June 2019, which were materially assisted by a payment received from South African Airways with regard to SAA breaching the Competition Act in 2005. Overall, the company actually performed relatively well, when stripping out this once-off payment, however there were still one or two issues which continued to create a dragging-effect on the company:
LOOKING AHEAD
South African markets will be closed on Tuesday to celebrate Heritage Day, while PPI is due for release on Thursday. US GDP is sure to make some waves, with a quarterly growth rate of 2% anticipated by markets. The GDP will give us an indication of the risk of a recession as well as provide guidance regarding future interest rate strategies by the Fed.
The rand held its ground rather well, until Trump’s impatience came to the fore in the trade wars. The ZAR weakened up to 1% at one stage in the overnight session, largely driven by some irresponsible language from the Whitehouse. Washington threatened 50-100% tariffs on Chinese goods should a trade agreement not be reached rapidly.
It had been a rather uneventful day yesterday as SARB kept rates unchanged, in line with market expectation. With the local unit trading largely rangebound over the past week, the risk of a negative event remains a threat to the rand, as we saw last night. The rand is heading towards a leg lower with a range of R14.60 to R14.86 remaining intact for the time being as we prepare for US GDP next week and the SA midterm budget October. The midterm budget is likely to set the tone for the Moody’s rating announcement due to take place in November, with markets largely expecting the rating to remain unchanged while the outlook will be adjusted to negative. Escalations in the Saudi/Iran tension can see the risk appetite rapidly evaporate, holding risks for emerging markets, including the rand. The rand started the day trading at R14.79/$, R16.35/€, R18.55/£.
GLOBAL DATA AND POLITICS
Tensions are understandably high in the Middle East, and where there is potential for military action, the US is never far away. While Saudi Arabia is trying to establish who ordered the drone strike from within the borders of Iran, and if the Iranian government is at all involved, President Trump is fighting his own battle with the Iranians. There is heightened risk of military action between the US/Saudi and Iran after the US blamed Iran for the attack on the oil plant.
A meeting, set to take place between President Trump, Taliban leaders and the Afghan President at Camp David was cancelled following the death of yet another US soldier during an attack initiated by the radical Islamist group. On Wednesday, the Federal Reserve cut interest rates by 25bps after divisions amongst not only policymakers but also market participants made their way to the fore. The cut had been largely priced in and the effect on markets was muted as a result.
Given the uptick in positive data from the US, subdued trade tensions (at the time) and the inflationary effect of rising oil prices due to the Saudi attack, the Federal Reserve gave no inclination of rate hikes for the rest of 2019. US manufacturing production rose by 0.5% month-on-month in August, while industrial production gained 0.6% during the same period.Turning towards the world’s second largest economy, Chinese unemployment remains steady at 5.2%, while retail sales marginally declined from previous periods to 7.5% year-on-year in August. Fixed asset investment grew by 5.5% during the same period while industrial production undershot expectations coming in at 4.4%.
It was a rather uneventful week on the European front. CPI remained flat at 1% year-on-year in August, while the current account surplus rose to 20.6bn in July. CPI from the UK remained largely in line with expectations rising 0.4% month-on-month in August, while reaching 1.7% year-on-year. Retail sales undershot the target, but still gained 2.7% year-on-year, while the BOE kept interest rates on hold on Thursday.
US EQUITIES
US equity markets were seen coming under pressure this week, within the turmoil of the global political chess game being played. If it’s not the Chinese trade war, its Trump picking on Iran. To make things slightly more interesting this week, the Fed’s decision to cut rates saw US equity market futures retreating on Thursday. The Fed’s 0.25% interest rate decision, along with an uncertain future interest rate timeline and trajectory, also helped European markets and currencies take a strong step forward against the US. The US dollar index (strength of the US dollar) was seen dipping around 0.20% on the back of the announcement.
This week saw actively managed US equity funds being overtaken by the new wave of exchange traded products like ETFs and ETNs (index trackers). Currently actively managed US Equity funds have a rough $4.25 trillion under management. The ‘new kids on the block’, index trackers, have around $4.27 trillion under management. With the cost of actively vs passively managed funds being on average priced around 0.76% and 0.08% respectively, it’s easy to see how the passive alternative has taken the industry by storm.
Equity-wise, it was indeed a quiet week with all three major equity indices grinding in a sideways direction. The only relatively interesting news to come out of one of the larger firms was the announcement that Microsoft will be rolling out a new share buyback program which will look at raising $40 billion from its shareholders. At the same time, Microsoft’s raised its dividend by $0.05 to $0.51 a share. It’s interesting to see the amount of share buybacks happening in 2019, given the economy is not entirely rosy.
Since last Friday morning, equity markets have attempted to scrape back some losses with performance for the week currently around:
- S&P 500: flat
- NASDAQ: flat
- Dow Jones: down around 0.27%
- Facebook: up around 1.00%
- Amazon: down around 1.06%
- Apple: up around 0.60%
- Netflix: down around 1.56%
- Alphabet: up around 0.57%
COMMODITIES
Probably the most prominent highlight for the week has been the flurry of news headlines released surrounding the automated drone attacks on Saudi Arabia’s Abqaiq oil processing facility, managed by Aramco, in the early hours of Saturday morning (14 September). Crippling around 5% of the world’s oil production in an instant, the ‘calculated drone attack’ sent oil prices soaring more than 12% in a moment – this, being the quickest move seen in Brent Crude and WTI oil in over 10 years. The moves were as follows:
- Brent Crude: $60.13 to $67.12 per barrel (over 12% move)
- WTI: $54.94 to $60.47 per barrel (over 10% move)
The majority of the week seemed to be a finger-pointing contest between the allies and their opponents, with many unfounded assumptions and blame being pinned on Iran. One surely has to consider that this could’ve possibly been a US tactic implemented through one of its ‘silent partners’ in order to keep oil prices up? Or is it genuinely a terror attack rolled out by Yemen's Houthi rebels, as they profess to have done? These days, no one seems to really know, although it’s getting easier for the public to see through the media noise, albeit influenced by ‘conspiracy’.
Although many analysts initially expected that the Abqaiq oil processing facility would only be restored and back into full working operation in over a month’s time, Saudi energy minister Prince Abdulaziz bin Salma softened the drama by announcing that almost 40% of the facility was already back online by Thursday afternoon, while the remaining facility would be fully operational within the next two-to-three weeks. This positive news saw oil prices retreating again by over 5% on Thursday’s trading day.
The most immediate events effected by these bombings were the delivery timelines of Saudi’s lighter Crude oil to PetroChina, which had around a 10-day delay added onto pre-attack delivery times, while Aramco’s much-awaited IPO on Saudi’s domestic stock exchange now has the chance of being held up slightly. Aramco’s listing is set to raise around $20 billion which will be deployed into non-oil related revenue generating streams for the country. This $20 billion float would only represent around 1% of Aramco’s value.
For now, investors can more-than-likely expect one-or-two more punches being thrown, in terms of political threats, before this particular saga lays to rest.Brent Crude closed Thursday’s ’s trading day at $62.66 per barrel, while US West Texas Intermediate (WTI) closed at $58.24.For the last five trading days, gold seemed to err towards the side of showing relative strength, however most of the gains produced by the precious metal were seen dipping right back to last Friday’s levels, shortly after the announcement of the US Fed’s decision to cut US interest rates by 0.25% to a target range of between 1.75% and 2.00% was made. It wasn’t necessarily the adjustment to the interest rate that created a drag on gold, but rather the mixed signals veiling the forward-looking guidance when it comes to the next rates adjustment. Although gold managed to keep it steady for the week, both palladium and platinum were seen dipping by just under 2% for the week.
On Thursday evening, gold, platinum and palladium were trading at levels of around $1,499.67, $942.60 and $1,472.01 per fine ounce respectively.
SOUTH AFRICAN FUNDAMENTALS
The violence in metropoles in the country has finally started to subside, while attention is still being paid to abuse against woman and children. From a political perspective, there have not been many key developments. However concern for Eskom’s ongoing power supply remains, with some confusion regarding planned load shedding over the next six weeks. What is certain is that the risk of unplanned outages remains high with SA’s electricity supply vulnerable.
The SARB monetary policy committee (MPC) kept interest rates unchanged this week, in line with market expectations, while CPI ticked up to 4.3% in August (4%). Retail sales from the local economy disappointed, reaching only 2% growth year-on-year for July, compared to the expected 2.6%.
SOUTH AFRICAN EQUITY
An ultimately negative week was witnessed on local shores, as the only positive day seemed to be Monday which tended to be largely influenced by the MSCI rebalancing implemented on the day. With the oil price ‘going through the roof’ over the weekend, while the South African rand held relatively steady against most major countries, there was really no other reason for local equity markets to have been so strong on Monday. So what happened with regard to the rebalancing?
- R37 billion volume traded through the JSE All Share Index on the day (2019 daily average: R19.68 billion)
- Net foreign investor purchasing of SA Inc. (local companies generating revenues primarily in rands) came to around R6 billion
- Foreigners traded about 30% of the entire SA equity market on the day.
- Foreign interest on the day was focused on the following sectors:
- Just under R3 billion worth of consumer sector stocks were purchased
- Just over R2 billion worth of financial sector stocks were purchased
- Local funds were one of the only sectors to have been sold out of
Major moves seen with regard to the rebalancing was Prosus (recently unbundled from Naspers) taking Sappi’s seat on the JSE Top 40 index. Sappi was seen dropping around 7% on the day, with R250 million being traded through it.
After a strong Monday, seeing most local indices delivering more than 1%, Tuesday took the role of the ‘Big Bad Wolf’, quickly wiping the smiles off of investor’s faces. On Tuesday, local markets were battered relatively hard. Some of the numbers were as follows:
- All Share and Top 40 indices: down around 1.60%
- Resources index: down 0.47%
- Industrial index: down 1.89%
- Financial index: down 2.64%
EOH continues to fight an uphill battle, as a trading statement released on Wednesday alluded to further loss expectations, which came as quite a surprise to the market. The potential extent of the loss per share, over the last financial period, starts to point towards a more fundamentally dire situation within EOH. Although the general investor knows that EOH has been trying to carve a new way forward, given the investigations into potentially corrupt historical transactions, the weight of losing client confidence and trust may now start to take effect more materially, should such bitter-tasting announcements continue to be released.
Even though the share price reacted with a swift 13.00% drop on the announcement, it actually recovered back to the day’s opening price of around R12.70 relatively quickly. The 15 October release of the financial results may provide investors with a more certain idea of “where-to next” for EOH, given that the legal team investigating the potentially questionable transactions may provide more transparent insight to the company’s past. Until then, not much action should be expected from the share price. On Friday morning, EOH opened the trading day at R12.35 per share.
Comair (COM) released a surprisingly strong set of results, for the year ended 30 June 2019, which were materially assisted by a payment received from South African Airways with regard to SAA breaching the Competition Act in 2005. Overall, the company actually performed relatively well, when stripping out this once-off payment, however there were still one or two issues which continued to create a dragging-effect on the company:
- The grounding of the Boeing 737 MAX – of which the company had purchased two (overall impact of the grounding currently costs COM around R195 million); and
- Problems with maintenance scheduling and inventory management at SAA Technical.
- Revenue up 9% to R7.1 billion from a previous R6.5 billion
- Profit up by 184% due to R1.1 billion payment from SAA and R168 million worth of interest thereon
- Earnings per share (EPS) was up 175% to R1.92 per share vs last year’s R0.69 per share
- Headline EPS was up 184% to R1.97 per share vs 2018’s R0.69 per share
LOOKING AHEAD
South African markets will be closed on Tuesday to celebrate Heritage Day, while PPI is due for release on Thursday. US GDP is sure to make some waves, with a quarterly growth rate of 2% anticipated by markets. The GDP will give us an indication of the risk of a recession as well as provide guidance regarding future interest rate strategies by the Fed.
The rand held its ground rather well, until Trump’s impatience came to the fore in the trade wars. The ZAR weakened up to 1% at one stage in the overnight session, largely driven by some irresponsible language from the Whitehouse. Washington threatened 50-100% tariffs on Chinese goods should a trade agreement not be reached rapidly.
It had been a rather uneventful day yesterday as SARB kept rates unchanged, in line with market expectation. With the local unit trading largely rangebound over the past week, the risk of a negative event remains a threat to the rand, as we saw last night. The rand is heading towards a leg lower with a range of R14.60 to R14.86 remaining intact for the time being as we prepare for US GDP next week and the SA midterm budget October. The midterm budget is likely to set the tone for the Moody’s rating announcement due to take place in November, with markets largely expecting the rating to remain unchanged while the outlook will be adjusted to negative. Escalations in the Saudi/Iran tension can see the risk appetite rapidly evaporate, holding risks for emerging markets, including the rand. The rand started the day trading at R14.79/$, R16.35/€, R18.55/£.
Advertisement (and yes South Africans can buy from Amazon as they deliver to SA)
Our highlight for the week:
The summary below shows the inflation rates per province in South Africa for August 2019. And surprise surprise the inflation rate of the Western Cape was the highest once again. For the30th month in a row
So for the last 30 months, the Western Cape has had the highest inflation rate of any of South Africa's provinces. And it is attributed to the growth rate in their property rent. See more regarding this in our Cape Town Property Bubble article.
The extremely low rates of inflation for durable and semi-durable goods (all goods expected to last between a year and 5 years such as appliances, and clothing and footwear etc) shows that retailers are struggling to sell these type of goods thus very little price increases are levied on such goods else retailers wont be able to move the stock as consumers wont buy it. It is a manifestation of the weak economic conditions and struggling consumer demand in South Africa. With the SARB monetary policy committee meeting today and tomorrow to decide on South Africa's interest rates one wonders if another interest rate cut is coming considering the inflation rate is still well within the 3% and 6% target.
- Western Cape: 4.9%
- Limpopo: 4.7%
- Northern Cape: 4.6%
- Mpumalanga: 4.4%
- South Africa: 4.3%
- Free State: 4.2%
- Gauteng: 4.1%
- KwaZulu-Natal: 4.1%
- Eastern Cape: 4.0%
- North West: 3.8%
So for the last 30 months, the Western Cape has had the highest inflation rate of any of South Africa's provinces. And it is attributed to the growth rate in their property rent. See more regarding this in our Cape Town Property Bubble article.
- Pensioners inflation: 4.4%
- Inflation for services: 4.7%
- Inflation for all goods: 3.9%
- Inflation for durable goods: 2.6%
- Inflation for semi-durable goods: 2.0%
- Inflation for non durable goods: 4.5%
The extremely low rates of inflation for durable and semi-durable goods (all goods expected to last between a year and 5 years such as appliances, and clothing and footwear etc) shows that retailers are struggling to sell these type of goods thus very little price increases are levied on such goods else retailers wont be able to move the stock as consumers wont buy it. It is a manifestation of the weak economic conditions and struggling consumer demand in South Africa. With the SARB monetary policy committee meeting today and tomorrow to decide on South Africa's interest rates one wonders if another interest rate cut is coming considering the inflation rate is still well within the 3% and 6% target.