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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 28 June 2019
For the lion’s share of President Donald Trump’s reign, many have been trying to figure out exactly what agenda may come from the reignited conflict between the United States and Iran. Could it lead to full-blown military action between the two nations, or is it simply a play to ensure short-term stability for the western nation?
Once again, the US/China trade dynamic is taking center stage, as markets gear up for the G20 Summit, kicking off in Japan today. One has to wonder if the picture is actually much bigger than first anticipated. Could it be that President Trump is looking at tipping the scales on a global scale that could change the world as we know it?
On Wednesday evening, Bloomberg published an article focusing on the actions recently implemented by President Trump - actions that may have been deliberately put in place to weaken the US dollar - an unprecedented (un-presidential) move, too say the least. The article argued that President Trump currently seeks to weaken the US dollar to a point where the US could aggressively compete in the export market, mainly against emerging market economies, such as China, and by doing this, many other emerging market countries would then agree to having a stronger local currency relative to the US dollar, opposed to having unforeseen increasing tariffs.
While the idea may seem quite absurd, and one could argue that it would be counter-intuitive of the US president, it does seem to collate with the narrative of building foundational industries in the US again with the aim of exporting goods. This does, however, tie in perfectly with the pressure that Trump is pressing on the Federal Reserve to reduce interest rates. As economics 101 teaches us, a decrease in interest rates decreases the value of the underlying currency.
Now, assuming that a currency war is the next big move, and assuming that the dollar does move weaker, in conjunction with an end to trade wars, where does it leave the rand and other emerging markets? The answer is: ‘stronger’.
GLOBAL DATA AND POLITICS
It’s been a quiet week on the data front with attention being directed toward the geopolitical environment. The data however, still plays an important role in assessing potential outcomes in big events such as interest rate announcements and credit ratings, both of which are prevailing themes, especially in the local market.
US data released this week indicated a rise in the house price index year-on-year in April by 5.2%, while new home sales decelerated month-on-month during May to 626,000. A drop in monthly durable goods orders of 1.30% highlighted the fear of an anticipated global slowdown, with consumers being less willing to commit to any large capital outlays. Real consumer spending saw a drop from 1.30% to 0.90% in the first quarter, while jobless claims marginally accelerated to 221,250 week-on-week. Gross domestic product remains above three percent - in line with expectations, however the number is considered slightly superficial, as many entities seem to be stockpiling inventory amidst the tariff uncertainty and the ongoing trade war. Friday will see the release of personal spending and income.
Thursday posed a busy data day for the European Union (EU), as consumer confidence worsened to -7.2 in June, while industrial and service sentiment declined to -5.6 and 11.0 respectively. Friday will see the release of EU consumer price index numbers, which is expected to remain flat at 1.20%. The European Central Bank remains dovish, with quantitative easing remaining on the cards, in line with other markets.
Turning our heads to the Middle East, the Morgan Stanley Capital International (MSCI) was seen upgrading Kuwait to ‘emerging market’ status from ‘frontier market’ status. Kuwait’s local stock market has seen around a 22 percent rally between 1 January and 31 May 2019, and could possibly see further gains, with a potential $2.8 billion worth of passive inflows drifting their way. Five blue chip Kuwaiti securities will be added to the emerging market benchmark index, representing a 0.50% weight in the overall index. Oil, finance and logistics are some of Kuwait’s larger industries.
The quarterly bulletin issued by the South African Reserve Bank (SARB) painted quite a dire picture, indicating that the national government’s cash book deficit increased by R21.0 billion from fiscal 2017/18 to fiscal 2018/19. Producer price index numbers declined during May from 1.30% to 0.50% month-on-month, in line with expectations, while a marginal decrease from 6.50% to 6.40% was recorded annually. Friday morning will see the release of M3 money supply and private sector credit data, while the trade balance is due for release later that afternoon.
US EQUITIES
After setting new highs on the S&P 500 over the last two weeks, the index seemed to take a step back this week, to the tune of around one percent - Thursday being it’s only positive day in four consecutive days. An interesting anomaly that is currently littering the market is that companies are now actually buying higher levels of their own shares back from the public equity markets in order to shrink or slow down the flow of more expensive equities, while rather playing in the cheaper debt market. In essence, there is a fine balance being managed in the undertow. Companies are still reporting in line with expectations and nothing seems too overvalued. More attention is now being focused on Trump’s political woes than anything else.
Ford Motor Company was seen gaining around 2.33% this week on the back of reassuring news that its European operations were set to improve by the end of the year. Lyft Inc. finally caught a break this week as autonomous vehicle company, Waymo, made their vehicles available to Lyft customers. After quite a rough IPO earlier this year, Lyft is technically looking quite interesting in the short term. Lyft will open Friday’s trading day at $65.27 a share.
With upcoming earnings from Netflix (17 July) and Alphabet (25 July), investors and analysts have high expectations of the tech sector over the next month. After Alphabet’s underwhelming quarter one results, analysts have lowered expectations for Q2, expecting revenue to increase by around 16.90% year-on-year to $38.20 billion.
FAANGs performance, for Thursday’s trading day:
In South African rand-terms, subtract 1.26% against each of these return-figures to see what the South African investor could be up in 2019, with the currency-effect added.
COMMODITIES
Both Brent Crude and WTI were seen creeping higher this week on the back of what the G20 summit may hold. Tensions are still alive and well, when looking at the Iranian sanction saga. So long as fear veils the Middle East, oil prices will remain at these levels. US oil stockpiles fell by 7.5 million barrels this week, assisting oil prices higher by around three to four percent stronger than a week ago. Brent Crude opened Friday’s trading day at $66.19 per barrel, while US West Texas Intermediate (WTI) opened at $59.07.
After an extremely robust move of more than seven percent over the last two weeks, gold finally slowed down and corrected by around two percent this week – a move that’s now got investors thinking, ‘is this just a small consolidation before a material move upward?’ Palladium had a relatively strong week, rising just under three percent for the week. Platinum remained unmoved. On Friday morning, gold, platinum and palladium were trading at levels of around $1,419.20, $815.85 and $1,560.00 per fine ounce respectively.
SOUTH AFRICAN FUNDAMENTALS
It has been a quiet week, to say the least, with the only political headlines being the State of the Nation (SONA) parliamentary debate, and albeit interesting, the effect on local markets were seemingly non-existent. While matters relating to the SARB have been a sensitive topic in recent times, there seems to be nothing untoward regarding the resignation of the Deputy Governor, Daniel Mminele. The Deputy is set to retire once his second term comes to and end on 30 June 2019. The question now, however, is who the Deputy’s replacement will be, and whether they would share the sentiment of an interest rate cut.
With the world all moving toward a monetary-easing regime, the SARB is expected to follow suit during the upcoming Monetary Policy Commission meeting. With inflation remaining comfortably within the middle of the target band, the SARB is expected to cut rates by 0.25%, however the cut in interest rates may not be enough to bolster the struggling economy.
The South African rand started the week off remaining extremely flat, to trade in a mere 10 cent range, however as the week unfolded, and hope of a trade deal between the US and China increased, the rand managed to rally against the Greenback(US dollar) and all other major currencies. While the current improved risk sentiment and anticipated interest rate decreases by the Fed are all playing in the favor of the rand, one shouldn’t take these strong levels for granted. The current rand strength is largely driven by global events and a weak dollar, while local fundamental elements remain weak. The weakening trend in the US dollar, should it continue, could see the rand break to levels below R14.00 in the short term, while one should still consider rand weakness over the longer run.
SOUTH AFRICAN EQUITY
SA equities lagged this week, almost in-line with the strengthening of the rand against the US dollar. It’s interesting to note that that the US dollar index (DXY) is also down around 1.64% so far in June, once again indicating that the rand strength isn’t necessarily all attributed to local happenings. With 2019 starting to feel like one of the most uncertain years witnessed within the millennial lifetime, it’s anyone’s guess as to when the fog will start to clear.
This week, the JSE saw its Top 40 index dipping by around 1.64%, mainly on the back of heavier –weighted dual-listed stocks being negatively impacted by a stronger rand. Examples of these would be Naspers (down around 2.99% for the week), Sasol (down 3.47%), AB Inbev (down 3.77%) and Richemont (remaining flat).
Making news this week, BHP Billiton reached all-time highs of around R366.83 a share on the back of a record breaking rally seen in the iron ore sector due to limited supply. Having said this, BHP will be paying $175 million over to Western Australia, due to a tax dispute – this may put a dampener on the share during Friday’s trading day. Kumba Iron Ore and Exxaro were also dragged higher on the back of the iron ore pump.
MTN saw its local share price stumbling along this week, as its dual listing in Nigeria was seen dropping around 2.40% to 128.75 naira (same levels as a month ago). This all on the back of the R28.65 billion tax dispute being pushed out until 29 October later in the year. MTN opened Friday’s trading day at R107.53 a share.
After bench warming for five years, Exxaro seems as if it’s now ready to join the A-team again on the Top 40 index. This was on the back of a re-rating of the resources sector in general, as well as the extremely strong conditions seen veiling iron ore. The last three years has seen Exxaro ramping up by around 190.00%, catapulting it to levels of around R174.05 a share.
Here’s some of the bigger movers on the JSE for the 2019 year so far, painting a relatively clear picture that the resource sector’s performance stands head and shoulders above most others:
THE WEEK AHEAD
The week ahead may be heavily influenced by the outcome of the G20 summit this weekend in Japan, with focus being primarily put on the trade negotiations between the US and China. Should a positive conclusion be reached, the rand could gain significant strength, as risk appetite may return to the emerging market. The opposite is unfortunately also true.
The subdued US dollar opens the door to a new range for the rand of R14.00 to R14.25. Assuming a broader thought of incorporating stop loss and profit-taking strategies, the market may play to the upside, while capping the risk and still obtaining certainty of outcome. On Friday morning the rand would’ve set investors back R14.17 per Greenback, R16.10 a euro and R17.95 a British pound.
Once again, the US/China trade dynamic is taking center stage, as markets gear up for the G20 Summit, kicking off in Japan today. One has to wonder if the picture is actually much bigger than first anticipated. Could it be that President Trump is looking at tipping the scales on a global scale that could change the world as we know it?
On Wednesday evening, Bloomberg published an article focusing on the actions recently implemented by President Trump - actions that may have been deliberately put in place to weaken the US dollar - an unprecedented (un-presidential) move, too say the least. The article argued that President Trump currently seeks to weaken the US dollar to a point where the US could aggressively compete in the export market, mainly against emerging market economies, such as China, and by doing this, many other emerging market countries would then agree to having a stronger local currency relative to the US dollar, opposed to having unforeseen increasing tariffs.
While the idea may seem quite absurd, and one could argue that it would be counter-intuitive of the US president, it does seem to collate with the narrative of building foundational industries in the US again with the aim of exporting goods. This does, however, tie in perfectly with the pressure that Trump is pressing on the Federal Reserve to reduce interest rates. As economics 101 teaches us, a decrease in interest rates decreases the value of the underlying currency.
Now, assuming that a currency war is the next big move, and assuming that the dollar does move weaker, in conjunction with an end to trade wars, where does it leave the rand and other emerging markets? The answer is: ‘stronger’.
GLOBAL DATA AND POLITICS
It’s been a quiet week on the data front with attention being directed toward the geopolitical environment. The data however, still plays an important role in assessing potential outcomes in big events such as interest rate announcements and credit ratings, both of which are prevailing themes, especially in the local market.
US data released this week indicated a rise in the house price index year-on-year in April by 5.2%, while new home sales decelerated month-on-month during May to 626,000. A drop in monthly durable goods orders of 1.30% highlighted the fear of an anticipated global slowdown, with consumers being less willing to commit to any large capital outlays. Real consumer spending saw a drop from 1.30% to 0.90% in the first quarter, while jobless claims marginally accelerated to 221,250 week-on-week. Gross domestic product remains above three percent - in line with expectations, however the number is considered slightly superficial, as many entities seem to be stockpiling inventory amidst the tariff uncertainty and the ongoing trade war. Friday will see the release of personal spending and income.
Thursday posed a busy data day for the European Union (EU), as consumer confidence worsened to -7.2 in June, while industrial and service sentiment declined to -5.6 and 11.0 respectively. Friday will see the release of EU consumer price index numbers, which is expected to remain flat at 1.20%. The European Central Bank remains dovish, with quantitative easing remaining on the cards, in line with other markets.
Turning our heads to the Middle East, the Morgan Stanley Capital International (MSCI) was seen upgrading Kuwait to ‘emerging market’ status from ‘frontier market’ status. Kuwait’s local stock market has seen around a 22 percent rally between 1 January and 31 May 2019, and could possibly see further gains, with a potential $2.8 billion worth of passive inflows drifting their way. Five blue chip Kuwaiti securities will be added to the emerging market benchmark index, representing a 0.50% weight in the overall index. Oil, finance and logistics are some of Kuwait’s larger industries.
The quarterly bulletin issued by the South African Reserve Bank (SARB) painted quite a dire picture, indicating that the national government’s cash book deficit increased by R21.0 billion from fiscal 2017/18 to fiscal 2018/19. Producer price index numbers declined during May from 1.30% to 0.50% month-on-month, in line with expectations, while a marginal decrease from 6.50% to 6.40% was recorded annually. Friday morning will see the release of M3 money supply and private sector credit data, while the trade balance is due for release later that afternoon.
US EQUITIES
After setting new highs on the S&P 500 over the last two weeks, the index seemed to take a step back this week, to the tune of around one percent - Thursday being it’s only positive day in four consecutive days. An interesting anomaly that is currently littering the market is that companies are now actually buying higher levels of their own shares back from the public equity markets in order to shrink or slow down the flow of more expensive equities, while rather playing in the cheaper debt market. In essence, there is a fine balance being managed in the undertow. Companies are still reporting in line with expectations and nothing seems too overvalued. More attention is now being focused on Trump’s political woes than anything else.
Ford Motor Company was seen gaining around 2.33% this week on the back of reassuring news that its European operations were set to improve by the end of the year. Lyft Inc. finally caught a break this week as autonomous vehicle company, Waymo, made their vehicles available to Lyft customers. After quite a rough IPO earlier this year, Lyft is technically looking quite interesting in the short term. Lyft will open Friday’s trading day at $65.27 a share.
With upcoming earnings from Netflix (17 July) and Alphabet (25 July), investors and analysts have high expectations of the tech sector over the next month. After Alphabet’s underwhelming quarter one results, analysts have lowered expectations for Q2, expecting revenue to increase by around 16.90% year-on-year to $38.20 billion.
FAANGs performance, for Thursday’s trading day:
- Facebook: up around 0.98%
- Amazon: up around 0.34%
- Apple: down around 0.03%
- Netflix: up around 2.16%
- Alphabet: down around 0.35%
In South African rand-terms, subtract 1.26% against each of these return-figures to see what the South African investor could be up in 2019, with the currency-effect added.
COMMODITIES
Both Brent Crude and WTI were seen creeping higher this week on the back of what the G20 summit may hold. Tensions are still alive and well, when looking at the Iranian sanction saga. So long as fear veils the Middle East, oil prices will remain at these levels. US oil stockpiles fell by 7.5 million barrels this week, assisting oil prices higher by around three to four percent stronger than a week ago. Brent Crude opened Friday’s trading day at $66.19 per barrel, while US West Texas Intermediate (WTI) opened at $59.07.
After an extremely robust move of more than seven percent over the last two weeks, gold finally slowed down and corrected by around two percent this week – a move that’s now got investors thinking, ‘is this just a small consolidation before a material move upward?’ Palladium had a relatively strong week, rising just under three percent for the week. Platinum remained unmoved. On Friday morning, gold, platinum and palladium were trading at levels of around $1,419.20, $815.85 and $1,560.00 per fine ounce respectively.
SOUTH AFRICAN FUNDAMENTALS
It has been a quiet week, to say the least, with the only political headlines being the State of the Nation (SONA) parliamentary debate, and albeit interesting, the effect on local markets were seemingly non-existent. While matters relating to the SARB have been a sensitive topic in recent times, there seems to be nothing untoward regarding the resignation of the Deputy Governor, Daniel Mminele. The Deputy is set to retire once his second term comes to and end on 30 June 2019. The question now, however, is who the Deputy’s replacement will be, and whether they would share the sentiment of an interest rate cut.
With the world all moving toward a monetary-easing regime, the SARB is expected to follow suit during the upcoming Monetary Policy Commission meeting. With inflation remaining comfortably within the middle of the target band, the SARB is expected to cut rates by 0.25%, however the cut in interest rates may not be enough to bolster the struggling economy.
The South African rand started the week off remaining extremely flat, to trade in a mere 10 cent range, however as the week unfolded, and hope of a trade deal between the US and China increased, the rand managed to rally against the Greenback(US dollar) and all other major currencies. While the current improved risk sentiment and anticipated interest rate decreases by the Fed are all playing in the favor of the rand, one shouldn’t take these strong levels for granted. The current rand strength is largely driven by global events and a weak dollar, while local fundamental elements remain weak. The weakening trend in the US dollar, should it continue, could see the rand break to levels below R14.00 in the short term, while one should still consider rand weakness over the longer run.
SOUTH AFRICAN EQUITY
SA equities lagged this week, almost in-line with the strengthening of the rand against the US dollar. It’s interesting to note that that the US dollar index (DXY) is also down around 1.64% so far in June, once again indicating that the rand strength isn’t necessarily all attributed to local happenings. With 2019 starting to feel like one of the most uncertain years witnessed within the millennial lifetime, it’s anyone’s guess as to when the fog will start to clear.
This week, the JSE saw its Top 40 index dipping by around 1.64%, mainly on the back of heavier –weighted dual-listed stocks being negatively impacted by a stronger rand. Examples of these would be Naspers (down around 2.99% for the week), Sasol (down 3.47%), AB Inbev (down 3.77%) and Richemont (remaining flat).
Making news this week, BHP Billiton reached all-time highs of around R366.83 a share on the back of a record breaking rally seen in the iron ore sector due to limited supply. Having said this, BHP will be paying $175 million over to Western Australia, due to a tax dispute – this may put a dampener on the share during Friday’s trading day. Kumba Iron Ore and Exxaro were also dragged higher on the back of the iron ore pump.
MTN saw its local share price stumbling along this week, as its dual listing in Nigeria was seen dropping around 2.40% to 128.75 naira (same levels as a month ago). This all on the back of the R28.65 billion tax dispute being pushed out until 29 October later in the year. MTN opened Friday’s trading day at R107.53 a share.
After bench warming for five years, Exxaro seems as if it’s now ready to join the A-team again on the Top 40 index. This was on the back of a re-rating of the resources sector in general, as well as the extremely strong conditions seen veiling iron ore. The last three years has seen Exxaro ramping up by around 190.00%, catapulting it to levels of around R174.05 a share.
Here’s some of the bigger movers on the JSE for the 2019 year so far, painting a relatively clear picture that the resource sector’s performance stands head and shoulders above most others:
- Impala Platinum: up 86.80%
- Kumba Iron Ore: up 75.67%
- Sibanye Gold: up 65.67%
- Tongaat Hulett: down 76.32%
- Rebosis Property Fund: down 77.32%
- Omnia: down 58.37%
- Brait: down 35.80%
THE WEEK AHEAD
The week ahead may be heavily influenced by the outcome of the G20 summit this weekend in Japan, with focus being primarily put on the trade negotiations between the US and China. Should a positive conclusion be reached, the rand could gain significant strength, as risk appetite may return to the emerging market. The opposite is unfortunately also true.
The subdued US dollar opens the door to a new range for the rand of R14.00 to R14.25. Assuming a broader thought of incorporating stop loss and profit-taking strategies, the market may play to the upside, while capping the risk and still obtaining certainty of outcome. On Friday morning the rand would’ve set investors back R14.17 per Greenback, R16.10 a euro and R17.95 a British pound.
Our highlight for the week:
Our highlight for the week focuses on a article we did yesterday which covered the latest South African banking sector information which showed that South African banks are writing off around 3.8% of loans and debt that has been issued, as consumers and businesses struggle to pay back their outstanding debts. Below an extract from the article yesterday.
In total South African banks wrote off or impaired loans that have been advanced to the value of R161.12 billion during April 2019. This is an increase of 22% on the R131.85 billion that was impaired by banks during April 2018. Impairments growing a lot faster than the new gross loans and advances that are being issued. And this will affect banks balance sheets and their overall profitability. Currently as at April 2019, 3.79% of all loans and advances made by South African banks are being impaired (or written off). This is up from 3.39% a year ago. If banks, South African's, government of the South African Reserve Bank needed a sign that South African consumers are really struggling this is it. South African's are struggling to pay back and service all their debt. And South Africa needs a more expansionary or accommodating monetary policy, not only to assist ailing South Africa consumers but to give South Africa's economy a boost.
Read the full article here
In total South African banks wrote off or impaired loans that have been advanced to the value of R161.12 billion during April 2019. This is an increase of 22% on the R131.85 billion that was impaired by banks during April 2018. Impairments growing a lot faster than the new gross loans and advances that are being issued. And this will affect banks balance sheets and their overall profitability. Currently as at April 2019, 3.79% of all loans and advances made by South African banks are being impaired (or written off). This is up from 3.39% a year ago. If banks, South African's, government of the South African Reserve Bank needed a sign that South African consumers are really struggling this is it. South African's are struggling to pay back and service all their debt. And South Africa needs a more expansionary or accommodating monetary policy, not only to assist ailing South Africa consumers but to give South Africa's economy a boost.
Read the full article here