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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 2 August 2019
A looming economic-cloud has seemed to quickly gather itself over most of the world’s economic activity. Will the hopeful winds potentially guide the stormy weather away, or should the greater-investor start boarding up their portfolio?
GLOBAL DATA AND POLITICS
D-day for the much anticipated Federal Reserve (Fed) interest rate decision finally arrived, but global markets seem to have been caught with their pants down. While the interest rate cut of 25 basis points was already priced in, the subsequent testimony by the Fed Chair, Jerome Powell, certainly wasn’t. Moments into Powell’s address, it became clear that Fed is no longer as dovish as previously portrayed, and certainly not nearly as the dovish as the European Central Bank (ECB), who painted quite a dire picture only a week before. Recent data from the US, including gross domestic product (GDP) data, employment and wage numbers also indicated a resilient economy, leading many to wonder whether the Fed is not acting prematurely.
While a less-dovish stance by the Fed might not have been market-friendly, and President Donald Trump is certainly not thrilled by the renewed dollar strength, one can argue that it is in fact the correct approach by the Fed, given the above mentioned resilience. Some of the key data events from the US this week included pending home sales that exceeded market expectations, quite drastically, by 2.3 percentage points, while employment wages rose by 0.7% quarter-on-quarter for Q2/2019. Initial jobless claims, that always plays it’s part in volatility on a Thursday afternoon, was in-line with forecasts at 215,000.The release of Manufacturing production managers index (PMI) numbers ticked up to the 50.4 point mark, indicating an acceleration in manufacturing activity. Friday will see the release of the unemployment rate, trade balance and a wide array of pay-roll data including government and non-farm payrolls.
Consumer confidence in the European Union (EU) remained flat at -6.6 in July, while industrial sentiment worsened to -7.4. Wednesday was quite a busy data day for the union, with GDP numbers marginally decelerating to 1.1% year-on-year, while consumer price index (CPI) numbers also declined to 1.1%, in July, from the previous 1.3%. The unemployment rate remained flat at 7.5%. Manufacturing PMI, released on Thursday, evoked little reaction, remaining flat at 46.5%. Retail sales and producer price index (PPI) data is due for release later today.
The United Kingdom Sterling remains under pressure, as the murkiness of Brexit and the ongoing uncertainty continues to rattle the market. Manufacturing PMI slightly exceeded market expectations, remaining flat at 48 points while the Bank of England kept interest rates unchanged at 0.75%, on Thursday. On Friday investors should keep an eye on the construction PMI that is forecast to come in at 46 points.
China and the US remain to be at odds, while the slowdown has, in recent months, been reflected in Chinese economic indicators much more than US indicators. Chinese manufacturing PMI rose incrementally in July, reaching 49.7 points, while non-manufacturing PMI undershot its target, declining to 53.7 points.
US EQUITIES
This week saw US equity indices dipping by between one and two percent, on the run-up to the Fed’s interest rates announcement. Although many assumed a rate cut to be priced in, the action seen in the equity markets seemed to suggest that investors still took the path of caution until the announcement was officially made. A general theme that’s starting to bleed into analyst chatter is one of a growing concern with regard to the US-China trade wars and who is actually being impacted the most.
General Motors (GM) reported their Q2 numbers, while interestingly citing that the trade war could now be negatively impacting the firm. They did however beat analyst exceptions, although having a relatively large drop-off in China-based revenues streams. Revenue came in at $36.1 billion for Q2 against an expected $35.98 billion. Earnings per share also surprised, coming in at $1.64 per share vs an expected $1.44. Overall, GM saw vehicle sales for the period rising to 153,000 against the same 2018 period of 138,000. It would be interesting to see what kind of impact this had on their Japanese, German and Chinese counterparts, when looking at vehicle pricing in the tough economic environment one finds themselves in.
Other companies who reported better-than-expected earnings came out of the likes of:
COMMODITIES
In general, not much has changed on the oil front, over the last week, as Brent Crude now trades in a tight band between $62.00 and $67.30 a barrel, while WTI continues to trade between its own range of $55.00 and $59.40 per barrel. For the moment, oil should continue to remain at these levels until tensions start clearing between US and the various countries they’re tussling with. Having said this, an unexpected announcement from US President, Donald Trump - late on Thursday evening, saw oil prices tumble, as he announced that a 10% tariff will be placed on the remaining $300 billion worth of Chinese imports on 1 September 2019. This could be the start to something interesting, when looking at global trade dynamics.
Brent Crude opened Friday’s trading day at $61.97 per barrel, while US West Texas Intermediate (WTI) opened at $55.02.
While both gold and platinum held steady throughout the week, palladium fell quite heavily on Thursday afternoon, with no real material reason backing the move, aside from the commodity having stayed at near all-time-highs for an extended period of time. The current uncertainty on the global political front may have played a silent part in the move seen.
On Friday morning, gold, platinum and palladium were trading at levels of around $1,445.85, $856.20 and $1,438.45 per fine ounce respectively.
SOUTH AFRICAN FUNDAMENTALS
Little attention has been paid to local events over the past week, with the release of the presidential advisory panel on land reform and agriculture, on Sunday, barely making its way onto the financial market headlines. The political landscape remains largely unchanged, while the Public Protector continues to suffer blows to her competency and credibility. This week, the release of a report by a local NPO, accusing Mkhwebane of receiving illicit funds from the infamous Gupta family, ultimately directly linking her to the state capture, was branded as ‘fake news’ by the Public Protector. South African citizens should potentially brace themselves for further dirty washing to be aired-out, before any understandings of the extent of the ‘state capture’, as well as the identity of any of the role players, truly come out.
The anticipation of the Fed interest rate cut has largely been responsible for the recent strength witnessed in the currency, driving it to trade at overvalued levels, for quite some time. This, however, came to a screeching halt on Wednesday evening, with the Fed making it clear that the cut, of 25 basis points, is not the start of a rate cutting cycle, and that they will take action as-and-when-needed, based on the economic data and activity of their country. The rand rapidly lost ground, as the news made its way to market, losing 1% overnight on Wednesday. The currency extended its losses on Thursday, making its way to the R14.50 mark. The current picture for the local unit is not a pretty one, with many risks now making its way to the forefront, as the shadow of the interest rate cut vanishes, leaving the fundamentals bare for all to see.
Some of the key risks weighing on the currency includes:
Given the stronger rand during this period, one would expect the surplus to decrease, as imports should theoretically increase, however two factors contributed to the increase in the trade surplus: subdued local consumer demand, leading to decreased imports of goods, and seasonal exports of agricultural goods. Total vehicle sales contracted by 3.7% year-on-year, during July, compared to the previous deceleration of 1.6%
SOUTH AFRICAN EQUITY
South African markets took on a very slow start to the week, with no more than R11 billion (average - R22 billion) trickling through the All Share index on Monday’s trading day. Relatively petty news came out of Old Mutual’s slight bickering with their ‘suspending’ CEO, Peter Moyo, and the legal battle that ensues. With a world of more materially important news, this headline is not worth wasting one’s time on - if anything, its more brand-damaging on Old Mutual and Moyo himself. Mondi reported more favorable results, when looking at their counterpart. Some of the numbers coming out of the paper-based producing firm were as follows:
Shoprite’s share price rallied by 9%, after the retailer reported that its core business, Supermarkets RSA, increased its sales by 4.9% for the 52 weeks ending 30 June 2019. In general, the move wouldn’t necessarily have been linked to guidance and results being in-line with expectations. The positive move seen in the share price is likely due to stronger sales growth for the period versus the headline earnings numbers which Shoprite actually gave negative guidance on.
Shoprite’s African business seems to be battling it’s way through the dark-and-dreary woods, especially in Angola, where hyper-inflation is veiling the country. Whether Shoprite decides to keep these kinds of countries within their portfolio, or not, could be a large factor, when looking at the firm’s forward-looking trajectory.
For the moment, both declining sales coupled with hyperinflation in Angola is, and will continue to be, a challenging situation for Shoprite to navigate. Currency instability in Angola or any other of Shoprite’s African business operations may force the company to examine its strategic geographic business locations on the continent in the longer run.
THE WEEK AHEAD
The rand is expected to remain under pressure, given the rally in the US dollar on the back of a less dovish Fed. With the Fed announcement out of the way, we will see local fundamentals, as well as economic data, become more relevant once again in the pricing of currencies. The picture, locally, remains a dismal one. Geopolitical factors will also make its way in to the spotlight, so investors should be sure to keep a close eye on President Trump’s Twitter account. With the new tariffs due to be imposed on $300bn worth of Chinese goods on 1 September 2019,the picture is once again looking dim for emerging markets.
Some of the local data, due for release next week, includes the Standard Bank PMI numbers for July as well as mining, gold and manufacturing production. China is up for a busy data week, with focus falling on imports and exports year-on-year, while the US is due to release numerous manufacturing data.
The rand broke through the R14.50 mark with relative ease, signaling a leg weaker with R14.80 as the next target . On Friday morning the rand would’ve set the investor back R14.60 per US dollar, R16.19 a euro and R17.70 a British pound.
GLOBAL DATA AND POLITICS
D-day for the much anticipated Federal Reserve (Fed) interest rate decision finally arrived, but global markets seem to have been caught with their pants down. While the interest rate cut of 25 basis points was already priced in, the subsequent testimony by the Fed Chair, Jerome Powell, certainly wasn’t. Moments into Powell’s address, it became clear that Fed is no longer as dovish as previously portrayed, and certainly not nearly as the dovish as the European Central Bank (ECB), who painted quite a dire picture only a week before. Recent data from the US, including gross domestic product (GDP) data, employment and wage numbers also indicated a resilient economy, leading many to wonder whether the Fed is not acting prematurely.
While a less-dovish stance by the Fed might not have been market-friendly, and President Donald Trump is certainly not thrilled by the renewed dollar strength, one can argue that it is in fact the correct approach by the Fed, given the above mentioned resilience. Some of the key data events from the US this week included pending home sales that exceeded market expectations, quite drastically, by 2.3 percentage points, while employment wages rose by 0.7% quarter-on-quarter for Q2/2019. Initial jobless claims, that always plays it’s part in volatility on a Thursday afternoon, was in-line with forecasts at 215,000.The release of Manufacturing production managers index (PMI) numbers ticked up to the 50.4 point mark, indicating an acceleration in manufacturing activity. Friday will see the release of the unemployment rate, trade balance and a wide array of pay-roll data including government and non-farm payrolls.
Consumer confidence in the European Union (EU) remained flat at -6.6 in July, while industrial sentiment worsened to -7.4. Wednesday was quite a busy data day for the union, with GDP numbers marginally decelerating to 1.1% year-on-year, while consumer price index (CPI) numbers also declined to 1.1%, in July, from the previous 1.3%. The unemployment rate remained flat at 7.5%. Manufacturing PMI, released on Thursday, evoked little reaction, remaining flat at 46.5%. Retail sales and producer price index (PPI) data is due for release later today.
The United Kingdom Sterling remains under pressure, as the murkiness of Brexit and the ongoing uncertainty continues to rattle the market. Manufacturing PMI slightly exceeded market expectations, remaining flat at 48 points while the Bank of England kept interest rates unchanged at 0.75%, on Thursday. On Friday investors should keep an eye on the construction PMI that is forecast to come in at 46 points.
China and the US remain to be at odds, while the slowdown has, in recent months, been reflected in Chinese economic indicators much more than US indicators. Chinese manufacturing PMI rose incrementally in July, reaching 49.7 points, while non-manufacturing PMI undershot its target, declining to 53.7 points.
US EQUITIES
This week saw US equity indices dipping by between one and two percent, on the run-up to the Fed’s interest rates announcement. Although many assumed a rate cut to be priced in, the action seen in the equity markets seemed to suggest that investors still took the path of caution until the announcement was officially made. A general theme that’s starting to bleed into analyst chatter is one of a growing concern with regard to the US-China trade wars and who is actually being impacted the most.
General Motors (GM) reported their Q2 numbers, while interestingly citing that the trade war could now be negatively impacting the firm. They did however beat analyst exceptions, although having a relatively large drop-off in China-based revenues streams. Revenue came in at $36.1 billion for Q2 against an expected $35.98 billion. Earnings per share also surprised, coming in at $1.64 per share vs an expected $1.44. Overall, GM saw vehicle sales for the period rising to 153,000 against the same 2018 period of 138,000. It would be interesting to see what kind of impact this had on their Japanese, German and Chinese counterparts, when looking at vehicle pricing in the tough economic environment one finds themselves in.
Other companies who reported better-than-expected earnings came out of the likes of:
- Verizon: adjusted quarterly profit of $1.23 per share vs an expected $1.20.
- Dunkin’ Brands: adjusted quarterly profit coming in at 86 cents per share vs an expected 82 cents.
- Yum Brands (owner of KFC): Adjusted quarterly profit of 93 cents per share vs an 87 expectation.
- Qualcomm: adjusted quarterly profit of 80 cents per share vs 75 cents.
- S&P 500: down around 1.50%
- NASDAQ: down around 1.86%
- Dow Jones: down around 1.21%
- Facebook: up around 2.55%
- Amazon: down around 3.93%
- Apple: up around 0.99%
- Netflix: down around 3.81%
- Alphabet: up around 7.26%
COMMODITIES
In general, not much has changed on the oil front, over the last week, as Brent Crude now trades in a tight band between $62.00 and $67.30 a barrel, while WTI continues to trade between its own range of $55.00 and $59.40 per barrel. For the moment, oil should continue to remain at these levels until tensions start clearing between US and the various countries they’re tussling with. Having said this, an unexpected announcement from US President, Donald Trump - late on Thursday evening, saw oil prices tumble, as he announced that a 10% tariff will be placed on the remaining $300 billion worth of Chinese imports on 1 September 2019. This could be the start to something interesting, when looking at global trade dynamics.
Brent Crude opened Friday’s trading day at $61.97 per barrel, while US West Texas Intermediate (WTI) opened at $55.02.
While both gold and platinum held steady throughout the week, palladium fell quite heavily on Thursday afternoon, with no real material reason backing the move, aside from the commodity having stayed at near all-time-highs for an extended period of time. The current uncertainty on the global political front may have played a silent part in the move seen.
On Friday morning, gold, platinum and palladium were trading at levels of around $1,445.85, $856.20 and $1,438.45 per fine ounce respectively.
SOUTH AFRICAN FUNDAMENTALS
Little attention has been paid to local events over the past week, with the release of the presidential advisory panel on land reform and agriculture, on Sunday, barely making its way onto the financial market headlines. The political landscape remains largely unchanged, while the Public Protector continues to suffer blows to her competency and credibility. This week, the release of a report by a local NPO, accusing Mkhwebane of receiving illicit funds from the infamous Gupta family, ultimately directly linking her to the state capture, was branded as ‘fake news’ by the Public Protector. South African citizens should potentially brace themselves for further dirty washing to be aired-out, before any understandings of the extent of the ‘state capture’, as well as the identity of any of the role players, truly come out.
The anticipation of the Fed interest rate cut has largely been responsible for the recent strength witnessed in the currency, driving it to trade at overvalued levels, for quite some time. This, however, came to a screeching halt on Wednesday evening, with the Fed making it clear that the cut, of 25 basis points, is not the start of a rate cutting cycle, and that they will take action as-and-when-needed, based on the economic data and activity of their country. The rand rapidly lost ground, as the news made its way to market, losing 1% overnight on Wednesday. The currency extended its losses on Thursday, making its way to the R14.50 mark. The current picture for the local unit is not a pretty one, with many risks now making its way to the forefront, as the shadow of the interest rate cut vanishes, leaving the fundamentals bare for all to see.
Some of the key risks weighing on the currency includes:
- potential downgrade of credit ratings, following the negative remarks by credit rating agency, Moody’s, and the change in outlook by Fitch from stable to negative
- unemployment figures are at their highest levels in 11 years, at a depressing 29%
- the South African Revenue Services will likely not collect their budgeted taxes this year, adding additional strain to the fiscus
- Eskom remains a cash drain on the government, with no end in sight for its financial turmoil
- economic growth remains subdued, estimated at 0.6% for 2019; and
- ongoing global geopolitical tension between the US, China and other key trade partners.
Given the stronger rand during this period, one would expect the surplus to decrease, as imports should theoretically increase, however two factors contributed to the increase in the trade surplus: subdued local consumer demand, leading to decreased imports of goods, and seasonal exports of agricultural goods. Total vehicle sales contracted by 3.7% year-on-year, during July, compared to the previous deceleration of 1.6%
SOUTH AFRICAN EQUITY
South African markets took on a very slow start to the week, with no more than R11 billion (average - R22 billion) trickling through the All Share index on Monday’s trading day. Relatively petty news came out of Old Mutual’s slight bickering with their ‘suspending’ CEO, Peter Moyo, and the legal battle that ensues. With a world of more materially important news, this headline is not worth wasting one’s time on - if anything, its more brand-damaging on Old Mutual and Moyo himself. Mondi reported more favorable results, when looking at their counterpart. Some of the numbers coming out of the paper-based producing firm were as follows:
- 8% increase earnings per share of EUR 0.962 cents per share.
- Profit before tax came in at EUR 632 million (up from the previous period by 29%)
- Earnings before interest, tax, depreciation and amortisation (six months) came in at EUR 894 million (beating the last period by five percent)
- Ordinary interim dividend of EUR 0.27 cents per share.
Shoprite’s share price rallied by 9%, after the retailer reported that its core business, Supermarkets RSA, increased its sales by 4.9% for the 52 weeks ending 30 June 2019. In general, the move wouldn’t necessarily have been linked to guidance and results being in-line with expectations. The positive move seen in the share price is likely due to stronger sales growth for the period versus the headline earnings numbers which Shoprite actually gave negative guidance on.
Shoprite’s African business seems to be battling it’s way through the dark-and-dreary woods, especially in Angola, where hyper-inflation is veiling the country. Whether Shoprite decides to keep these kinds of countries within their portfolio, or not, could be a large factor, when looking at the firm’s forward-looking trajectory.
For the moment, both declining sales coupled with hyperinflation in Angola is, and will continue to be, a challenging situation for Shoprite to navigate. Currency instability in Angola or any other of Shoprite’s African business operations may force the company to examine its strategic geographic business locations on the continent in the longer run.
THE WEEK AHEAD
The rand is expected to remain under pressure, given the rally in the US dollar on the back of a less dovish Fed. With the Fed announcement out of the way, we will see local fundamentals, as well as economic data, become more relevant once again in the pricing of currencies. The picture, locally, remains a dismal one. Geopolitical factors will also make its way in to the spotlight, so investors should be sure to keep a close eye on President Trump’s Twitter account. With the new tariffs due to be imposed on $300bn worth of Chinese goods on 1 September 2019,the picture is once again looking dim for emerging markets.
Some of the local data, due for release next week, includes the Standard Bank PMI numbers for July as well as mining, gold and manufacturing production. China is up for a busy data week, with focus falling on imports and exports year-on-year, while the US is due to release numerous manufacturing data.
The rand broke through the R14.50 mark with relative ease, signaling a leg weaker with R14.80 as the next target . On Friday morning the rand would’ve set the investor back R14.60 per US dollar, R16.19 a euro and R17.70 a British pound.
Our highlight for the week:
Woolworths released an updated trading statement yesterday. Below a short extract.
A strategic review of the David Jones store portfolio has also identified stores with onerous leases resulting in an additional provision of A$22.4 million at period end. The impairment reflects the economic headwinds and the accelerating structural changes affecting the Australian retail sector as well as the performance of the business, which has fallen short of expectations.
The WHL Board believes that the valuation of David Jones is realistic and reflective of its prospects. EPS, HEPS and adjusted diluted HEPS for the pro forma 52 weeks ended 23 June 2019 are expected to be within the ranges reflected in the table below:
June 2018 June 2019 (expected increase/decrease) in % June 2019
EPS (cents) -369.5 60.0% to 70.0% -110.8 to -147.8
HEPS (cents) 346.3 -7.5% to -2.5% 320.3 to 337.6
Adjusted diluted HEPS (cents) 364.1 -5.0% to 0% 345.9 to 364.1
Read the full article here
A strategic review of the David Jones store portfolio has also identified stores with onerous leases resulting in an additional provision of A$22.4 million at period end. The impairment reflects the economic headwinds and the accelerating structural changes affecting the Australian retail sector as well as the performance of the business, which has fallen short of expectations.
The WHL Board believes that the valuation of David Jones is realistic and reflective of its prospects. EPS, HEPS and adjusted diluted HEPS for the pro forma 52 weeks ended 23 June 2019 are expected to be within the ranges reflected in the table below:
June 2018 June 2019 (expected increase/decrease) in % June 2019
EPS (cents) -369.5 60.0% to 70.0% -110.8 to -147.8
HEPS (cents) 346.3 -7.5% to -2.5% 320.3 to 337.6
Adjusted diluted HEPS (cents) 364.1 -5.0% to 0% 345.9 to 364.1
Read the full article here