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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 31 May 2019
A week filled with relative excitement was witnessed to a great degree, from the local South African cabinet announcement, through to the United States’ Donald Trump attempting to turn the tables on his European Union (EU) trade partners and even a MSCI index rebalancing on local shores. Looking back, a world of difference wasn’t seen, indicating both a global and local environment which continue to walk ever so warily along a precipitous weir toward a potentially impaired future.
GLOBAL DATA AND POLITICS
If there is one thing the US has come to master, it is conflict. The US has quite the reputation when it comes to global altercations and President Donald Trump certainly does not walk away from a fight. While the dynamic mostly reminds us of a bully on a playground, one cannot help but wonder if the bully has met his match, facing off against China. The second largest economy in the world seems to have no intention to budge, and continues to stand it's ground against the mighty US, while the US locks horns with various other friendly and not-so-friendly “allies" including Iran and the EU. One might argue that these protectionist policies are the right thing for the US, but surely in a globalized environment, filled with trade treaties and alliances, the time for closing our borders to trade, migration and interconnected economies between countries has surely come and gone.
To add to the political turbulence in the US, President Trump although not criminally prosecuted for collusion with Russia during the elections, could now face disciplinary action and even impeachment in the extreme scenario by congress following the Meuller report – this, expressively highlights that Trump has not been exonerated from the allegations against him. In the midst of the controversy, the US continues to present solid economic data, especially when compared to its peers, the question on everyone's mind however how long this will be sustainable.
Initial jobless claims rose marginally to 215,000 from the previous weeks 212,000, however the employment rate in the US remains exceptionally healthy. Gross domestic product (GDP) from the economic powerhouse continues to grow in line with expectations, expanding by 3.10% in quarter one (Q1) of 2019. The increase of 1.30% in consumer spending, was however not reflected in corporate earnings for Q1, as earnings slumped by 3.50%- a move many attributes to trade spats between the US and its allies.
The protectionist uprising is unfortunately not only confined to the US, and one would think that the rest of the world would have learned from their British counterparts- just about three years later, and Britain is no closer to reaching a mutually acceptable deal with the EU, that could see the controversial "hard exit" realise in June. The fall of a prime minister, along with a relatively large protest by citizens, Brexit is just as much of a reality as it was in 2016 when the votes to exit the EU was tallied. While the UK had no data of crucial importance to report on this week, the uncertainty within the UK continues to pose a threat not only to the stability of the UK, but also to the overall market sentiment.
Parliamentary elections in the EU also saw an increase in the number of seats held by socialist/populist parties, the pro-EU faction however retains majority seats, but one can expect many of the traditional and conventional thinking and policies to be challenged by the populist members. Consumer confidence and services sentiment both improved during May, however both numbers remain dismal. The European Central Bank (ECB) in the financial stability review, once again highlighted the risk of a global economic slowdown as one of the key risk the EU continues to face in the medium term.
Shifting our focus to emerging markets, the risk-off environment continues to cast a dark shadow over these economies, and their typically riskier assets. The largest emerging market, China, saw PMI numbers disappointing with drop to 49.4 in May, indicating a slowdown in manufacturing - this adding significant pressure to emerging market appetite, however tension between the US and China is still expected to negatively impact the Chinese economy in the near future.
Retail sales in Argentina is steadily on the rise, accelerating by 26.90% year-on-year compared to the previous 22.60%. Brazil managed to muster a meager increase in GDP by 0.50% year-on-year in Q1, while the Turkish economy is due to report a contraction in GDP tomorrow with analysts leaning to a decline of 2.50% for the same period. Friday will also see the release of Brazilian unemployment rates and debt-to-GDP ratio's, while Turkey will release manufacturing and non-manufacturing PMI and trade balance data.
US EQUITIES
US markets saw a relatively tough week, with the S&P 500 and NASDAQ both dipping more than 3.00% over the last. The “Sell in May and go away” sentiment still lingers within the markets, leading to more of a cash outflow situation than a risk-on appetite. As it stands, should the S&P 500 close lower on Friday’s trading day, the American index will log its first negative month in 2019. At the moment, there’s nothing more to the story than a small trade war on the go, mixed with interesting technical levels when looking at trading charts. In general, the dollar index has strengthened over the month of May, however Trump’s continual tariff war points more and more toward self-destruction than anything else.
During Thursday’s trading day, FAANGs seemed to hold relatively flat, compared to what we’ve recently seen in these stocks.
FAANGs performance, for Thursday’s trading day:
In South African rand-terms, add 3.19% against each of these return-figures to see what the South African investor could be up in 2019, with the currency-effect added.
COMMODITIES
Following the slowing global trend, oil prices were seen dipping over the last five trading days primarily due to tensions building on the trade war front between the US and China. With two respective key levels now starting to solidify themselves in the back of trader’s minds, over the course of the last month or two, Brent Crude oil seems to have been governed by the $70.00 a barrel resistance level, where West Texas Intermediate (WTI) has hit its speed-bump which hangs around the $60.00 per barrel area.
Fears of a global slowdown, largely lead by the prospects of an all-out trade war, has, to a degree, impacted the price of oil to the downside as slowing growth points toward less fuel needed to keep a stagnating economy ticking. With OPEC’s downward management of oil output now being offset by a weaker demand for oil, it will be interesting to see where the road could be headed for this black gold. Brent Crude opened Friday’s trading day at $65.92 per barrel, while WTI opened at $55.97.
Much like oil, precious metals have been stuck between relatively tight trading ranges within the last five trading days. Not much interest has been placed on the likes of gold over the last week, once again pointing toward general uncertainty within the greater market. Platinum was also seen taking a step back, while palladium seemed to defy odds by moving around 2.74% stronger this week. On Friday morning, gold, platinum and palladium were trading at levels of around $1,292.00, $792.70 and $1,366.81 per fine ounce respectively.
SOUTH AFRICAN POLITICS
The rand landed in treacherous terrain this week, as the global backdrop continues to place excessive pressure on emerging markets. While liquidity of the South African market is often highlighted as a positive factor, the liquidity also causes the rand and rand denominated assets to be sold off as a proxy for other more illiquid emerging market assets. Local fundamental elements, although limited in its contribution to the performance of the rand, as always played its part once again this week, as markets anticipated the announcement of President Ramaphosa's Cabinet.
On Wednesday evening it was all eyes on the President as he announced the new administration for for the Republic. After promises of a new dawn, market expectations were highly- likely unfairly so. With the high expectations from President Ramaphosa, the effect of the announcement was somewhat underwhelming. While markets reacted positively to the newly elected cabinet, the anticipated correction in the local currency was undermined by 2 key elements:
All is however not doom and gloom, and while the cabinet may still be bloated, and the inclusion of controversial figures causes concerns for the leadership of the President, the retention of Finance minister Tito Mboweni, and public enterprises minister Pravin Gordhan played a big part in appeasing market participants, and certainly adds some stability and continuity to cabinet. It is now up to the president and his members of cabinet to make good on the pre-election promises and deliver on crucial aspects such as employment, economic growth and the turnaround of Eskom to ensure sustainable electricity supply.
With little activity on the local data calendar, global and local politics dominated the scene. Local PPI accelerated to 6.5% year on year during April, while the manufacturing PMI and trade balance data is due for release on Friday.The local currency suffered severe blows this week, reaching a 7 month low of R14.86 against the Greenback. With the unstable footing of the rand in conjunction with other emerging markets as a result of the ongoing US/China, US/Iran and Brexit fallout, the delay in the cabinet announcement on Tuesday- and the uncertainty and speculation that goes with it- created the perfect storm. The rand lost as much as 2.00% on Tuesday, after remaining fairly stable during the previous few trading sessions.
SOUTH AFRICAN EQUITY
Local markets sold into the cabinet reshuffle this week, pointing toward a material amount of investors not being too confident in the thinking of Ramaphosa - most interestingly, David Mabuza being appointed as an MP.
Sibanye Gold saw their shareholders voting overwhelmingly in favour of the buyout of Lonmin, indicating that the risk appetite is big enough to venture into the likes of palladium and platinum, where they previously hadn’t. Shortly after this announcement the Sibanye chairman announced his retirement. Neal Froneman will now take center stage and ensure the success of the takeover.
Here’s some of the bigger movers on the JSE for the 2019 year so far, as at Friday morning:
THE WEEK AHEAD
We will continue to focus on the key geopolitical elements that are currently dictating the global backdrop, with the rand expected to remain under pressure as the trade war wages on. Should we see positive feedback from the US and China, one can expect the rand to make some headway. GDP figures due for release next week are likely to cause some short term volatility, however the greater performance of the rand will continue to be determined by global factors, with poor economic data merely fueling the already fairly large fire.
On Friday morning the rand would’ve set investors back R14.78 per Greenback, R16.45 a euro and R18.63 a British pound.
GLOBAL DATA AND POLITICS
If there is one thing the US has come to master, it is conflict. The US has quite the reputation when it comes to global altercations and President Donald Trump certainly does not walk away from a fight. While the dynamic mostly reminds us of a bully on a playground, one cannot help but wonder if the bully has met his match, facing off against China. The second largest economy in the world seems to have no intention to budge, and continues to stand it's ground against the mighty US, while the US locks horns with various other friendly and not-so-friendly “allies" including Iran and the EU. One might argue that these protectionist policies are the right thing for the US, but surely in a globalized environment, filled with trade treaties and alliances, the time for closing our borders to trade, migration and interconnected economies between countries has surely come and gone.
To add to the political turbulence in the US, President Trump although not criminally prosecuted for collusion with Russia during the elections, could now face disciplinary action and even impeachment in the extreme scenario by congress following the Meuller report – this, expressively highlights that Trump has not been exonerated from the allegations against him. In the midst of the controversy, the US continues to present solid economic data, especially when compared to its peers, the question on everyone's mind however how long this will be sustainable.
Initial jobless claims rose marginally to 215,000 from the previous weeks 212,000, however the employment rate in the US remains exceptionally healthy. Gross domestic product (GDP) from the economic powerhouse continues to grow in line with expectations, expanding by 3.10% in quarter one (Q1) of 2019. The increase of 1.30% in consumer spending, was however not reflected in corporate earnings for Q1, as earnings slumped by 3.50%- a move many attributes to trade spats between the US and its allies.
The protectionist uprising is unfortunately not only confined to the US, and one would think that the rest of the world would have learned from their British counterparts- just about three years later, and Britain is no closer to reaching a mutually acceptable deal with the EU, that could see the controversial "hard exit" realise in June. The fall of a prime minister, along with a relatively large protest by citizens, Brexit is just as much of a reality as it was in 2016 when the votes to exit the EU was tallied. While the UK had no data of crucial importance to report on this week, the uncertainty within the UK continues to pose a threat not only to the stability of the UK, but also to the overall market sentiment.
Parliamentary elections in the EU also saw an increase in the number of seats held by socialist/populist parties, the pro-EU faction however retains majority seats, but one can expect many of the traditional and conventional thinking and policies to be challenged by the populist members. Consumer confidence and services sentiment both improved during May, however both numbers remain dismal. The European Central Bank (ECB) in the financial stability review, once again highlighted the risk of a global economic slowdown as one of the key risk the EU continues to face in the medium term.
Shifting our focus to emerging markets, the risk-off environment continues to cast a dark shadow over these economies, and their typically riskier assets. The largest emerging market, China, saw PMI numbers disappointing with drop to 49.4 in May, indicating a slowdown in manufacturing - this adding significant pressure to emerging market appetite, however tension between the US and China is still expected to negatively impact the Chinese economy in the near future.
Retail sales in Argentina is steadily on the rise, accelerating by 26.90% year-on-year compared to the previous 22.60%. Brazil managed to muster a meager increase in GDP by 0.50% year-on-year in Q1, while the Turkish economy is due to report a contraction in GDP tomorrow with analysts leaning to a decline of 2.50% for the same period. Friday will also see the release of Brazilian unemployment rates and debt-to-GDP ratio's, while Turkey will release manufacturing and non-manufacturing PMI and trade balance data.
US EQUITIES
US markets saw a relatively tough week, with the S&P 500 and NASDAQ both dipping more than 3.00% over the last. The “Sell in May and go away” sentiment still lingers within the markets, leading to more of a cash outflow situation than a risk-on appetite. As it stands, should the S&P 500 close lower on Friday’s trading day, the American index will log its first negative month in 2019. At the moment, there’s nothing more to the story than a small trade war on the go, mixed with interesting technical levels when looking at trading charts. In general, the dollar index has strengthened over the month of May, however Trump’s continual tariff war points more and more toward self-destruction than anything else.
During Thursday’s trading day, FAANGs seemed to hold relatively flat, compared to what we’ve recently seen in these stocks.
FAANGs performance, for Thursday’s trading day:
- Facebook: up around 0.45%
- Amazon: down around -0.16%
- Apple: up around 0.52%
- Netflix: up around 0.76%
- Alphabet: up around 0.13%
In South African rand-terms, add 3.19% against each of these return-figures to see what the South African investor could be up in 2019, with the currency-effect added.
COMMODITIES
Following the slowing global trend, oil prices were seen dipping over the last five trading days primarily due to tensions building on the trade war front between the US and China. With two respective key levels now starting to solidify themselves in the back of trader’s minds, over the course of the last month or two, Brent Crude oil seems to have been governed by the $70.00 a barrel resistance level, where West Texas Intermediate (WTI) has hit its speed-bump which hangs around the $60.00 per barrel area.
Fears of a global slowdown, largely lead by the prospects of an all-out trade war, has, to a degree, impacted the price of oil to the downside as slowing growth points toward less fuel needed to keep a stagnating economy ticking. With OPEC’s downward management of oil output now being offset by a weaker demand for oil, it will be interesting to see where the road could be headed for this black gold. Brent Crude opened Friday’s trading day at $65.92 per barrel, while WTI opened at $55.97.
Much like oil, precious metals have been stuck between relatively tight trading ranges within the last five trading days. Not much interest has been placed on the likes of gold over the last week, once again pointing toward general uncertainty within the greater market. Platinum was also seen taking a step back, while palladium seemed to defy odds by moving around 2.74% stronger this week. On Friday morning, gold, platinum and palladium were trading at levels of around $1,292.00, $792.70 and $1,366.81 per fine ounce respectively.
SOUTH AFRICAN POLITICS
The rand landed in treacherous terrain this week, as the global backdrop continues to place excessive pressure on emerging markets. While liquidity of the South African market is often highlighted as a positive factor, the liquidity also causes the rand and rand denominated assets to be sold off as a proxy for other more illiquid emerging market assets. Local fundamental elements, although limited in its contribution to the performance of the rand, as always played its part once again this week, as markets anticipated the announcement of President Ramaphosa's Cabinet.
On Wednesday evening it was all eyes on the President as he announced the new administration for for the Republic. After promises of a new dawn, market expectations were highly- likely unfairly so. With the high expectations from President Ramaphosa, the effect of the announcement was somewhat underwhelming. While markets reacted positively to the newly elected cabinet, the anticipated correction in the local currency was undermined by 2 key elements:
- The reduction of cabinet from 36 ministers to 28: the reduction in cabinet, although a step in the right direction, was not nearly bold enough to appease critics of the bloated South African cabinet. the string of deputy ministers also dampened the joy of the reduction, as it is clear that a compromise had to be made on the part of President Ramaphosa.
- David Mabuza once again being one man away from being the most important politician in the republic. The appointment of David Mabuza further speaks to the sacrifices and compromises made by the President in an effort to appease the various factions within the ANC, indicating the President Ramaphosa might not be on as strong a footing as one might have hoped.
All is however not doom and gloom, and while the cabinet may still be bloated, and the inclusion of controversial figures causes concerns for the leadership of the President, the retention of Finance minister Tito Mboweni, and public enterprises minister Pravin Gordhan played a big part in appeasing market participants, and certainly adds some stability and continuity to cabinet. It is now up to the president and his members of cabinet to make good on the pre-election promises and deliver on crucial aspects such as employment, economic growth and the turnaround of Eskom to ensure sustainable electricity supply.
With little activity on the local data calendar, global and local politics dominated the scene. Local PPI accelerated to 6.5% year on year during April, while the manufacturing PMI and trade balance data is due for release on Friday.The local currency suffered severe blows this week, reaching a 7 month low of R14.86 against the Greenback. With the unstable footing of the rand in conjunction with other emerging markets as a result of the ongoing US/China, US/Iran and Brexit fallout, the delay in the cabinet announcement on Tuesday- and the uncertainty and speculation that goes with it- created the perfect storm. The rand lost as much as 2.00% on Tuesday, after remaining fairly stable during the previous few trading sessions.
SOUTH AFRICAN EQUITY
Local markets sold into the cabinet reshuffle this week, pointing toward a material amount of investors not being too confident in the thinking of Ramaphosa - most interestingly, David Mabuza being appointed as an MP.
Sibanye Gold saw their shareholders voting overwhelmingly in favour of the buyout of Lonmin, indicating that the risk appetite is big enough to venture into the likes of palladium and platinum, where they previously hadn’t. Shortly after this announcement the Sibanye chairman announced his retirement. Neal Froneman will now take center stage and ensure the success of the takeover.
Here’s some of the bigger movers on the JSE for the 2019 year so far, as at Friday morning:
- Impala Platinum: up 54.85%
- Kumba Iron Ore: up 60.70% (up 7.00% in the last week)
- Lonmin: up 51.13% (up almost 20.00% in the last week due to Sibanye takeover)
- Tongaat Hulett: down 67.56%
- Rebosis Property Fund: down 69.52%
- Delta Property Fund: down 56.00% (more than 10.00% in the last week)
THE WEEK AHEAD
We will continue to focus on the key geopolitical elements that are currently dictating the global backdrop, with the rand expected to remain under pressure as the trade war wages on. Should we see positive feedback from the US and China, one can expect the rand to make some headway. GDP figures due for release next week are likely to cause some short term volatility, however the greater performance of the rand will continue to be determined by global factors, with poor economic data merely fueling the already fairly large fire.
On Friday morning the rand would’ve set investors back R14.78 per Greenback, R16.45 a euro and R18.63 a British pound.
Our main article for the week covered Famous Brands's latest financial results and their continued struggle with Gourmet Burger Kitchen in the United Kingdom. On the bright side the group has started paying dividends again. See an extract from our latest review of Famous Brands' financial results below.
GROUP PERFORMANCE
Our key strategic focus areas during the review period were to:
In the Leading (mainstream) brands portfolio, we made good progress in aligning our supply chain and cost drivers to provide better support for the brands, to ensure they are positioned to deliver like-for-like growth ahead of food inflation. In the Signature (niche) brands portfolio, following our sustained investment over recent years, our interventions were directed at significantly improving our own operating margins in this division.
Across the Leading and Signature brands, we continued to review and optimise our footprint in terms of trading relevance, rental viability, changes in footfall, and competitor activity. Our goal to deliver sustainable returns to our shareholders is underpinned by ensuring that GBK Restaurants Limited ("GBK") outperforms the UK casual dining market and delivers ahead of our targeted performance. On 11 December 2018 we notified shareholders that GBK UK had completed a Company Voluntary Arrangement (CVA) aimed at improving the financial viability of the business. Management is optimistic that remedial actions underway to ensure the long term sustainability of the business are gaining momentum, reflected by the stronger trading results reported for the second half of the year compared to the first half, and the positive like-for-like sales recorded in the period since year-end.
Read the full article here.
GROUP PERFORMANCE
Our key strategic focus areas during the review period were to:
- enhance the profitability of our franchise partners and the viability of the franchise model;
- ensure the improvement of returns for stakeholders through refining and implementing our long-term strategy in the UK; and
- optimise allocation of capital in the business.
In the Leading (mainstream) brands portfolio, we made good progress in aligning our supply chain and cost drivers to provide better support for the brands, to ensure they are positioned to deliver like-for-like growth ahead of food inflation. In the Signature (niche) brands portfolio, following our sustained investment over recent years, our interventions were directed at significantly improving our own operating margins in this division.
Across the Leading and Signature brands, we continued to review and optimise our footprint in terms of trading relevance, rental viability, changes in footfall, and competitor activity. Our goal to deliver sustainable returns to our shareholders is underpinned by ensuring that GBK Restaurants Limited ("GBK") outperforms the UK casual dining market and delivers ahead of our targeted performance. On 11 December 2018 we notified shareholders that GBK UK had completed a Company Voluntary Arrangement (CVA) aimed at improving the financial viability of the business. Management is optimistic that remedial actions underway to ensure the long term sustainability of the business are gaining momentum, reflected by the stronger trading results reported for the second half of the year compared to the first half, and the positive like-for-like sales recorded in the period since year-end.
Read the full article here.