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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 5 July 2019
The winds of change continue to blow within the global markets, as economies, no matter how big, grapple with a continuous deceleration of economic activity, leading to a dovish stance by Central Banks across the board.
While the world is gearing up for, potentially, the first bout of interest rate cuts seen in the United States (US) in over a decade, the United Kingdom (U.K.) is no closer to completing their change-initiative by exiting the European Union (EU). Two prime ministers later, a rather rebellious and potentially controversial candidate for the position, and a potential recession looming, Brexit still remains little more than a poorly thought out idea.
These uncertain times are expected to continue throughout 2019 and into 2020, as politicians attempt to leverage geopolitical dynamics in order to advance their own agendas. And while China and the US might have reached a theoretical trade war cease-fire, the two nations are still no closer to a water-tight agreement, while the EU has quietly become the latest target in Donald Trump’s scope.
GLOBAL DATA AND POLITICS
The expected interest rate cut by the Federal Reserve (the Fed) continues to take center stage, adding pressure on the US dollar, and even more so on US treasury yields. Following the G20 summit, the shine of the US-China truce quickly wore thin, as President Trump reiterated his opinion that China and the EU manipulate their currencies to the disadvantage of the US, driving the belief that President Trump will exert as much power as possible in order to place the dollar under pressure as a rebuttal against the EU and China monetary policy stances.
While data has been limited this week, the focus will fall on the key sets of employment and earnings data due for release on Friday afternoon, which is likely to set the tone for the Fed. Should the employment figures exceed market expectations, one can expect a slightly less dovish stance by the Fed. Manufacturing purchasing manager’s index (PMI) numbers improved slightly during June to 50.6, while total vehicle sales remained flat at 17.3 million. Initial jobless claims this week slightly overshot consensus coming in at 221,000 (consensus: 223,000).
The EU made history this week, as Christine Lagarde received the nomination to take over from Mario Draghi as the new President of the European Central Bank (ECB). Lagarde, who is also the managing director of the International Monetary Fund (IMF), is mostly known for her dovish outlook, which could lead markets to assume that the ECB will continue on its already dovish path, with quantitative measures remaining on the cards to assist the struggling EU economy. The nomination of Lagarde, and ultimately what she represents, quickly caused the euro to tumble to two week lows against the US dollar. Manufacturing PMI as well as private sector loans decreased to 47.6 in June and 3.30% year-on-year respectively.
The U.K. is also battling their own demons, as the continuous risk of a recession lurks over the kingdom. The potential appointment of Boris Johnson has also not done the U.K. any favors, with the British pound losing traction against the US dollar and other major currencies, as a ‘no-deal Brexit’ seems to be becoming more of a reality. Manufacturing PMI dropped to 48 points in June, while mortgage lending and lending to individuals both contracted to 3.1 billion and 3.9 billion, respectively. The Bank of England (BOE) also joined the band of Central Bankers hitching a ride on the monetary stimulus train, as the economy continues to wane under the strain of Brexit and the global slowdown.
US EQUITIES
US equities continue to keep global investors on edge, as Wednesday’s trading day saw all three major indices reach record high levels, on the run up to the 4th of July (Independence Day) public holiday. The rally was also heavily influenced by the assumption that the Federal Reserve will follow through with a dovish stance at the end of July, when the Federal Open Market Committee deliver their views on the health of the US economy. This week alone saw the following moves out of the three major indices:
On Wednesday afternoon, Facebook, Instagram and Whatsapp mobile applications all experienced their largest network outage ever, when it came to the uploading and downloading of both videos and images. The outage lasted around 12 hours, with a large majority of users across Europe and the US being impacted by the outage. Facebook did respond briefly by saying that it was a simple glitch on their cloud-based servers during a standard maintenance procedure, however it’s interesting to note that most of the gateways to their servers are controlled by Chinese-based companies. Facebook is currently up around 54.68% year-to-date and will open Friday’s trading day at $197.20 per share.
FAANGs performance, for the last four trading days:
In South African rand-terms, subtract 2.08% against each of these return-figures to see what the South African investor could be up in 2019, with the currency-effect added.
COMMODITIES
Down slightly from a week ago, Brent Crude oil and WTI were seen clawing back around 2.96% on Wednesday afternoon, as US equity markets rallied into their public holiday. The future path of the price of oil will remain heavily influenced by the tug-of-war between a slowing global economy, where demand simply isn’t enough, and keeping a tight handle on managing inventory and stockpiles lower. Just this week, five oil rigs were closed down on US shores, due to the immense price-pressure that WTI has experienced over the last four years. As it stands, 788 oil rigs remain operational.
Brent Crude opened Friday’s trading day at $63.22 per barrel, while US West Texas Intermediate (WTI) opened at $56.70. After experiencing a healthy correction over the last two weeks, gold spot prices returned to robust levels of around $1,437.00. With the weakening US dollar, general political and economic uncertainty and falling yields, gold has the potential to take its share price to the next level in the coming months. Most analysts have a target price of around $1,450.00 on the cards, given that the murkiness within the greater economy may lead investors toward a safe-haven harbour. The platinum price has begun to show signs of giving up its fight of moving higher, when looking at momentum recently spurred on by buyers. Palladium, although remaining extremely sturdy over the last week, saw little-to-no action over the last four trading days.
On Friday morning, gold, platinum and palladium were trading at levels of around $1,418.40, $835.65 and $1,564.72 per fine ounce respectively.
SOUTH AFRICAN FUNDAMENTALS
The local scene has remained fairly quiet, with the South African market taking cues from the great global market environment, with the focus remaining on the potential rate cut by the Federal Reserve. A rate cut by the Federal Reserve has assisted the rand, but in more ways than one:
Data from the local economy this week improved slightly, with total vehicle sales increasing to 45,940 in June versus the previous month’s 40,430. The Standard Bank PMI marginally accelerated to 49.7 points (over 50 points indicates an expansion in business activity; under 50 generally indicates declining business activity), while business confidence ticked up to 93.3 points in June from the previous 93.0 points.
The Monetary Policy Committee is set to meet again on 16 July 2019, with an anticipated interest rate cut to be announced on 18 July. With inflation remaining well within the target range, there has been more and more calls for the South African Reserve Bank (SARB) to decrease interest rates, with the latest coming from Deputy Finance Minister David Masondo, stating that the interest rate should have been decreased months ago. While markets expects the SARB to cut rates by 25 basis points, the real question on everyone’s mind is what the effect will be on economic growth, should there be any effect at all.
SOUTH AFRICAN EQUITY
Down around 2.96% since last Friday, Truworths share price was seen falling over nine percent over the course of Tuesday and Wednesday, based on the back of news that the retail firm would be looking to restructure their debt pile, which now sits at around R800 million. Over the last 18 months, foot traffic through most retail stores has declined by more than two percent, mainly due to a slowing global economy. Truworths’ U.K. shoe wear company called Office, generated around 27.00% of the company’s revenue and ten percent of their overall profit, but remains the main contributor to the company’s growing debt pile in an extremely competitive footwear industry. Truworths opened Friday’s trading day at R68.49
Anheuser-Busch InBev have made a move to list on the Hong Kong Stock Exchange in order to sell off parts of its Asia Pacific beer unit. Trading of the shares will officially commence on 19 July 2019. AB Inbev opened Friday’s trading day at R1,315.00
Quilter is said to be mulling over the sale of their Old Mutual Wealth Life Assurance business in the U.K. The potential sale of the Old Mutual Wealth Life Assurance is not necessarily related to the net outflows witnessed in 2018, if connected at all. This decision rather forms part of the company’s long-term strategy to strip non-core assets from out its business model, as Old Mutual Wealth Life Assurance has never been part of Quilter’s main strategic focus. Should the sale occur, a special dividend could possibly be distributed to shareholders, while any remaining profits from the sale would be invested into bettering the company’s vertical integration as a whole. This would potentially mean a positive outcome for all parties. Quilter opened Friday’s trading day at R25.90
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 will once again focus on the Federal Reserve interest rate decision, with the employment data due today likely to drive market expectations. It will be important to keep a close eye on this data, the trade dynamic between the US/China and the US/European Union, and of course the statements made by the Federal Reserve. Any hint of a less dovish Fed will see the rand giving up some of its recent gains. The rand is expected to test the R14.00 mark, with a sustainable break below the level opening the door to another leg stronger to target R13.80, while lows of R14.20 can be expected as various economic and political events unfold. On Friday morning the rand would’ve set the investor back R14.05 per US dollar, R15.85 a euro and R17.68 a British pound.
While the world is gearing up for, potentially, the first bout of interest rate cuts seen in the United States (US) in over a decade, the United Kingdom (U.K.) is no closer to completing their change-initiative by exiting the European Union (EU). Two prime ministers later, a rather rebellious and potentially controversial candidate for the position, and a potential recession looming, Brexit still remains little more than a poorly thought out idea.
These uncertain times are expected to continue throughout 2019 and into 2020, as politicians attempt to leverage geopolitical dynamics in order to advance their own agendas. And while China and the US might have reached a theoretical trade war cease-fire, the two nations are still no closer to a water-tight agreement, while the EU has quietly become the latest target in Donald Trump’s scope.
GLOBAL DATA AND POLITICS
The expected interest rate cut by the Federal Reserve (the Fed) continues to take center stage, adding pressure on the US dollar, and even more so on US treasury yields. Following the G20 summit, the shine of the US-China truce quickly wore thin, as President Trump reiterated his opinion that China and the EU manipulate their currencies to the disadvantage of the US, driving the belief that President Trump will exert as much power as possible in order to place the dollar under pressure as a rebuttal against the EU and China monetary policy stances.
While data has been limited this week, the focus will fall on the key sets of employment and earnings data due for release on Friday afternoon, which is likely to set the tone for the Fed. Should the employment figures exceed market expectations, one can expect a slightly less dovish stance by the Fed. Manufacturing purchasing manager’s index (PMI) numbers improved slightly during June to 50.6, while total vehicle sales remained flat at 17.3 million. Initial jobless claims this week slightly overshot consensus coming in at 221,000 (consensus: 223,000).
The EU made history this week, as Christine Lagarde received the nomination to take over from Mario Draghi as the new President of the European Central Bank (ECB). Lagarde, who is also the managing director of the International Monetary Fund (IMF), is mostly known for her dovish outlook, which could lead markets to assume that the ECB will continue on its already dovish path, with quantitative measures remaining on the cards to assist the struggling EU economy. The nomination of Lagarde, and ultimately what she represents, quickly caused the euro to tumble to two week lows against the US dollar. Manufacturing PMI as well as private sector loans decreased to 47.6 in June and 3.30% year-on-year respectively.
The U.K. is also battling their own demons, as the continuous risk of a recession lurks over the kingdom. The potential appointment of Boris Johnson has also not done the U.K. any favors, with the British pound losing traction against the US dollar and other major currencies, as a ‘no-deal Brexit’ seems to be becoming more of a reality. Manufacturing PMI dropped to 48 points in June, while mortgage lending and lending to individuals both contracted to 3.1 billion and 3.9 billion, respectively. The Bank of England (BOE) also joined the band of Central Bankers hitching a ride on the monetary stimulus train, as the economy continues to wane under the strain of Brexit and the global slowdown.
US EQUITIES
US equities continue to keep global investors on edge, as Wednesday’s trading day saw all three major indices reach record high levels, on the run up to the 4th of July (Independence Day) public holiday. The rally was also heavily influenced by the assumption that the Federal Reserve will follow through with a dovish stance at the end of July, when the Federal Open Market Committee deliver their views on the health of the US economy. This week alone saw the following moves out of the three major indices:
- S&P 500: up 2.35%
- NASDAQ: up 2.30%
- Dow Jones: up 1.13%
On Wednesday afternoon, Facebook, Instagram and Whatsapp mobile applications all experienced their largest network outage ever, when it came to the uploading and downloading of both videos and images. The outage lasted around 12 hours, with a large majority of users across Europe and the US being impacted by the outage. Facebook did respond briefly by saying that it was a simple glitch on their cloud-based servers during a standard maintenance procedure, however it’s interesting to note that most of the gateways to their servers are controlled by Chinese-based companies. Facebook is currently up around 54.68% year-to-date and will open Friday’s trading day at $197.20 per share.
FAANGs performance, for the last four trading days:
- Facebook: up around 4.15%
- Amazon: up around 1.84%
- Apple: up around 2.61%
- Netflix: up around 3.09%
- Alphabet: down around 4.08%
In South African rand-terms, subtract 2.08% against each of these return-figures to see what the South African investor could be up in 2019, with the currency-effect added.
COMMODITIES
Down slightly from a week ago, Brent Crude oil and WTI were seen clawing back around 2.96% on Wednesday afternoon, as US equity markets rallied into their public holiday. The future path of the price of oil will remain heavily influenced by the tug-of-war between a slowing global economy, where demand simply isn’t enough, and keeping a tight handle on managing inventory and stockpiles lower. Just this week, five oil rigs were closed down on US shores, due to the immense price-pressure that WTI has experienced over the last four years. As it stands, 788 oil rigs remain operational.
Brent Crude opened Friday’s trading day at $63.22 per barrel, while US West Texas Intermediate (WTI) opened at $56.70. After experiencing a healthy correction over the last two weeks, gold spot prices returned to robust levels of around $1,437.00. With the weakening US dollar, general political and economic uncertainty and falling yields, gold has the potential to take its share price to the next level in the coming months. Most analysts have a target price of around $1,450.00 on the cards, given that the murkiness within the greater economy may lead investors toward a safe-haven harbour. The platinum price has begun to show signs of giving up its fight of moving higher, when looking at momentum recently spurred on by buyers. Palladium, although remaining extremely sturdy over the last week, saw little-to-no action over the last four trading days.
On Friday morning, gold, platinum and palladium were trading at levels of around $1,418.40, $835.65 and $1,564.72 per fine ounce respectively.
SOUTH AFRICAN FUNDAMENTALS
The local scene has remained fairly quiet, with the South African market taking cues from the great global market environment, with the focus remaining on the potential rate cut by the Federal Reserve. A rate cut by the Federal Reserve has assisted the rand, but in more ways than one:
- Economic theory teaches us that when interest rates decrease, money becomes cheaper - therefore a rate cut in the US would tend to cause the dollar to depreciate.
- A large portion of government debt is owed to our foreign counterparts, expressed largely in dollars. A decrease in the interest rate of a debt obligation reduces the strain of foreign debt obligations on the fiscus.
- Disparity in interest rates causes carry trade - a strategy simply expressed as market participants borrowing at low interest rates (as seen in the US, U.K. and EU) and investing in higher interest rate instruments (these mainly found in emerging markets, with South Africa being the most preferred)
Data from the local economy this week improved slightly, with total vehicle sales increasing to 45,940 in June versus the previous month’s 40,430. The Standard Bank PMI marginally accelerated to 49.7 points (over 50 points indicates an expansion in business activity; under 50 generally indicates declining business activity), while business confidence ticked up to 93.3 points in June from the previous 93.0 points.
The Monetary Policy Committee is set to meet again on 16 July 2019, with an anticipated interest rate cut to be announced on 18 July. With inflation remaining well within the target range, there has been more and more calls for the South African Reserve Bank (SARB) to decrease interest rates, with the latest coming from Deputy Finance Minister David Masondo, stating that the interest rate should have been decreased months ago. While markets expects the SARB to cut rates by 25 basis points, the real question on everyone’s mind is what the effect will be on economic growth, should there be any effect at all.
SOUTH AFRICAN EQUITY
Down around 2.96% since last Friday, Truworths share price was seen falling over nine percent over the course of Tuesday and Wednesday, based on the back of news that the retail firm would be looking to restructure their debt pile, which now sits at around R800 million. Over the last 18 months, foot traffic through most retail stores has declined by more than two percent, mainly due to a slowing global economy. Truworths’ U.K. shoe wear company called Office, generated around 27.00% of the company’s revenue and ten percent of their overall profit, but remains the main contributor to the company’s growing debt pile in an extremely competitive footwear industry. Truworths opened Friday’s trading day at R68.49
Anheuser-Busch InBev have made a move to list on the Hong Kong Stock Exchange in order to sell off parts of its Asia Pacific beer unit. Trading of the shares will officially commence on 19 July 2019. AB Inbev opened Friday’s trading day at R1,315.00
Quilter is said to be mulling over the sale of their Old Mutual Wealth Life Assurance business in the U.K. The potential sale of the Old Mutual Wealth Life Assurance is not necessarily related to the net outflows witnessed in 2018, if connected at all. This decision rather forms part of the company’s long-term strategy to strip non-core assets from out its business model, as Old Mutual Wealth Life Assurance has never been part of Quilter’s main strategic focus. Should the sale occur, a special dividend could possibly be distributed to shareholders, while any remaining profits from the sale would be invested into bettering the company’s vertical integration as a whole. This would potentially mean a positive outcome for all parties. Quilter opened Friday’s trading day at R25.90
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 99.59%
- Kumba Iron Ore: up 79.83%
- Sibanye Gold: up 59.18%
- Tongaat Hulett: down 76.32% (trade halted)
- Rebosis Property Fund: down 74.35%
- Omnia: down 62.66%
- Brait: down 36.33%
THE WEEK AHEAD
The week ahead will once again focus on the Federal Reserve interest rate decision, with the employment data due today likely to drive market expectations. It will be important to keep a close eye on this data, the trade dynamic between the US/China and the US/European Union, and of course the statements made by the Federal Reserve. Any hint of a less dovish Fed will see the rand giving up some of its recent gains. The rand is expected to test the R14.00 mark, with a sustainable break below the level opening the door to another leg stronger to target R13.80, while lows of R14.20 can be expected as various economic and political events unfold. On Friday morning the rand would’ve set the investor back R14.05 per US dollar, R15.85 a euro and R17.68 a British pound.
Our highlight for the week:
Our highlight of the week is the latest customs data released for May 2019 by the South African Revenue Service (SARS). We take a look at the top 5 export destinations for South African goods and the top 5 import origins for goods entering South Africa
Exports
The top 5 export destinations for South African exports during May 2019:
So just over 10% of South Africa's exports in May 2019 headed to China, with just over 7% heading to the United Sates.
Imports
The top 5 import origins in South Africa during May 2019:
Almost 20% of South Africa's imports came from China, 9.1% from Germany (most cars and machinery and equipment), and 7.3% of South Africa's imports came from the USA.
Total Exports for May 2019: R 112,069,153,495
Total Imports for May 2019: R 110,331,942,516
Trade Balance for May 2019: R 1,737,210,979
Read the full article here
Exports
The top 5 export destinations for South African exports during May 2019:
- China (11.0%)
- United States (7.2%)
- Germany (6.8%)
- United Kingdom (6.1%)
- Japan (5.4%)
So just over 10% of South Africa's exports in May 2019 headed to China, with just over 7% heading to the United Sates.
Imports
The top 5 import origins in South Africa during May 2019:
- China (18.5%)
- Germany (9.1%)
- United States (7.3%)
- India (4.9%)
- Nigeria (4.6%)
Almost 20% of South Africa's imports came from China, 9.1% from Germany (most cars and machinery and equipment), and 7.3% of South Africa's imports came from the USA.
Total Exports for May 2019: R 112,069,153,495
Total Imports for May 2019: R 110,331,942,516
Trade Balance for May 2019: R 1,737,210,979
Read the full article here