Equities markets had notched up healthy gains in August, with the MSCI World Index gaining 2.6% and the S&P 500 rising 2.7%. This week, the mood soured. Oil prices and geopolitical fears came back into focus after a month in which markets were driven higher by impressive second-quarter corporate earnings and optimism about the AI theme.
Resurgent conflict in the Middle East has reminded markets that the war in Iran is still dragging on. Brent and US crude both touched their highest levels in months yesterday and recorded their biggest one-day jumps in weeks. Yesterday, Brent pushed past $105 a barrel before settling at $107.60, its highest price since May. Brent’s price at the time of writing was $104.60, bringing this week’s gain to 9%.
The oil market is facing growing pressures. Houthi attacks on Saudi Arabia as well as shipping through the Bab al-Mandab Strait, a reported decline in Saudi production to its lowest level since 1990, and renewed flare-ups between the US and Iran around the Strait of Hormuz have all given investors reason to worry. With global oil reserves dwindling, there is a strong case for a prolonged oil supply shock.
This, in turn, could set the stage for higher global inflation. Rising US Treasury yields, with the 10-year yield pushing to multi-year highs, and the release of hotter-than-expected producer price numbers have added to the unease. The European Central Bank’s rate hike this week, attributed to an energy-driven inflation outlook, may signal the direction of travel for other global central banks.
Markets have accordingly increased bets on the Fed hiking interest rates. CME Group’s FedWatch gauge now puts the odds of a rate hike at next week’s meeting at 70%. At the time of writing, markets were anticipating the release of the Consumer Price Index, the final inflation reading before the Fed convenes. A higher-than-expected reading may solidify prospects for an interest rate hike.
As a result, risk assets have weakened this week, but not dramatically. The S&P 500 is down 1.6% for the week at the time of writing, the Nasdaq 100 Index has slipped 1.5%, and the MSCI World Index has shed 1.6%. The Magnificent Seven club of Big Tech stocks, apart from Apple, helped to drag indices down. Nvidia alone is 5.2% down for the week at the time of writing. AI stocks’ valuations are particularly sensitive to interest rate hikes.
Throughout the year, markets have been torn between oil and inflation concerns on the one hand, and enthusiasm for AI and corporate earnings momentum on the other. This week’s oil price spike was a reminder of how these competing forces will continue to shape global equities markets in the near future, especially since there is no apparent sign of resolution to the Middle East conflict ahead of the US midterms.
“The step up in attacks in the Strait of Hormuz and by the Houthis against Saudi Arabia suggests that Iran and its proxies are trying to regain the initiative in the war. This could set back the recovery in oil output in the Gulf and raises the risk that global energy prices rise even further in the coming weeks.”
– Jason Tuvey, Deputy Chief Emerging Markets Economist at Capital Economics
“[The market is] not returning to calm. It is adjusting to the new normal defined by unresolved conflict and persistent Maritime risk.”
– Jim Burkhard, Global Head of Crude Oil Research at S&P Global Energy
Global News
- The US-Iran conflict escalated further on Thursday as both sides intensified attacks on shipping and Iran-backed Houthis advanced towards the strategically important Bab el-Mandeb Strait. The widening hostilities threaten shipping through both the Red Sea and the Strait of Hormuz, where vessel traffic remains severely disrupted. Tehran says it is prepared for a more intense and prolonged war, while US President Donald Trump said the conflict could continue until after the November midterm elections, pointing to little prospect of near-term de-escalation.
- Saudi Arabia reported its lowest oil production since 1990 in August as the US-Iran conflict continued to disrupt regional export routes. Riyadh told OPEC on Thursday that output plunged by 1.9 million barrels a day to 6.238 million, falling below its previous wartime low in April, while crude exports dropped by about a third. The disruption is further constraining global oil supply as OPEC also faces pressure over future production quotas.
- The Middle East energy shock is shifting the global interest-rate outlook as higher oil prices intensify inflation pressures. The European Central Bank (ECB) raised rates to 2.5% on Thursday, while the Bank of Japan is expected to lift rates next week and markets now see about a 70% chance of a Fed hike. The dollar strengthened following US producer inflation data and the ECB decision, while the yen remained near seven-month highs despite easing against the dollar on Thursday. Rising rate expectations are pushing global bond yields higher and tightening financial conditions.
- The competing force against the fallout from the oil price surge is that US corporate earnings expectations continue to strengthen despite mounting pressure on equity markets from inflation concerns and rising bond yields. (The 30-year yield reached a 19-year high of 5.37% on Thursday.) Analysts have raised profit forecasts for 21 consecutive weeks, the longest streak since 2021, according to a Citigroup index released on Tuesday. S&P 500 earnings estimates for next year have risen nearly 4% in two months, with upgrades spread across sectors. Strong economic growth and expectations of AI-driven productivity gains are supporting the longer-term earnings outlook even as higher interest rates weigh on market sentiment.
- The gap between US and Chinese government bond yields widened to a record 317 basis points on Thursday as the two countries pursue increasingly different interest-rate policies. US yields are rising as investors expect further rate hikes to contain inflation, while China is keeping borrowing costs low to support its economy. The growing advantage offered by US bonds could encourage capital to move out of China and put pressure on the yuan, although strong Chinese exports have helped the currency remain resilient.
- The EU and Canada were in talks this week on a far-reaching trade and security alliance as both seek to reduce their dependence on the US and China. The partnership would deepen cooperation across defence, trade, science, technology, and other strategic areas, potentially giving Canada a relationship with the bloc that approaches membership without formally joining. European Commission President Ursula von der Leyen is expected to unveil the initiative on 16 September, ahead of an EU-Canada summit in October.
- The US Justice Department is investigating whether Nvidia structured its licensing agreement with AI chip startup Groq to avoid antitrust review. The deal gave Nvidia access to Groq’s technology and brought its chief executive and chief operating officer to Nvidia while leaving Groq as an independent company. The investigation, revealed on Thursday, adds to regulatory scrutiny of deals that allow dominant technology companies to secure rivals’ technology and talent without making outright acquisitions.
- OpenAI launched a specialised version of ChatGPT for financial services on Thursday, deepening its push into high-value enterprise markets, with Morgan Stanley and Evercore as design partners. The move comes as the company pushes for mandatory US safety standards for advanced AI systems, including independent testing and cybersecurity requirements. OpenAI has also backed four California AI safety bills, signalling a greater willingness to support binding regulation as it expands into highly regulated industries.
- Apple unveiled its first foldable iPhone and new AI-powered smartwatch features on Wednesday, expanding its push into premium devices and wearable AI. The new iPhone Duo starts at $1,999 and reaches an industry-record $3,199 for the most advanced version, testing consumers’ willingness to pay significantly more for smartphones. Apple’s latest watches can also use AI to listen to, transcribe and summarise conversations, alongside expanded health monitoring. The launches show Apple extending AI across its devices while continuing to push pricing at the premium end of the market.
- Eli Lilly is expanding its investment in women’s health, using the financial windfall from its blockbuster obesity and diabetes drugs to broaden its pipeline. The company is recruiting specialists and investing in treatments for underserved conditions including osteoporosis, endometriosis and pregnancy-related disorders. The push, outlined on Thursday, shows Lilly using the strength of its GLP-1 business to pursue new sources of long-term growth.
- As at Thursday’s close the S&P 500 was 1.64% down for the week.
Local News
- Plans to revive domestic oil refining could reduce South Africa’s growing exposure to global fuel supply disruptions. The Central Energy Fund said on Wednesday it intends to rebuild the flood-damaged Sapref refinery and ultimately expand local refining capacity. Imports now supply about 61% of the country’s fuel, up from 22% in 2019, after the closure of several refineries left only two operating. The plan could strengthen domestic energy security, although funding and timelines have yet to be finalised.
- South Africa’s current account swung sharply into deficit in the second quarter as imports rose faster than exports, increasing the economy’s exposure to external pressures. South African Reserve Bank (SARB) data released on Thursday showed a deficit of R205.5 billion, or 2.6% of GDP, compared with a surplus of 2.4% in the first quarter. Higher fuel import costs linked to the Middle East conflict are adding to pressure on the country’s trade position.
- Weakening economic growth is adding to SARB’s dilemma ahead of its interest-rate decision later this month. Statistics South Africa data released on Tuesday showed the economy contracted for the first time in six quarters, as trade, manufacturing and mining weakened amid subdued domestic demand and geopolitical tensions. Economists now expect growth of about 1.2% this year, below National Treasury’s forecast, strengthening the case for holding rates steady despite persistent inflation pressures.
- South African business confidence has weakened despite faster economic reforms, with the RMB/BER confidence index falling to 38 in the third quarter from 47 in the first. Business Leadership South Africa said on Monday that companies have yet to feel the benefits of reforms to the electricity and logistics sectors, despite progress in restructuring Eskom and increasing competition. Higher fuel costs and delayed interest-rate cuts are adding to pressure, suggesting stronger implementation will be needed for reforms to translate into greater investment and economic growth.
- The ANC’s participation in November’s local elections is at risk in six municipalities as it challenges the exclusion of 181 candidates in the Electoral Court. The party blames a technical problem for preventing final submissions before the deadline, but court papers revealed on Thursday show the Electoral Commission disputes this, saying the required final step was not completed. If the ANC loses the case, it could be excluded entirely from the ballot in its strongholds of Ingquza Hill and Port St Johns and lose proportional representation seats in four other municipalities.
- National Treasury and its entities have 65 senior management vacancies, including deputy DG and chief director positions, parliament was told on Wednesday. Recruitment is under way, but senior posts typically take three to six months to fill, while several National Treasury entities are also managing disciplinary proceedings involving executives. The vacancies highlight capacity and governance challenges across institutions responsible for South Africa’s public finances and development funding.
- The rapid growth of Chinese vehicle brands is reshaping South Africa’s car market and putting significant pressure on second-hand vehicle prices. WesBank said on Thursday that six out of every 10 vehicles it finances are now Chinese brands, as consumers increasingly choose competitively priced new cars over used vehicles. The lender has increased provisions against potential losses when repossessed vehicles are sold, highlighting how the shift is creating new credit and resale-value risks even as WesBank benefits from financing the growing Chinese brands.
- Super Group delivered strong earnings growth in the year to June, with EBITDA rising 15.5% to R4.16 billion as revenue increased 6.2% to R45.83 billion. Growth was driven by its Supply Chain and Dealership operations, with South African dealerships outperforming the broader vehicle market amid strong demand for Asian brands, while UK operations improved. Despite challenging trading conditions, the group expects further earnings growth from new customers and expanded services in its Consumer Supply Chain and Fleet Lease businesses, alongside continued strength in dealerships and selected strategic opportunities.
- Southern Sun expects half-year headline earnings to rise about 20% as major sporting events and strong conference demand offset continued weakness in leisure and regional travel. The hotel group said on Wednesday that occupancy improved to about 60% in the five months to August, helped by New Zealand’s rugby tour, while the reopening of Paradise Sun supported its offshore business. Anti-immigrant sentiment has also deterred some regional travellers, adding to pressure from a weak economy and rising costs.
- Dis-Chem is investing R330 million to rebuild its e-commerce platform and mobile app as it seeks to strengthen its position in South Africa’s increasingly competitive on-demand retail market. The new platform, due in early 2027, is intended to improve reliability, delivery times and the overall customer experience as Dis-Chem competes with services such as Checkers Sixty60. The investment is weighing on short-term earnings, but the group said on Tuesday that it expects the initiative to become profitable during its 2027 financial year.
- Richemont has taken a significant step in its succession planning by appointing Johann Rupert’s son Anton as co-deputy chair alongside independent director Bram Schot. Announced on Wednesday, the structure gives Anton responsibility for strategic product and communications matters, while Schot oversees governance, separating family stewardship from corporate oversight as Richemont prepares for an eventual leadership transition. The changes come as the luxury group continues to trade strongly, with first-quarter jewellery sales up 24%.
- As at the time of writing, the rand was 1.2% weaker against the dollar, and the ALSI was 1.3% down for the week.
Sources: Dynasty, Bloomberg, Reuters, Business Day, IOL, TechCentral, ITWeb, etc.
