Market news this week was dominated by a strong rally across global equity markets and a weaker dollar that tumbled on the back of the latest consumer price index (CPI) numbers from the US. Headline inflation dropped to 3%, the lowest read since March 2021 and down from the four-decade high of 9.1% reached in June 2022. Markets took these numbers—which were below expectations— as a signal that the Fed has turned the corner in its fight against inflation, although it’s not certain to reach the Fed’s “terminal rate” of 2% by year-end.
Risk appears to be back on the menu as stock markets enjoyed their strongest weekly gains since November, building on what has already been a robust year for equity market returns. According to Reuters, the US dollar is down nearly 13% against a basket of currencies from last year’s two-decade high and is trading at its lowest level in 15 months.
The South African rand, which has spent most of the year as one of underperformers among emerging market currencies, was the top performer among its peers this week, up 4.5% against the dollar. Whereas rand weakness for most of the year was caused by South Africa’s foreign policy and a fragile economy combined with political uncertainties, the local currency’s rebound this week was all about the dollar and a return to global “risk-on” sentiment. The risk-on environment has also helped to lift the rand versus other currencies such as the British pound and the Euro.
The JSE ALSI followed major global stock market indices upwards this week, seeing gains of 3.8% in rand and 8% in dollars.
Our “currency decoder” estimates current fair value to be R16.75/$ and, based on today’s exchange rate at R18.10/$, it is still representing a discount of circa 8% to the greenback. Whereas we were reluctant to externalise funds at R18-plus to the dollar, we will now consider moving rands offshore below R18/$ in a phased approach. With trucks burning on South African highways, worrying disclosures about the deputy president and a return to level 6 load shedding, local risk factors are still in play which could cause the discount to fair value to widen.
What’s more, as encouraging as the US CPI figures are, we might not be completely out of the woods. So-called core inflation—which excludes the volatile food and energy sectors—is stickier and declined more modestly to 4.8%. The Fed and economists believe that more interest rate hikes may be necessary to reach the inflation target of 2%—so it’s too early to bet that the rate tightening circle is completely over, in which case the dollar could strengthen from current levels.
Whether it’s global equity markets or the rand, the US is still the dominant force!
“Constituting less than 5 percent of the world’s population, Americans generate and earn more than 20 percent of the world’s total income”
– Office of the United States Trade Representative
Global News
- While inflation has fallen significantly it remains above the Fed’s 2% target and the final phase of reducing it may prove to be challenging. Americans continue to experience higher prices for goods and services compared to pre-pandemic levels, and high inflation could potentially be used as a political weapon against President Joe Biden in the upcoming re-election battle. UBS says the US labour market is seeing nominal wages being too high to be consistent with inflation targets, but real wages are too low. The hope is that nominal wage growth slows more slowly than inflation.
- Ahead of the BRICS summit, to be held in South Africa in August this year, intense lobbying is happening with two big issues standing out: the expansion of BRICS and “de-dollarisation” – or the replacement of the US dollar as the sole international reserve currency. The summit, which will be the biggest yet, will include all African heads of state and 11 political heads of global south bodies, including some controversial ones like Iran. It comes at a time of shifting geopolitical power from a unipolar world controlled by the US to a multipolar world as China rises and the two compete with each other in a scenario reminiscent of the cold war.
- China’s GDP is expected to grow 5% this year, although this is off a low base given its Zero Covid rules which were still in place during 2022. When accounting for this effect, Bloomberg Economics suggests that the growth rate for 2023 will be closer to 3%, which is less than half of the pre-pandemic average growth rate. Furthermore, China’s consumer inflation rate remained flat in June, indicating a lack of price increases in the market. Additionally, factory gate prices fell further raising concerns about the possibility of deflation.
- In company news, Meta Platforms’ Threads, crossed 100 million sign-ups within five days of launch, according to CEO Mark Zuckerberg, dethroning ChatGPT as the fastest-growing online platform. Threads could add as much as $8 billion to Meta’s revenue by 2025, off 200 million daily active users.
- In a symptom of the disruptive forces of AI, Hollywood writers and actors are on strike for the first time in six years. The Screen Actors Guild, which represents some 160,000 performers, announced a walkout on Thursday after failing to reach a new labour agreement with the Alliance of Motion Picture and Television Producers. Background actors argue that for just one day’s pay, their likeness can be replicated again and again through AI in future film releases.
- As at Thursday’s close the S&P was 2.5% up for the week.
Local News
- This week’s rand rebound is considered a positive development for local inflation and could support a pause in rate hikes by the South African Reserve Bank, which is now expected to keep the repo rate unchanged at a 14-year high of 8.25%.
- International ratings agency, S&P, has a negative outlook on South Africa’s prospects due to the ongoing electricity and logistics crises. They have revised down their growth forecasts predicting sluggish growth rates for the next few years and a continuous rise in the debt-to-GDP ratio.
- Business and government are developing a master plan to rid the country of its R1 trillion crime headache. This includes building a forensics lab, strengthening the National Prosecuting Authority and pooled intelligence, among other initiatives, to disrupt syndicates and mafias. Business and government agreed in June to partner on workstreams to target three of woes undermining South Africa’s economic potential: energy, transport, and crime and corruption.
- A Constitutional Court ruling on Thursday stated that former President Zuma should return to prison to serve the remainder of his sentence. This upholds a previous ruling by the Supreme Court of Appeal. Perhaps in an advance message to the courts ahead of this week’s judgment, several trucks were set alight in Limpopo, Mpumalanga and KwaZulu-Natal. These acts of arson have particularly affected the key transport corridor between Mpumalanga and Richards Bay. These incidents happened to coincide with the anniversary of the July 2021 judgment that originally sent Zuma to jail.
- Deputy President Paul Mashatile is facing increasing scrutiny over his financial management and lifestyle, including his Waterfall Estate residence and his alleged use of luxury properties connected to individuals doing business with the state. Mashatile had recently announced a plot to unseat him, which President Ramaphosa denied. However, the revelations regarding Mashatile’s financial affairs would place the President in an awkward position should incriminating evidence be unearthed from an investigation into the Deputy President’s financial affairs.
- Naspers’ top priority and chief area of investment is AI as ever more capital is ploughed into the technology across the world, moving up from being a top three or four focus area. In its latest annual report, Naspers says it is increasingly focused on “AI-by-design — using our technologies and expertise to make operational improvements and to radically change the way we do business.”.
- As at the time of writing, the rand was 4% stronger and the ALSI was 3.8% up for the week.
Sources: Dynasty, News24, NYT, BusinessLIVE, Bloomberg, CNN, BizNews, TechCentral, Daily Maverick, NinetyOne, UBS etc.