Global equities markets continued their dramatic recovery this week following the Flash Crash that troughed on Monday, August 5th. The S&P 500 and Nasdaq Composite indices have now notched up sufficient gains to erase the losses recorded during the beginning of August.
It is interesting that the confluence of negative factors that caused the sharp drop has totally dissipated, having given way to a convergence of positive influences to drive this week’s sustained strong rebound.
The first point to note is the unwinding of carry trades in Japan that brought about last week’s rout was a totally unexpected event. Subsequent assurances from the Bank of Japan that it will hike interest rates in a more controlled and cautious manner have since helped to calm the markets down. This, in turn, has helped to reduce concerns that we will see traders dump more of the risk assets that they had bought with loans denominated in yen.
Secondly, the markets have responded positively to recent economic data from the US, which suggests fears of an upcoming recession might be misplaced. US retail sales for July exceeded Wall Street’s expectations in a sign that US consumers remain resilient. Markets also took heart from unemployment claims data pointing to an orderly slowdown in the economy.
Even though those economic signals are strong, the US annual inflation rate encouragingly dipped below 3% in July for the first time since 2021. Prices climbed at an annual rate of 2.9% while core inflation, which doesn’t include food and energy, climbed 3.2% over the previous 12 months and only 0.2% since June.
Investors have interpreted the combination of lower inflation, resilient jobs, and consumer spending to mean a soft landing might be in sight. This has led investors to appear confident that the Fed will cut interest rates in September.
Thirdly, it is the economy that appears, for now, to be taking centre stage in the US presidential race, with both candidates voicing their plans to target higher costs of everything from housing to groceries and gasoline. Neither candidate is likely to issue policy statements that would damage the trajectory of the economy and harm their respective campaigns. This should provide a measure of comfort for investors over the ensuing months.
However, as the volatility of the past two weeks shows, markets are capricious.
“Everyone will start to say that ‘uncertainty has increased’. This cannot be true. It makes no sense to claim that we were more certain about things before an unpredictable occurrence. Markets are always uncertain, sometimes we are complacent.”
– Joe Wiggins, financial author
Global News
- By Friday last week, Wall Street was gaining and had all but erased the losses incurred after some of the worst days of trading at the start of last week. Yesterday, stocks gained while bonds tumbled as data on retail spending and the labour market underscored the strength of the world’s largest economy, allaying fears that the Fed would be risking a deeper slowdown. The S&P 500 extended a six-day rally to 6.6%, the best performance in such a span since November 2022. Treasury yields surged, with the move led by shorter maturities. The question that remains is whether this is merely an oversold rally – temporary enthusiasm that will fade – or the beginning of the next leg upward in an ongoing bull market.
- US consumer prices rose moderately in July, gaining 0.2%, while the annual increase in inflation slowed to below 3% for the first time since early 2021, further strengthening expectations that the Fed will cut interest rates in September.
- The number of Americans filing new applications for unemployment benefits dropped to a one-month-low last week, indicating that an orderly labour market slowdown remained in place. Claims for state unemployment benefits dropped to 227,000 for the week ended 10 August, below expectations of 235,000 claims for the latest week.
- According to The Economist, US presidential hopeful Kamala Harris’s polling surge far exceeded expectations. She has transformed her ratings and enthused the Democratic base, leading Donald Trump nationwide by three percentage points and having overtaken him in the most recent polling of most swing states. The Economist’s revised presidential forecast shows that, on 21 July, the day he withdrew, Joe Biden had a 24% chance of re-election. Now, Harris has a 52% chance of winning in November.
- Elon Musk has strengthened his alignment with US presidential candidate Donald Trump by proposing that Trump lead a government commission focused on ensuring the effective use of taxpayer money, during a conversation on X. Despite the platform going down for 40 minutes, it offered Trump an audience of more than 1 million during a critical moment in the lead up to the election. Musk has turned X into a pro-Trump machine.
- On Tuesday, oil broke a five-day streak of gains, as the prospect of a potential crude surplus overshadowed concern about an escalation in the Middle East conflict. West Texas Intermediate dived 2.1% to settle at just above $78 a barrel, with traders taking advantage of a lull in major developments from the region to take profits.
- The UK’s economy grew in the second quarter, overshadowing a flatlining in June with the best first half since the end of 2021. It expanded 0.6% in the three months to June, as anticipated, when compared with the first quarter, when it grew 0.7. Other data from the UK showed that Industrial Production and Manufacturing Production increased by 0.8% and 1.1%, respectively, monthly in June. Both indicators outpaced estimates.
- A group of senior Biden administration officials are in Shanghai this week for a round of high-level meetings intended to keep the economic relationship between the United States and China on stable footing amid mounting trade tensions between the two countries. Officials are expected to discuss ways to maintain economic and financial stability, capital markets, and efforts to curb the flow of fentanyl into the United States.
- Japan’s economy expanded more than expected at an annualised 3.1% in the second quarter due to a strong rise in consumption, which backs the case for another near-term interest rate hike. Economists had predicted a 2.1% gain in GDP after a 2.3% contraction in the first quarter. The country’s Nikkei 225 Index on Tuesday jumped to levels seen before the benchmark had its steepest plunge since October 1987 last week. The Index dropped 12.4% on Monday, 5 August, recording its worst-performing day since October 1987. However, over the course of a week, from 6 August to 13 August, the Index subsequently recovered 14.7% to more than offset the record loss incurred, while also returning more than 3.5% today.
- The World Health Organization has declared Mpox a global public health emergency for the second time in two years, following an outbreak of the viral infection in the Democratic Republic of Congo that has spread to neighbouring countries. This category is its highest level of alert and aims to accelerate research, funding, and international public health measures and cooperation to contain the disease
- Google debuted AI-powered phones on Tuesday as it seeks to beat Apple’s iPhone. The internet giant unveiled the next generation of Pixel phones, headphones, and watches to stand out in a hardware market that has mostly ignored it. The Pixel 9, Pixel 9 Pro, and the double-wide Pixel 9 Fold let users engage with a conversational assistant, edit people into photos, and search for information found in their screenshots.
- Apple will begin letting third parties use the iPhone’s payment chip to handle transactions, a move that allows banks and other services to compete with the Apple Pay platform. This follows years of pressure from regulators, including those in the European Union, for it to open up its ecosystem. Apple said it will allow developers to use the transaction solution starting in iOS 18.1, an upcoming software update for the iPhone. The company is also seeking new sources of revenue and is developing a tabletop home device that combines an iPad-like display with a robotic limb to move around a large screen.
- Chinese internet giant Tencent reported an 82% surge in second-quarter net profit, its biggest jump since late 2020, after a resurgence in its gaming business. Net profit hit $6.7 billion in April-June, compared with $3.7 billion in the same period last year. However, it posted its lowest annual profit (since 2019) earlier this year, due in part to stagnating gaming revenue in the final quarter of 2023.
- AstraZeneca, the UK’s most valuable listed company, saw its market value surge above £200 billion on Wednesday for the first time after a big bet on cancer drugs helped drive a rally in the shares. The stock climbed 0.5% on the day, extending an advance this year to 22%.
- Warren Buffett’s Berkshire Hathaway has bought stakes in cosmetics store chain Ulta Beauty and aircraft parts maker Heico at the same time as it nearly halved its huge stake in Apple. Berkshire owned Ulta Beauty shares worth $266.3 million and Heico shares worth $185.4 million as of 30 June, according to a Wednesday regulatory filing. Ulta Beauty shares soared 14% and Heico shares rose 3% in after-hours trading, reflecting a belief that the companies won Berkshire’s, and perhaps Buffett’s, stamp of approval.
- As at Thursday’s close, the S&P 500 was 3.72% up for the week.
Local News
- Local financial markets have responded positively to the formation and early performance of the new government, with the rand strengthening by 1.9% since the elections and the FTSE/JSE All-Share index rising nearly 6% as of 11h00 today.
- Sentiment in the business sector hit a four-month high in July following the formation of the Government of National Unity while also benefitting from increased new vehicle sales and a stronger rand exchange rate. On Wednesday, the South African Chamber of Commerce and Industry said the Business Confidence Index came in at 109.1 in July, up marginally from 109 in June and the highest since 114.7 in March, after dipping by 5.8 index points in April and a further 1.1 index points in May. The Chamber said there is now an opportunity to boost economic growth.
- However, the number of job seekers unable to find work rose to a new high of almost 8.4 million people as the economy is not creating jobs fast enough to absorb all the people entering the job market.
- The rand broke through R18/$ for the first time since mid-July, when it briefly traded around R17.93 on Thursday. This followed a weaker dollar after data showed US inflation was slowing, underpinning wagers that the Federal Reserve could lower borrowing costs next month. The currency has now strengthened almost 2% year-to-date.
- South Africa’s 10-party ruling coalition is expected to stay united despite internal differences, as they see no better alternative for governance, according to Helen Zille, DA chairman. The new administration is focused on economic growth to tackle a 33.5% unemployment rate, despite ongoing challenges like electricity shortages, logistical bottlenecks, and red tape which have stifled economic output and resulted in an average GDP growth of less than 1% per year over the past decade.
- The EFF’s woes have worsened with the resignation of deputy president Floyd Shivambu yesterday. Shivambu has left to join the rival uMkhonto weSizwe (MK) party, making him the second leader to jump ship. Mzwanele Manyi resigned last week to join MK, which is led by former president Jacob Zuma. Shivambu’s departure comes months before the EFF is set to hold its third conference to elect new leadership and is the biggest shake-up since the EFF’s launch 11 years ago. Shivambu’s exit paves the way for more EFF members to join the MK.
- The DA called an urgent meeting of its Johannesburg council caucus to decide on its approach for today’s special council meeting, which is expected to elect a new mayor after the resignation of Al Jama-ah’s Kabelo Gwamanda. EFF Gauteng chair Nkululeko Dunga said it would like to continue to serve on the mayoral committee when a new mayor was elected. The ANC has been meeting different political parties in the Johannesburg council to ensure it has a stable coalition should it take over the city.
- The reported decision by the ANC’s leadership to only now finally institute disciplinary proceedings against three senior members, Malusi Gigaba, David Mahlobo, and Cedric Frolick, for their role in State Capture is another sign of how defiantly the party has enabled a culture of non-accountability, writes Stephen Grootes for Daily Maverick. “It almost defies belief that the party would do this after the elections and not before. The promises that ‘this time will be different’ ring hollow.” None of the three have been officially charged.
- Transnet could break even and could even deliver a profit by March next year as it implements its rail and port recovery plan. Transnet expects applications from third parties for access to its rail network to begin in the final quarter of this year. However, CEO Michelle Phillips is unsure of the private sector’s preparedness to take part in the programme. The third-party access programme is central to Transnet’s plans to increase competition, boost efficiency and reliability, and reduce costs for customers.
- The South African Revenue Service will implement a delayed import duty on small parcels from companies such as Temu and Shein from next month. It will impose both VAT and a 20% import tax on small parcels from 1 September as an interim measure. The final “appropriate” duties on a range of goods will go into effect on 1 November. Currently, customers of Temu and Shein are paying a minimal price for importing clothing and other products through the online offshore retailers. Parcels valued at under R500 are taxed at 20%, but don’t attract VAT; for parcels valued at over R500, they pay a 45% import duty.
- Private education group AdvTech expects earnings to rise as much as 18% in the six months to June. Basic normalised earnings per share and basic headline earnings per share for the period are expected to be 13% to 18% higher. In March, the group reported double-digit growth in operating profit and cash generation in the year to end-December thanks to strong enrolment growth.
- Aveng shares had their best day since November 2021 on Wednesday, leaping 15.92%, after it said it expected its recovery to be better than it had previously estimated if the consequences of one-time write-downs are taken out of its figures. It expects to swing to a profit for the year to June.
- As at the time of writing, the rand was 2.20% stronger and the ALSI was 2.45% up for the week.
Sources: BusinessLIVE, TimesLIVE, Reuters, Bloomberg, CNN, Business Report, Daily Maverick, BizNews.com, NYT, News24, The Economist, WSJ, Market Watch, etc.
