In the wake of the banking crisis earlier this month, together with continued concerns about a recessionary environment, we’ve again seen investors behaving in ways that run contrary to expectations this week. Partly explaining this is the fact that earnings for the S&P 500 constituents remain resilient, according to Bloomberg’s consensus forward earnings forecasts.
Despite the lack of clarity about whether rate cuts, as currently priced in by the interest rate curve, will be caused by an incremental fall-off in inflation, or whether the Fed will need to cut rates in response to a recessionary environment, the S&P 500 has gained an average 0.3% each day following down days this year. According to Bloomberg, this is the second-biggest average daily rebound since 1927.
Markets are being driven by FOMO, or fear of missing out. Essentially, whenever stock markets weaken, buyers are piling in, perhaps expecting to be rewarded for buying the dips as they were in 2020 and hoping that the Fed will be moderating interest rate hikes sooner than was expected a little earlier this year.
In a similar vein, we’ve seen Big Tech companies rally especially strongly this week, despite losing some of their pandemic lustre in 2022, and notwithstanding the likes of Amazon, Google, Meta, and Microsoft continuing to announce cutbacks in headcounts after their workforces swelled during the COVID-19 crisis in 2020.
Back in South Africa, the South African Reserve Bank defied market expectations with a repo rate hike of 50 basis points, when most economists were expecting 25 basis points. Although the rand immediately rallied in response, it continues to price in SA-specific risks and trade at a discount of 5.2% to fair value, according to our currency model.
Also defying what should be the logical consequences of leading a failing state, is President Cyril Ramaphosa, who appears to be safe in his position despite his Phala Phala challenges. Former President Thabo Mbeki has written a stinging rebuke of ANC MPs for kicking a parliamentary investigation into the sofa saga as well as corruption at Eskom to the curb, but for now, the party is happy to defy calls for closer scrutiny of the executive.
“It is one thing to like defiance, and another thing to like its consequences.”
– George Eliot, English Novelist
Global News
- Federal Reserve Chair Jerome Powell indicated in a meeting with Republican lawmakers on 29 March, that as forecasted previously by policy makers, the Fed anticipates one more rate increase this cycle. Fed officials last raised interest rates by a quarter percentage point in March, continuing their year-long fight to cool price pressures despite recent turmoil in the banking system. The move lifted their policy benchmark to a 4.75% to 5% target range, from near zero in March 2022.
- The run-on Silicon Valley Bank’s deposits in March went far deeper than was initially known: Since the day regulators seized SVB, it was public knowledge that panicked customers withdrew $42 billion from the bank on 9 March following concerns that uninsured deposits were at risk. However, this week, it emerged that clients tried to take out all their money, leading to 81% of deposits having been withdrawn. This amounts to $148 billion.
- The issues with banks collapsing have, understandably, also led to investors moving money into safe-haven assets, including gold. (The dollar gold price has risen by 8.4% for the month of March).
- Consumer confidence in the United States unexpectedly improved during the past month as Americans grew more optimistic about the outlook for business conditions and the work market, according to non-profit research company, Conference Board. This suggests that the latest financial turmoil has had very little immediate impact on sentiment. That said, following the layoffs in the tech sector in recent months, the share of respondents who said jobs were “plentiful” decreased to 49.1%, the first decline in five months, but this number still remains high compared with historical data. However, if the banking crisis leads credit conditions to tighten significantly, sentiment may deteriorate further in the months ahead.
- The US has taken over from Russia as the biggest supplier of crude oil to the European Union, providing 18% of the bloc’s crude imports in December. Russia used to account for as much as 31% of total imports until the end of January 2022. Moscow’s invasion of Ukraine in February last year led to an upheaval in Europe’s energy supplies as sanctions were imposed on the communist country.
- Former US president Donald Trump is set to be the first previous US president to face criminal charges. This comes after a grand jury in New York City voted to indict him for his role in paying hush money to a porn star during his 2016 presidential campaign. Trump will face arraignment, at which point the specific charges will be unsealed. The development will shake up the 2024 presidential race, in which Trump is a candidate: It’s uncertain if an indictment would rally Republican voters to Trump’s side — or erode his standing among them. Notably, Trump faces other investigations, but any indictment or conviction would not bar him from running.
- In what could be a $3 trillion threat to global financial markets, Japanese investors are gearing up for the seemingly inevitable end to a decade of ultra-low interest rates that punished domestic savers and sent a wall of money overseas under former Bank of Japan Governor, Haruhiko Kuroda. The exodus accelerated after Kuroda moved to suppress bond yields in 2016, culminating in a mountain of offshore investments worth more than two-thirds Japan’s economy. Now, newly appointed Governor Kazua Ueda is likely to dismantle that policy, setting the stage for a flow reversal back into Japan that risks sending shockwaves through the global economy, according to Bloomberg News.
- The UK will join an 11-nation Indo-Pacific free-trade bloc, which will make it the first new member since the bloc’s creation. The Brits want to strengthen economic ties with new partners following Brexit. Prime Minister Rishi Sunak’s government sees membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which includes Australia, Japan, and Canada, as a boost for economic growth and geopolitical relations. This could boost its anticipated growth rate of $2.23 billion per year over the long-term.
- Elon Musk, together with a group of artificial intelligence experts and industry executives, want a six-month pause in developing systems more powerful than OpenAI’s newly launched GPT-4. The call, made in an open letter issued by non-profit Future of Life Institute, was signed by more than 1,000 people. Several companies, including Meta (Facebook’s parent) and Microsoft are delving into this area as a potential source of revenue.
- The US Commodity Futures Trading Commission has initiated proceedings against Binance, the crypto empire that dominates the industry, and CEO Changpeng Zhao for allegedly evading federal laws and operating an illegal digital-asset exchange, threatening to send shock waves across the world of virtual currencies. Bitcoin fell as much as 4.5% after the lawsuit was recently filed. This is a large issue for Binance and Zhao, who famously became crypto’s singular titan after contributing to FTX’s demise.
- Entertainment giant Walt Disney is starting to cut jobs in a move that could see 7,000 of its staff unemployed as it looks to trim $5.5 billion of costs. It will start notifying the first group in the next few days, while a second, larger, round will happen in April, impacting several thousand workers. The last of the affected workers will receive notice before the Northern Hemisphere’s summer. The company’s streaming TV businesses lost more than $1 billion in the quarter to end December.
- China’s biggest e-commerce company, Alibaba, will split its business into six groups, which is one of the most significant overhauls of a leading Chinese tech firm to date. Its $220 billion empire will be divided into units focusing on logistics, cloud computing, entertainment, e-commerce, and two others offering services to global businesses. Its overhaul plan boosted Chinese tech stocks, with investors betting the sector is in for an overdue revaluation as the regulatory environment improves. Its founder, Jack Ma, made a rare public appearance in China, which could signal government efforts to quell concerns in the country’s tech sector after a bruising two-year regulatory crackdown. He has kept a low profile since late 2020 following a speech he made attacking Chinese regulators. A record fine of $2.75 billion was then imposed on the company for alleged unfair practices.
- Automotive maker Ford expects to burn through $3 billion this year on electric vehicles (EVs), and the division will continue to lose money until 2026 as it calls on investors to see it as a start-up. Its $5.6 billion BlueOval City complex outside of Memphis, Tennessee will include a truck plant capable of producing 500,000 EVs a year. The first vehicle to roll off the line will be a next-generation electric truck, code named Project T3, in 2025. It aims to sell two million EVs annually by late 2026.
- As at Thursday’s close the S&P was up 2.01% for the week.
Local News
- The Reserve Bank surprised financial markets on Thursday by hiking interest rates more than expected citing concerns about the effect of load-shedding on prices, sharply lower exports, and turmoil on the rand and inflation. According to Stanlib, weaker commodity prices and higher state-owned enterprise financing needs will put pressure on financing conditions for rand-denominated bonds – which will require the Reserve Bank to sustain higher real interest rates. The 50 basis-points rise on Thursday exceeded market expectations of a 25bps increase and takes the repo rate to 7.75%, pushing the prime lending rate of commercial banks to 11.25%. A further increase of 25bps is likely at the next MPC meeting, which should hopefully signal the end of the rate-hiking cycle.
- The rand had been adversely affected by the turmoil in the US and Swiss banking sector. In the first three days after news broke that SVB had failed, it weakened against the dollar, falling by around 2% to almost R18.60/$. However, once the Fed and the US government made it clear that depositors at the smaller regional banks would be fully supported, the dollar weakened by around -1.8% against the Euro as investment flows moved back into riskier assets, which led to the rand gaining more than 2% against the dollar. Before Thursday’s rate decision the rand was 0.3% firmer at R18.03/$, while shortly thereafter it strengthened to its strongest level in two months.
- Following a recent decision by S&P Global to cut South Africa’s growth rate, Fitch Ratings now says the country’s GDP will only gain 0.2% this year. S&P pegged growth at 0.1%. The downward predictions are thanks to loadshedding. In December last year, Fitch expected growth of 1.1% for this year.
- Writing for Business Day, Jonny Steinberg believes that President Cyril Ramaphosa will probably survive Phala Phala. Having been exonerated in investigations by SARS and the Public Protector, he is likely to see off any further challenges. However, that means South Africa will continue to have a weakened president for the foreseeable future, with the cautious Ramaphosa unlikely to act boldly in implementing economic reforms or addressing corruption in his party during what remains of his presidency.
- After a strike that lasted a week, the bulk of unions in the public service sector have inked a 7.5% wage deal for 2023/4. However, the National Education, Health and Allied Workers’ Union is refusing to consider the offer until a deal is reached on 2022/23 wages. Unions initially wanted 8%. The deal affects 1.2 million public servants. It could cost government an additional R50 billion to implement its latest pay rise offer at a time when it plans to stabilise the remuneration bill, which is the biggest fiscal risk to the budget.
- Transnet, which has been hard hit by state capture, has launched a huge clampdown on continued corruption at the entity after it found that both internal and external parties were implicated in the use of “ghost trains,” robbing the parastatal of income. This independent probe into corruption implicates both Transnet employees and third parties. As Ramaphosa demands the utility find a solution, public enterprises minister Pravin Gordhan will lead a delegation to China in April to resolve an impasse between Transnet and China Railway Rolling Stock Corporation e-Loco Supply, which aims to fast-track the delivery of locomotives and parts needed to rehabilitate South Africa’s rail network.
- Independent pharmacies have won a seven-year battle against Clicks over its ownership of both pharmacies and a drug manufacturer, after the Constitutional Court ruled in a five to four decision that the listed retailer had contravened regulations of the Pharmacy Act. This raises the prospects that Clicks may have to sell off pharmaceutical manufacturing subsidiary Unicorn Pharmaceuticals. Unicorn is not a material contributor to Clicks’ operations, although divestiture could affect its profit margins.
- Embattled company Transaction Capital’s local Taxi unit is having to radically change its strategy. This comes as operators in the market for used vehicles are battling high interest rates, as well as a surge in fuel prices, rising costs of parts and maintenance, and the impact of load shedding. Its sister company, which is the largest taxi lender, has been repossessing hundreds of taxis every month. Transaction Capital, which was recently hard hit by a share sell-off, now plans an “aggressive restructuring to right-size” the business and has increased its bad debt provisions by more than R1.8 billion.
- In good news for investors, shares in Murray & Roberts (M&R) gained more than 17% on Tuesday, closing at R1.16 a share, after it reported it has entered into a binding agreement with the administrators of its Australian operations to regain control of the group’s Australian mining business, RUC Cementation. The deal, subject to arrangements being signed, could be implemented by the end of June.
- Steinhoff is technically bankrupt as it is due to pay a €10.2 billion (R200 billion) debt, on 30 June that it cannot honour. On 23 March, it failed to pass a plan to give creditors 80% of its equity, described as intended to facilitate its orderly unwinding to avoid bankruptcy, and “create a stable platform to potentially realise higher proceeds from the controlled sale of the assets”, Bloomberg quoted its CEO, Louis du Preez, as saying. On Wednesday the holding company initiated a private Dutch restructuring plan known as “Whoa” (Wet Homologatie Onderhands Akkoord) that could see debt repayment dates extended for three years, leaving shareholders with nothing.
- As at the time of writing, the rand was 2.04% stronger for the week with the ALSI up 1.93%.
Sources: Dynasty, Daily Maverick, Bloomberg, GroundUp, BusinessLIVE, FM, News24, Reuters, eNCA, Al Jazeera, BusinessTech, TechCentral, Reuters, NYT, Analytics Consulting FX Solutions, etc.
