Markets look set to end 2023 on a high note, with the Federal Reserve giving its strongest signal to date that the end of the current interest rate tightening cycle is now in sight. Practically every asset class—including equities and corporate bonds—surged yesterday after the Fed indicated that it is projecting more aggressive interest rate cuts in 2024. The S&P 500 climbed 1.37% and the Nasdaq rose 1.38% on the day.
The dollar sank and other currencies, including the rand, rallied in response to the suggestion that a soft landing for the US economy is now in sight. Bloomberg’s data shows that Wednesday was the best Fed day across assets in almost 15 years. Traders are now also betting on European central banks starting to loosen policy in the months to come.
According to Bloomberg, investors are now pricing in six quarter-point rate reductions from the Fed in 2024. Some analysts are forecasting that interest rates could start falling from March and with this in mind, risk assets and emerging markets in general are set to start 2024 on the front foot.
There is, of course, no guarantee that the rally will continue throughout the new year, especially if the Fed spots signs that inflation is flaring up again or if that the economy is overheating. With US markets advancing around 23% this year, there may be limited scope for significant further gains as most of the good news may already be priced in.
But after having clashed in recent years, the markets and the Federal Reserve are – for the time being – in sync.
This will be our last News Flash for 2023. The new year will begin with our First Quarterly Update on 12 January 2024, followed by our first weekly News Flash on Friday 21st.
“The Fed is done raising rates, and the market could not be more thrilled to have higher conviction in that.”
– Matthew Miskin, co-chief investment strategist at John Hancock Investment Management
“We’re having a party.”
– Kathy Jones, Charles Schwab’s chief fixed-income strategist
Global News
- Wall Street’s great cross-asset rally got an extra dose of encouragement yesterday as dovish Federal Reserve signals pushed the S&P 500 closer to its all-time high while sinking bond yields. The S&P 500 topped 4,700, the Dow Jones Industrial Average hit a record and the Nasdaq 100 extended this year’s surge to over 50%. Two-year yields sank 30 basis points — the most since March — to around 4.4% and the dollar fell to a four-month low. Gold and Bitcoin also showed strong gains
- Meaningful signs that the Fed may not hike interest rates ahead of the decision include the fact that the pace of inflation’s descent — which has left it now only a percentage point above the central bank’s 2% target — has also surprised policymakers, just as it did on the way up. At 3.7%, the unemployment rate is right about where it was when the Fed began raising interest rates in March 2022.
- On Tuesday, oil plunged to its lowest level in five months as signs of solid supplies piled up. Prices continued to be battered by fresh signs that supplies remain ample. The weekly average of Russia’s seaborne crude exports jumped to the highest level since early July, and a US government agency raised its estimate for the country’s oil output this year by 30,000 barrels a day from its projection last month.
- Argentina has devalued its currency, the peso by 54%, while also announcing massive spending cuts to eliminate its primary fiscal deficit next year as the first steps in recently elected President Javier Milei’s shock-therapy program. The central bank will target a monthly devaluation of 2% going ahead. Argentina has a mixed economic system with centralised economic planning and government regulation.
- In a first-of-its-kind deal, COP28 ended yesterday with in a deal that saw a commitment to transition away from all fossil fuels. The agreement calls for countries to quickly shift energy systems away from fossil fuels in a just and orderly fashion. Under the deal, countries also are called to contribute to a global transition effort — rather than being outright compelled to make that shift on their own.
- Tesla is set to recall and fix more than 2 million vehicles — its biggest recall ever — after the National Highway Traffic Safety Administration determined its driver-assistance system Autopilot doesn’t do enough to guard against misuse.
- Apple cemented its position as the world’s most valuable company after its shares closed at a record high on Wednesday amid a broad rally in technology stocks spurred on by bets that the Fed will soon begin cutting interest rates as inflation slows. Its stock climbed 1.7% to $197.96, surpassing its previous closing record set in July. The gain leaves the stock up 52% for the year.
- Google has lost a competition case in the US to Fortnite maker Epic Games, which could end up costing the technology giant billions of dollars in revenue. A jury in San Francisco found that Google Play wilfully wields monopoly power through Google, an Alphabet unit, with this being symptomatic of anticompetitive behaviour. The decision threatens to roil an app store duopoly with Apple that generates close to $200 billion a year and dictates how billions of consumers use mobile devices. Google will appeal the ruling.
- As at Wednesday’s close the S&P was up 2.23% for the week.
Local News
- The JSE soared by 3.18% today on the back of the Fed’s positive announcement on rate hikes yesterday. At the time of writing, the JSE Resource 10 Index was up 7.12% with the JSE Metals and Mining Index up 11.18%. The rand also experienced strong gains in this renewed risk-on environment, showing once again that movement in the dollar is a major determinant in the directionality of our local currency.
- The ANC seems to be fast-tracking new legislation and legislative changes to win over voters next year. The 2024 elections will be the most contested since 1994 and could prove pivotal for the ANC in that it could lose its majority. The laws that appear to be being pushed through include the National Health Insurance Bill, the Revenue Laws Amendment Bill, the Pension Funds Amendment Bill, the Road Accident Fund Amendment Bill, and the Expropriation Bill.
- Discovery CEO Adrian Gore has said that the National Health Insurance Bill in its current form will diminish the funds available for healthcare, deter investment and stymie collaboration with the private sector. This is because the Bill, which now just awaits President Cyril Ramaphosa’s signature, could kill medical aids as they will only be allowed to cover services that are not provided by NHI once it is fully implemented. A Wednesday BusinessLIVE editorial says the Bill is a “blunt, ideologically driven instrument that has been bludgeoned through each step of the public consultation process”.
- Eskom remains in dire straits after its interim results for the six months to end-September 2023 showed a power utility in deep crisis, with debt spiralling and its operational performance sagging. Eskom said it made a net profit after tax in its latest six-month period of R1.6 billion, down from R3.8 billion in the previous first half. Arrear debt owed by municipalities is increasingly problematic with a jump from R58.5bn to R70bn.
- Cabinet has approved the Freight Logistics Roadmap, which will be implemented in conjunction with Transnet’s turnaround plan. The map, developed through a partnership between business and government, proposes that Transnet be unbundled to break its monopoly and allow for greater private sector participation in the sector
- State-owned oil and gas company PetroSA has pushed back against critics over its decision to use Russia’s Gazprombank Africa, who’s parent is under US sanctions, as its investment partner to restart operations at its gas-to-liquid refinery in Mossel Bay. PetroSA made it a large part of the conditions for the entity chosen from the 20 bidders to have access to a minimum investment amount of $200 million.
- The pace of inflation growth slowed to 5.5% in November from a year earlier after a 5.9% gain in October. This was due to a sharp decline in fuel prices. Other categories remained elevated, sending mixed signals to the central bank, which has cautioned it remains wary of ongoing cost pressures.
- Manufacturing activity rebounded in October, increasing by 2.1% year-on-year after September’s downwardly revised 4.1% fall. The outcome was above market estimates of a 1.8% increase. On a month-on-month basis, manufacturing output shrank by 0.2% in October after shrinking by 0.8% in September.
- Confidence among retailers increased in the current quarter thanks to less loadshedding and more solar power according to the Bureau for Economic Research’s latest Retail Survey, released on Monday. Retailer business confidence recovered further during the fourth quarter of 2023 increasing to 47 points from a three-year low of 20 in the second quarter and 32 during the third quarter.
- The IDC has backtracked from its earlier threats to pull Tongaat Hulett’s R2.3 billion business rescue funding, which would have forced it into liquidation. Tongaat Hulett bidder RGS has alleged, in leaked letters, that the business rescue practitioners have attempted to sideline them in favour of a rival bid led by IT mogul Robert Gumede. This amounts to claims that the business rescue practitioners acted contrary to the best interests of Tongaat Hulett and its creditors.
- At the time of writing the Rand was up 2% and the ALSI had gained 1.5% for the week.
Sources: Dynasty, BusinessLIVE, News24, Wall Street Journal, Bloomberg, TimesLIVE, MyBroadband, Daily Maverick, CNN, BBC, The Guardian, BizNews.com, TechCentral, etc.
