The equities sell-off that was sparked on Thursday last week, ignited on Monday with Asian markets plummeting at the start of trade. Japan’s Nikkei Index dropped by more than 12% on the day in a plunge reminiscent of Black Monday in 1987. Key indices across Europe and Asia followed the Nikkei down as did the JSE.
Since then, trade has been extremely choppy, with the Nikkei bouncing back nearly 11% on Tuesday. In the US, meanwhile, the S&P 500 (-3%) and Nasdaq (-3.4%) fell further on Monday after the shaky performance towards the end of last week. Like the Nikkei, trade on these US benchmarks has been extremely choppy this week.
As we noted last week, fear has set into the markets and investors braced for volatility. Although market weakness late last week was attributed to the Fed being “behind the curve” with fears of a hard landing for the US economy, much of what happened this week can be explained by an unwinding of global carry trades. Investopedia defines a carry trade as “a trading strategy that involves borrowing at a low-interest rate and investing in an asset that provides a higher rate of return”.
Because Japan’s interest rates continue to hover at rates far lower than the rest of the world, the yen is a favourite carry trade. Traders continued to bet Japanese interest rates would remain low and to take extensive yen-dominated loans to invest in emerging market equities and other risk assets.
They were blindsided when the Bank of Japan raised interest rates for a second time and signalled the potential for more hikes. This triggered a wide sell-off of riskier assets as traders fled to cash and US treasuries. With market confidence fragile following last week’s weak US job’s data, the stage was thus set for a continued market correction.
As we have mentioned above, many commentators are speculating that the Fed has waited too late to cut interest rates – increasing the risks of a recession in the US. Furthermore, many investors could be taking profits on high-flying Big Tech shares. It is likely that escalating tensions in the Middle East are also affecting confidence. It’s also not unusual to see volatile trading in August when many northern hemisphere traders are on holiday.
Yet, it’s important to contextualise this week’s global market levels in the context of year-to-date returns and to avoid behavioural biases to comparing weaker markets to the record high reached by the S&P 500 on 16 July. Year-to-date, the S&P 500 and Nasdaq were still up nearly 10% in dollars at the time of writing and even the Nikkei was up 5.41% in yen and slightly positive in dollars. Given that we had modest expectations for equities performance at the outset of the year, we see the explainable events of the past week as a relatively healthy correction rather than a cause for panic. Indeed, the mood may well change again in September if, and when, the Fed cuts rates into an economy that remains resilient – as it has been to date.
As the Cboe Volatility Index VIX – regarded as Wall Street’s fear gauge – shows, we are likely to see volatile trading for what remains of the year. Some analysts believe that we will see further unwinding of carry trades, which may cause markets to drop. However, we remain cautiously optimistic that there will not be a hard landing for the US economy and that markets will start to settle after the election, in the absence of other major macroeconomic or geopolitical shocks.
Of course, it is relatively easy to exit risk assets when markets are falling, but much more difficult to reestablish entry points, as the market troughs are reached during periods of maximum pessimism.
“A ‘flash crash’ or some other extreme market fluctuation can’t hurt an investor any more than an erratic and mouthy neighbour can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.”
– Warren Buffet, well-known investor and CEO of Berkshire Hathaway
“Tokyo markets opened the week with great drama – and it’s best to think of it as chaos theory at work. A butterfly flapping its wings in Wall Street (with some help from Warren Buffett, the Federal Reserve, and innumerable retail investors) has created a Tokyo typhoon.”
– John Authers, journalist at Bloomberg
Global News
- Stock markets across the globe started to recover on Tuesday after Monday’s panic selling that caused a worldwide bloodbath across bourses. Analysts marked Monday’s rout as a knee-jerk reaction to the less than favourable data from the US as growth in the labour market slowed, together with an unwinding of the Japanese carry trade. Goldman Sachs now pegs the chance of a US recession at 25% – up from a previous forecast of 15%.
- Experienced Wall Street insiders stated that the sharp selloff was driven more by panic than logic and that the sudden concerns about a US downturn were unfounded. By the close of trading in New York on Wednesday the S&P was down 2.75% for the week. European stocks closed higher on Wednesday in their best performance for more than nine months, as global markets continued to shake off the recent rout.
- The bloodbath, however, indicates that the pillars that had underpinned financial-market gains for years – assumptions that the US economy is unstoppable, AI will quickly revolutionise business everywhere, and Japan will not hike rates enough to matter – have been shaken.
- However, the Fed is unlikely to announce an emergency rate cut on the back of the rout, as this could cause more panic. Emergency cuts are rare and the last thing the Fed wants is for people to believe the US economy is on the cusp of a potential recession. Furthermore, its mandate does not include settling the stock market.
- As equities sank and carry trades unravelled, Bitcoin followed stocks rather than gold down, at one point tumbling 17% to below $50,000 on Monday before recouping some losses for the day. Its correlation with the precious metal turned negative in July, data compiled by Bloomberg shows. The crypto asset selloff is testing the industry maxim that Bitcoin is the equivalent of “digital gold,” and therefore belongs in an asset portfolio to hedge against stock market gyrations.
- On Saturday, Warren Buffett’s Berkshire Hathaway said it cut its stake in tech giant Apple by nearly 50%. The sharp selloff is notable for Buffett, who is known for holding onto stocks for long periods of time. Berkshire Hathaway has previously downsized its stake in Apple.
- Google has violated US antitrust law with its search business, US District Judge Amit Mehta ruled on Monday, handing the tech giant a massive court defeat with the potential to reshape how millions of Americans get information online and to upend decades of dominance. Search is Google’s oldest and most important business. The company has spent tens of billions of dollars on exclusive contracts to secure a dominant position as the world’s default search provider on smartphones and web browsers.
- Authorities in the European Union, Britain and China have requested Nvidia provide information about its sales of AI chips, allocation of supplies and investments in other companies, according to Nvidia’s financial filings. The Justice Department has also started investigating Nvidia’s sales practices and will review one of the company’s most recent acquisitions, according to sources.
- Nvidia is facing engineering snags in the development of two new advanced chips, slowing the release of some products designed to extend its lead in the market for artificial intelligence computing. The delays affected the company’s highly anticipated Blackwell lineup. A version of the chip, known as an AI accelerator, is being reworked to better work with data centre infrastructure designed for an earlier chip, the Hopper H100.
- AngloGold Ashanti’s first half of the year to June results saw a gain of 65% in adjusted earnings before interest, taxes, depreciation and amortisation, with headline earnings up 413% year-on-year thanks to the successful turnaround of its Brazilian operations. The past two years have seen AngloGold’s Brazil operations dragged down by the Córrego do Sítio mine.
- Airbnb shares tumbled more than 16% in extended trading on Tuesday before recovering 4% the following day after the company gave a disappointing outlook for a third consecutive quarter and warned of slowing demand from US vacationers. This is a sign that travel momentum is tapering off despite the peak summer season. Airbnb expects a slowdown of its measure of nights and experiences booked during the current period. It posted an 8.7% gain in that category during the second quarter, short of investors’ estimates. The third-quarter increase will be even smaller. Analysts had been projecting an 11% gain amid the peak travel season.
- As at Wednesday’s close the S&P was 2.75% down for the week.
Local News
- As global markets crashed on Monday, the JSE’s All-Share index was down 2.7% in intraday trading and the rand retreated to its weakest level in almost two months. On Tuesday, the index ended the day slightly down 0.19% at 79,430.05 points after Monday’s negative 1.19% close. The rand see-sawed this week between its weakest level of R18.67/$ at mid-day on Monday to its strongest level of R18.28/$ on Wednesday.
- Last week, the ANC’s National Executive Committee met to evaluate the results of the 29 May elections and discuss why it performed so badly. At the centre of this was a report by Joel Netshitenzhe, the head of the Mapungubwe Institute for Strategic Reflection. One insight from the report is that, where the ANC did well, there was low voter turnout, and where the ANC did badly, there was high turnout. The real danger to the ANC here is that this suggests that if there are options other than the ANC, people will choose them. Should more parties emerge in the future, many voters will find those new choices tempting.
- Health Minister Aaron Motsoaledi’s announcement of a roadshow to consult stakeholders on National Health Insurance has met with scepticism from organised business, the DA and trade union Solidarity, with the argument that this isn’t the correct way to consult interested parties. President Cyril Ramaphosa assented to the Act in May, but none of its sections have been promulgated yet.
- The Energy and Electricity Department is considering the next steps to eventually procure transmission development projects from the private sector. It could be 18 months to two years before the government goes to market to procure transmission. However, South Africa’s plan to build new renewable power capacity is at risk after the National Energy Regulator of South Africa rejected a bid by generators to access the electricity grid. Delinquent municipalities owe Eskom R82 billion.
- South Africa’s 15 water boards, which are responsible for providing and maintaining water infrastructure, are owed R21.3 billion by municipalities, which threatens their viability. Across the country, the percentage of households that experienced water interruptions, South Africa’s new crisis, lasting more than two days at a time or 15 days in total in 2023 increased to 35.8% from 24.3% in 2012. The ANC is backing its Operation Vulindlela project, a joint initiative of President Cyril Ramaphosa’s office and the National Treasury created in 2020, to tackle municipal debt.
- Johannesburg needs R221 billion to catch up on maintenance and overdue upgrades across its collapsing road, power and water networks. The city council discussed the shortfall late last month and detailed it in documents seen by Bloomberg. This comes at a time when regular power outages, the result of distribution network breakdowns, hit large swathes of Johannesburg. Officials leave potholes unattended for months and parts of the city had no water for as long as 11 days in March.
- The World Bank has called for a widespread overhaul of South Africa’s trade policy, urging the country to consider forging new trade agreements with advanced and emerging economies, including those in East Asia. It has also said the country’s move to drive industrialisation through localisation could put a brake on foreign investment and reduce the competitiveness of its exports.
- The South African Reserve Bank has developed a new inflation measure to monitor underlying price developments that will help support monetary policy decision-making. The measure, Supercore inflation, included core price growth components that are more likely to be triggered by general economic conditions as measured by the output gap and show high sensitivity to the business cycle. It will assist policymakers to distinguish short-lived inflationary pressures from those showing more persistent trends. The measure will also be used alongside headline and core inflation, which strips out food and non-alcoholic beverages, fuel and energy prices.
- Nedbank expects the South African Reserve Bank to start cutting rates in September, with a cumulative 50bps of cuts expected in the second half and a further 75bps of cuts in 2025. CEO Jason Quinn says that should help unlock consumer appetite for credit, while the rand could trade closer to R17/$ from next year under the bank’s post-Government of National Unity upside economic scenario. He added that Nedbank forecasts GDP to increase by 0.9% in 2024, while inflation is set to continue to decline.
- The South African Revenue Service is still discussing when to start charging 45% tariffs, plus VAT, on small cut-price clothing imports. Chinese fast fashion retailers like Temu and Shein have been paying duties of 20% (or less) if their clothing packages cost under R500. The local clothing industry hopes the higher tariffs will “level the playing field” and help it compete against a flood of cheap imports. The take hike was supposed to kick in on 1 July 2024.
- Naspers and its associates, Amsterdam-listed Prosus and its largest investment Tencent, were unscathed by Monday’s massive sell-off as tech shares of companies focused on AI slumped. By market close on the day, Naspers shares were 0.98% firmer, with Prosus adding 0.78%. Their largest constituent, Tencent, lost just 0.45% in Hong Kong. Their exposure to AI is much lower than their US counterparts.
- MTN is expecting to report a significant loss in the first half of the current financial year, with the group anticipating a massive 150% reduction in headline earnings. It said it expects to report a headline loss per share of between 271 and 217 cents for the six months to June.
- Discovery Group plans to create a single global composite of its Vitality offerings, with the same strategy, product and technology, which it will simply name Vitality, outside of its existing South Africa composite. The group has traditionally been made up of three business composites: Discovery South Africa; Vitality UK (VUK); and Vitality Global (VG). The share price gained 2.54% to R139.50 Wednesday afternoon on the news.
- Glencore, which impaired R11 billion in its South African coal business due to logistics constraints and low thermal coal prices, is encouraged by moves being made by Transnet’s new leadership team in turning the performance of the state-owned entity around. The impairment is more than the $597 million revenue the business raked in the period under review. More than 90% of Glencore’s shareholders have rejected the company’s plans to unbundle its coal and carbon steel business.
- Impala Platinum has warned shareholders that it would report a loss in the year to end June when it publishes its results later this month, with the group set to write off R20 billion in the value of its assets due to a plunge in platinum group metal prices. The impairment is more than a quarter of the group’s market capitalisation of R75 billion.
- Pick n Pay’s recent R4 billion rights offer attracted subscriptions of over R8 billion, it said on Monday. It added that this reflects strong confidence in its brand and turnaround strategy. The group said in a statement that 98.7% of shareholders followed their rights in its recent capital raise, with the group receiving R4.3 billion in excess subscriptions. RMB, Absa and Standard Bank were paid a total of R80 million for their role. Pick n Pay was down 2% on Monday afternoon and has lost about 37% on a one-year basis.
- As at the time of writing, the rand was 0.7% weaker and the ALSI was 0.5% down for the week.
Sources: Dynasty, Daily Maverick, BusinessLIVE, Reuters, CNN, Freight News, News24, Euronews, Bloomberg, BizNews.com, Daily Investor, Analytics Consulting, etc.
