We’ve borrowed the title for our News Flash this week from the book of the same name by Dr Dan Ariely, in which he refutes the common assumption that humans behave in fundamentally rational ways – a form of behavioural economics. Traditional economics is routed in the set of simplifying assumptions which include that humans are rational in their decision making and always evaluate all the costs and benefits to maximise their personal satisfaction.
In behavioural economics, researchers such as Dr Ariely show that, not only are humans irrational, but they’re irrational to the degree that it’s predictable.
We’ve discussed how unpredictable markets can be on two occasions in the last two weeks – in our weekly newsletter and in our quarterly market update – and this was once again on full display yesterday, where the US CPI data was released just before the US market opened.
The forecast was that the headline number would show an increase in CPI of 8.1% year-on-year (y-o-y) and that the core number (which excludes food and energy) being the perpetrator of last month’s market rout, would increase by 6.4% y-o-y. While the headline CPI was published at 8.2%, the core consumer price index increased by 6.6% y-o-y, the highest since August 1982.
Predictably the US markets opened very weak with the S&P500 down 2.36% within three minutes of the opening bell. South African markets were also not left unscathed as the ALSI fell 1.7% in minutes and the rand traded to a high of R18.57/$ – the worst levels since the Covid sell-off in April/May 2020.
Unpredictably, the markets then turned very quickly and reversed the negative sentiment despite the lack of any new data points or Fed statements to calm the selling. Within two hours, the S&P was in positive territory, eventually closing 2.6% up on the day, with a 5.6% range between the day’s worst and best levels.
Journalists were left dumbfounded, struggling to find the cause of the rebound and asking if we had indeed seen the bottom of the year’s sell-off. They attributed the bounce to technical levels, short covering, “a lot was priced in” with risk assets being too cheap, and finally better than expected results at the start of the third quarter earnings’ season. One of the culprits of the better-than-expected results was Domino’s Pizza (which caught our eye as a key Fundsmith holding) – its share price gaining 10.4% on the day on better-than-expected results.
Having spent quite a bit of time with a number of our local and international fund managers over the last few weeks and digesting their feedback, we’re not suggesting that all the volatility is quite behind us – we’re probably going to have to wait for early 2023 to clear that hurdle – but we’re constantly reminded of how emotional and unpredictable the markets can be, as sentiment plays a massive role in the short-term direction, but fundamentals, such as underlying company earnings, determine the ultimate outcome.
“At market extremes confidence is best read in a contrarian fashion – major bull markets do not start when investors are feeling euphoric and major bear markets do not start when they are depressed. So extreme low points in confidence are often associated with market bottoms, and vice versa for extreme highs.”
– Shane Oliver, Head of Investment Strategy & Chief Economist at AMP Capital.
Global News
- As noted in our introduction, US inflation rose by more than forecast with the core measure, which excludes food and energy, increasing to a 40-year high of 6.6% in September. Inflation was driven by the cost of housing, medical care, airline fares, and other services.
- This will put pressure on the Federal Reserve to raise interest rates even more aggressively to stamp out persistent inflation before it becomes entrenched – effectively increasing borrowing costs to slow economic activity by curbing spending, hiring and investment, because over time that should reduce demand to bring down inflation.
- Duma Gqubule, a research associate at the Social Policy Initiative, has argued that central banks have gone too far in raising interest rates aggressively. Critics say central banks have gone too far, too fast. That the medicine — inducing a global recession that will throw millions of people out of work — will be worse than the disease. They say central banks do not have the policy tools to directly address supply-side shocks that have already started to fade.
- Asian equities and US stock futures gained as US stocks were poised to break a five-day losing streak, jumping back from losses sparked by the hot inflation reading, signalling another jumbo rate hike in November.
- Rising interest rates are making gold less attractive as an investment, which has seen large volumes of the metal being drawn out of vaults in financial centers like New York to be sent east to meet demand in Shanghai’s gold market or Istanbul’s Grand Bazaar.
- The increase in US payrolls was slower than the first half of the year when the monthly average was 440,000. The unemployment rate fell to 3.5% from 3.7% in August, which means that the tighter monetary conditions have not yet had an impact on the US Jobs’ market.
- US President Joe Biden has stated that a recession is likely in the US, but will be slight, as the economy is resilient enough to ride out the decline in growth.
- The third-quarter earnings season that kicks off in earnest this week will give analysts the broadest look yet at how business has held up as costs continue to rise, higher interest rates threaten demand, and a strong dollar squeezes overseas income. Investors will examine results from big banks including JPMorgan Chase, Citigroup, and Wells Fargo, as well as PepsiCo. Delta Air Lines gained 4% yesterday on its strong results and outlook.
- In the ongoing war in the Ukraine, Russian President Vladimir Putin has threatened more strikes against Ukrainian infrastructure after his country’s missiles hit cities across Ukraine, marking a major escalation as he tries to overcome a string of humiliating reverses. Biden has said he will “continue providing Ukraine with the support needed to defend itself, including advanced air defense systems”, while Russia has warned that admitting Ukraine to the US-led military alliance would trigger a world war.
- Meanwhile, a complete US ban on Russian aluminum is threatening to upend a global market already reeling from multiple disruptions, throwing a spotlight on how China could fill any supply gap.
- An increased selloff in UK pension funds is continuing to raise alarm bells across the bond market, with the end of central bank support scaring investors. Bonds in UK pension funds are being sold to meet margin calls as the Bank of England confirmed it will end emergency bond buying, and the reverberations are being felt everywhere from Sydney to Frankfurt and New York. In the US, investment-grade corporate bonds are falling, with average prices of around 86 cents on the dollar compared with 90 cents on September 21.
- At the same time, UK Prime Minister Liz Truss has appeared to rule out a reduction in public spending, a pledge that most economists find difficult to square with her promise not to blow out the deficit. Doubts about the fiscal soundness of the government’s economic plan continue to reverberate in the financial markets.
- As at Thursday’s close the S&P 500 was up 0.8% for the week.
Local News
- Transnet and labour unions have been meeting to end a strike over wages that’s progressively slowing the flow of goods in and out of the nation. The strike action started on 6 October and has also put shipments of agricultural goods at risk, with fruit farmers raising concerns about the limited shelf life of their products. The effects are being felt as far as an already battered Europe as the European power producers are trying to stock up on coal ahead of winter to make up for dwindling supplies of natural gas from Russia.
- Transnet group CEO Portia Derby said the company will not be yielding to worker demands as it simply cannot afford it, potentially setting the stage for a protracted standoff with labour unions.
- At the same time, the unprotected strike has badly affected Kumba Iron Ore, which said that a notice of force majeure from Transnet in the face of what the state-owned enterprise describes as an illegal strike will cost the Anglo American unit 120,000 tonnes per day in lost export sales. This bodes ill for an economy already beset by rolling power cuts.
- The International Monetary Fund has downgraded its outlook for South African economic growth for 2022 to 2.1% from 2.3% previously, which already looks optimistic and out of touch with the realities on the ground. It also expects more than a third of the global economy to contract this year or next, warning that “the worst is yet to come”.
- Economic activity fell for a fourth consecutive month, as the BankservAfrica economic transactions index declined further in September, contracting 0.4% compared with 2% in August. This reflects dire conditions in the economy as rolling blackouts take their toll on all spheres of the economy, businesses, and households. The economy is buckling under the pressure of severe load-shedding and global challenges.
- Despite this, business confidence for August remained resilient and at higher levels than before the Covid-19 pandemic and the imposition of local and global economic lockdowns, the South African Chamber of Commerce and Industry said. Confidence levels increased by 5.3 index points in August, reflecting the positive effect that overseas tourism, as well as merchandise import and export volumes, has had on the country’s business confidence in that period. However, much of the effect of the imports and exports could be undone by the Transnet strike.
- The Financial Action Task Force is highly likely to demote South Africa to its grey list in early 2023, a report commissioned by Business Leadership South Africa has found. It warns of adverse outcomes including a bad reputation for South Africa and higher costs for international transactions. Having witnessed the impact in Mauritius, we do not feel that it will be as dire for our clients as some are predicting, as we are already faced with stringent anti-money-laundering requirements.
- Meanwhile, the National Prosecuting Authority is seeking to prosecute a long list of those allegedly responsible for criminality linked to transactions associated with Transnet’s 1,064 locomotives deal. It is under pressure to produce a compelling charge sheet for one of State Capture’s biggest cases — and it must do so by 14 October 2022.
- It’s looking increasingly likely that former cabinet minister and Gauteng premier Nomvula Mokonyane could well become the next deputy secretary-general of the ANC. This shows that the findings of the Zondo Commission appear to mean very little to some of its internal constituencies. It also indicates just how hard it is to understand how deals leading to so much support, across provinces, are actually put together.
- German IT giant, T-Systems, scored one of the biggest Gupta-linked State Capture contracts in South Africa, with links to both Transnet and Eskom. Despite glaring evidence available in the public domain, the findings of the Zondo Commission and a fresh criminal investigation in Germany, South African authorities seem uninterested in holding T-Systems to account for its corrupt billions earned at the expense of the public, reports Daily Maverick.
- As at the time of writing, the rand was 0.2% weaker for the week and the ALSI was 1% lower.
Sources: Dynasty, Daily Maverick, BusinessLIVE, News24, Bloomberg, Moneyweb, Scorpio, UBS, What’sNews.com, New York Times, etc.
