Yesterday, it was announced that US inflation had cooled in October by more than forecast, causing US stocks to surge the most since early 2020. On the day, the S&P 500 gained 5.5% in a euphoric reaction to the possibility that the US annual inflation rate may well have now peaked, and that the worst may be over in terms of future jumbo rate hikes in the order of 75bps.
The jubilation spread across the globe, with Europe’s Stoxx Index rising for a second consecutive day, thereby posting a weekly gain of 4.9%. Across in the east, Hong Kong listed technology stocks surged by 10% today, boosted by a partial relaxation of China’s Covid quarantine measures.
Back at home, investors in our domestic market were able to celebrate a gain of 3.4% from the FTSE/JSE All Share for the day, but on the back of a 2.3% intra-day reversal on Thursday.
Other asset classes also felt the positive contagion: Bitcoin recovered 15.6%, having fallen to 2022 lows of $15 000 on Wednesday, US treasury yields dropped by 0.29%, and oil and gold were up 3.9% and 3.2% respectively, across Thursday and Friday.
On the other hand, the stand-out loser on the day of the announcement was the US dollar, which slumped by 2%, heading for a fourth consecutive week of losses. (A weaker dollar is closely correlated with “risk on” sentiment.)
All of this shows investors how asset price directionality can shift dramatically in a single day, proving how futile it is to try and time markets and currencies based on short-term considerations.
After all, market timing can only be successful if both entry and exit points are optimised – a strategy which is of lesser concern to longer-term investors.
“If you have a farm and you have a bad year, nobody quotes your farm 50% below its actual intrinsic value. But in stocks, this does happen and happens very often.”
– Naved Abdali: Seasoned financial professional and author
Global News
- In major political news, Republicans were on track overnight on Thursday to win the House, but control of the Senate is still undecided. In the House, Republicans had won 210 races, compared with 192 for Democrats, putting them within striking distance of the 218 needed for a House majority. In the Senate, Republicans had claimed 49 seats compared with 48 for Democrats and would need to win in two of three remaining states—Arizona, Nevada, and Georgia – to win a majority.
- Donald Trump has been called the Republican party’s “biggest loser” following the US midterms on Tuesday. His party rival Ron DeSantis swept to victory in a landslide in Florida, giving him a strong platform to challenge the former president in 2024.
- Although inflation and the economy were key concerns during voting, they did not result in the kind of political drubbing of President Biden and his party that many had expected. That has made Biden less inclined to pivot on economic issues to appease Republicans, who have spent months pummeling the president over his handling of the economy.
- The US core consumer price index, which excludes food and energy, increased 0.3% from the prior month, a percentage that was lower than the month-to-month increase of 0.6% in September. Year-on-year, the measure decelerated from a four-decade high in September to 6.3%. This offers hope that the fastest price increases in decades are ebbing and giving Federal Reserve officials room to take the foot off the accelerator of steep rate hikes. Stocks gained on Thursday on the lower numbers as investors felt more confident that the Fed could slow the pace of interest rate increases that have weighed on the market. This could lead to a more modest hike of 0.5 % next month.
- Key take-outs from the inflation report include that the slowdown in the overall number, from an 7.7% gain in October versus 8.2% the prior month on a year-on-year basis, was despite the rise in gasoline prices. Rental costs, however, are still high, as is food inflation. While the lower inflation numbers are good news, there is still a long way to go before high inflation becomes history. Elevated inflation continues to weigh on American households. High prices have eaten at wage gains and led many to either tighten their belts or rely on savings and credit cards to keep spending.
- In the UK, the government is seeking £21 billion in new taxes as part of a solution to finding more than £50 billion in revenue and spending cuts. That will make it the biggest fiscal tightening since George Osborne’s 2010 austerity package.
- Chinese producer prices fell 1.3% in October compared with a year earlier, the country’s first year-over-year decline in producer-price inflation since December 2020.
- In terms of the war waged by Russia against the Ukraine, Western intelligence services are working around the clock trying to work out whether it will go nuclear. President Vladimir Putin has warned that Russia reserves the right, which means that it may be an inescapable reality that we are closer to nuclear confrontation than at any time since the 1962 Cuban Missile Crisis.
- Amazon.com had become the world’s first listed company to lose a trillion dollars in market value due to a combination of rising inflation, tightening monetary policies, and disappointing earnings updates that triggered a historic selloff in the stock this year. Shares fell 4.3% on Wednesday, pushing its market value to about $879 billion from a record close at $1.88 trillion on July 2021.
- Meta, previously Facebook, is getting rid of more than 11,000, or about 13% of its workforce, in what is its most significant layoff move. Since Mark Zuckerberg founded Facebook in 2004, the Silicon Valley company has steadily hired more employees and at the end of September, it had a staff complement of 87,314 people. Salesforce also laid off hundreds of staff members this week as the onslaught of tech cutbacks continued unabated.
- Elon Musk has sold another $3.95 billion of Tesla’s shares to help fund his buyout of Twitter Inc., bringing his sales of the electric-vehicle maker’s stock to about $36 billion in the past year. This comes despite his assurances that he was done offloading the stock.
- Shares in Walt Disney dropped to their lowest since March 2020 on Wednesday, losing 13% in its biggest one-day loss since 2001, after it reported fourth quarter results that showed that ballooning costs at the entertainment giant’s fast-growing streaming division were overshadowing strong subscriber additions.
- Stocks such as Amazon and Microsoft, which are well represented in Dynasty’s offshore equity portfolios, are up 6.2% and 9.8%, respectively, for the week.
- As at Thursday’s close the S&P 500 was up 4.9% for the week.
Local News
- In political news, Stephen Grootes has said that there will be “seven days that could make or break Cyril Ramaphosa”. While the ANC’s National Conference in December is expected to be the climax of our political year, several of the defining questions about our politics and the strength of Ramaphosa’s leadership could be answered as early as next week. Read more here.
- A survey by political think tank Rivonia Circle, which polled 2,000 registered voters across the country, found that no party would receive more than 50% of the vote, with the poll putting the ANC’s support at 41% from the 57.5% it obtained in the 2019 national elections.
- Finance Minister Enoch Godongwana has clarified BBBEE requirements will still apply to state procurement even as National Treasury tables new rules. Treasury has proposed amendments to the Preferential Procurement Policy Framework Act after a recent Constitutional Court ruling found that the finance minister and the Treasury had exceeded their powers by prescribing procurement rules and requirements to state organs, including government departments and state-owned enterprises.
- On the sidelines of COP27 in Sharm El-Sheikh, Egypt, Ramaphosa, in a press conference shortly after delivering South Africa’s national statement, called for the hastened implementation of international climate agreements. European countries last year pledged $8.5 billion to help the country move off fossil fuels. Richer nations are now pledging more money to assist South Africa. France, Germany, and South Africa have signed new loan agreements for the two European nations to each extend €300 million concessional financing to support the country’s efforts to reduce its reliance on coal in the energy sector. Yet a year after the signature of the COP26 agreement, the deal is still subject to negotiations between South Africa and Germany, France, the UK, the US, and the European Union, and what exactly happens could have far-reaching ramifications.
- South Africa is close to a tipping point in its capacity to deal with the risks facing the energy sector. Despite adding about 1GW of renewable energy a year, this accounts for only 10% of the roughly 10GW of renewables the country should be building annually to meet future demand.
- One of the biggest polluters in the country, Sasol has again outlined its plans to produce green hydrogen to reshape the company and the energy industry in South Africa. The challenge is to get it done relatively quickly, and profitably. It admitted that its use of coal is unsustainable.
- In currency news, the step-down in the US dollar this week has helped to release further pressure on the USD/ZAR exchange rate. Our updated research by our Investment Committee shows fair value has declined to R17.66 from R18.62 at the September peak of the US dollar spot index.
- As at the time of writing, the rand was 3.7% stronger for the week and the ALSI was up 5.4%.
Sources: Dynasty, BusinessLIVE, New York Times, Bloomberg, Daily Maverick, Reuters, News24, The Guardian, AC FX Solutions, etc.