Economists and analysts have, from early in 2021, signalled the danger that stock markets may face a ‘taper tantrum’ this year – in other words, a surge in US treasury yields in response to an indication that the Fed may begin tapering quantitative easing, despite the Fed’s continued reassurances to the contrary. The fear is that a rise in bond yields would lead to a sell-off in global equity markets.
The taper tantrum in May 2013 saw US 10-year bond yields spike overnight from around 2.15% to nearly 2.55%, but only caused a very temporary fall in stock markets. The MSCI World Index retreated 7.6% over the following month and recovered over the subsequent months to end the year nearly 11% higher than the May peak.
This week, we saw evidence that a sequel to that taper tantrum may arrive soon. US stocks declined on Thursday after the Fed predicted an increase in consumer prices from mid-year. The 10-year US government bond yield was up 0.07% at 1.54% at closing time, having risen from 0.93% at the beginning of 2021. South Africa could be as vulnerable to Taper Tantrum 2 as it was to the last one, so it’s worth watching for the potential impact on the rand and government bonds.
“Because of the massive programs that have happened, the stimulus that is happening, the dollar being the world’s reserve currency, there is clearly a trend to stoke inflation and it is going to come. Again, I don’t know when and how, but the interest rates have been steepening and they should be steepening further.”
– Oliver Bäte, CEO of Allianz
- The S&P 500 briefly erased its 2021 gains on Thursday, reaching its lowest close in about five weeks. The Nasdaq 100 extended losses from a February peak to almost 10%. The dollar climbed and the oil price surged after the OPEC+ alliance decided to keep output unchanged. We expect markets to be volatile whenever traders hear hints that stimulus and quantitative easing might be coming to an end.
- The UK Budget contained hints about what the costs will be of rebuilding the economy after Covid-19. Corporate taxes are to be hiked from 19% to 25% for the most profitable companies from April 2023, while the income tax rate for basic and higher rate earners will not be adjusted for inflation through to 2026. The tax rises are needed to pay for the UK government’s massive Covid-crisis spending plan, which has now hit £344 billion.
- Nicolas Sarkozy, the former president of France, was convicted and sentenced to at least one year in jail on charges of corruption. While it is rare for a sitting president or prime minister to be charged and convicted, it’s not unusual for former leaders in Europe to face consequences for corruption. François Fillon, France’s Prime Minister from 2007-2012, for instance, is currently serving a prison sentence. As scandals in Austria, Belgium, Spain, Estonia and other countries show, locking up political leaders is no panacea for corruption.
- Former US president Donald Trump has hinted at a possible run for president again in 2024 during a speech at the Conservative Political Action Conference in Florida.
- CEO of crypto exchange Kraken, Jesse Powell, predicts Bitcoin could reach $1 million in the next decade. Extreme predictions are nothing new in the world of Bitcoin, where adherents stand to profit from convincing a wider audience that crypto is a legitimate asset class, rather than a speculative fad. Billionaire hedge-fund manager, Dan Loeb called for openly engaging with cryptos while maintaining healthy scepticism.
- The US will contribute as much as $4 billion to COVAX, the global effort to fund vaccinations in lower-income countries, but doesn’t plan on shipping any of its own vaccines abroad until the nation’s own demand has been met. The World Bank is meanwhile preparing emergency financing to help about 30 African countries access Covid-19 vaccines. Global vaccine equity is seen as the key to ending the pandemic, since rampant outbreaks in some countries could create conditions for new variants of Covid to emerge.
- The JSE has slipped on rising US bond yields. Higher yields could trigger illiquidity in the market and that could have spillover effects and a negative effect across other markets, according to analysts.
- The National Treasury continues to complicate tax matters for South Africans who plan to emigrate. The Budget Review 2021 includes a proposal to impose a deemed retirement withdrawal tax on retirement assets of emigrants as an exit tax. It’s not clear how the proposal will work in practice, but South Africans planning to move abroad will need to keep close tabs on this.
- Only 5.8% of South Africa’s population is paying about 92% of all personal tax in the country, according to Econometrix chief economist and director Azar Jammine. This underscores the importance of government clamping down on corruption and enforcing tax compliance before seeking to impose new taxes or higher taxes on a small population that is bearing a heavy tax burden.
- According to Stats SA, the proportion of those who worked from home decreased from 10,9% in Q3 2020 to 8,0% in Q4. This is possibly a result of lockdown restrictions being relaxed in Q4, making it possible for more people to work from their usual place of work rather than working from home. However the acceleration in remote working that occurred during the hard lockdown is most likely to be a structural shift. Most local companies do not expect staff in physical offices to return to pre-Covid levels for years to come.
- The ANC’s factional battles continue to shape South Africa’s economy and destiny. A process to remove Public Protector Busisiwe Mkhwebane from her position is underway, while the Ace Magashule and Cyril Ramaphosa factions are still contesting for the upper hand in the ANC.
- Political commentators suggest Finance Minister Tito Mboweni is still in place because President Cyril Ramaphosa cannot find a suitable replacement. The Finance Minister is thought to be keen to retire from politics. Minister Mboweni has taken a relatively market friendly approach to his Budgets; should he be replaced in the near future, markets will be looking for policy continuity.
- South Africans continue to be concerned about the slow pace of the country’s vaccine rollout. At an interesting Wiser (Wits Institute for Social and Economic Research) webinar session Professor Imraan Valodia and Judge Dennis Davis looked at some of the political failures behind the country’s vaccine issues. The Solidarity Fund, meanwhile, plans to spend half a million rand to boost South Africa’s vaccine-rollout programme.
- Over the past year, we have published various links to PANDA research. Daily Maverick has interrogated some of PANDA’s claims to which PANDA has responded. Take a look for a provocative view on whether lockdowns are necessary and the expected course of the pandemic.
- Monster Beverage Corporation, an American firm run by Rodney Sacks and Hilton Schlosberg, is the top-performing company in the S&P 500 Index over the last 30 years, outperforming Amazon and Apple! It was founded by two South Africans. Check out this article for an interesting South African success story that rivals that of Elon Musk, as well as a table of the best performing stocks for the past three decades.
Sources: Dynasty, Bloomberg, The New York Times, The Wall Street Journal, Daily Maverick, BizNews, Business Day, Moneyweb, etc.