The fear factor impacted markets this week, with a robust rally on Wednesday giving way to a sharp drop on Thursday across major indices, with a downward slope continuing today. Fears of a recession have resurfaced, with some investors questioning whether the Fed is going to be too late with an interest rate cut to prevent a hard landing.
Technology stocks have had a particularly torrid week, with only Meta bucking the trend on the back of an exceptional earnings report on Thursday. A 5% increase in the value of Meta’s stock helped to curtail losses on the S&P 500 and Nasdaq composites as markets digested weak manufacturing data. To add to this was a much weaker than expected US jobs report released this afternoon. Lastly, investors have reacted to fears that a slowdown in US consumer spending would crimp corporate profits.
Performance by close of markets on Thursday for the week among members of the Magnificent Seven were as follows:
- Microsoft was marginally down, and Apple was flat for the week.
- Nvidia was down 3% for the week, despite a massive 13% surge on Wednesday.
- Amazon was up nearly 1% on the back of healthy cloud revenues for the quarter.
- Tesla continued to tumble after reporting weak earnings last week.
- Alphabet was more than 2% up.
- Meta was up almost 7%.
News that Intel is going to lay off 15,000 people after an earnings miss will no doubt affect confidence in the tech sector. Intel stock is down nearly 40% for the year-to-date. Fellow chip company, ARM, was nearly 22% down for the week at the time of writing. It reported good earnings, but investors were worried about its forward guidance.
Outside the tech sector, stocks that would suffer the most under a recession were among notable losers during Thursday’s slump, including banking, energy and manufacturing counters. (Our quality managers do not have any exposure to these sectors, with the exception of tech). With tension building ahead of the US election, a much-anticipated Fed interest rate cut in September might not be enough to prevent volatility.
Indeed, The Cboe Volatility Index VIX – regarded as Wall Street’s fear gauge – gained more than 50% in a month. This suggests that the months leading into the US election might be a rollercoaster ride. As we have written before, volatility tends to increase in the third quarter of a US election year and settle down after the results in November.
Current volatility notwithstanding, this has been a good year overall for the markets and intra-year periods of market weakness should be expected. Tesla aside, the Big Tech companies that comprise a large part of the market capitalisation of the S&P 500 and Nasdaq indices are still well up for the year-to-date, with returns of 14 % and 12%, respectively as at yesterday’s close.
As per our recent news editions, we see the rotation from tech into other sectors and from mega-caps into small and midsized caps to continue, but on the proviso that a hard landing for the US economy does not materialise. However, these sectors were also not immune to this week’s fear factor that gripped the markets in general.
“There are reasons to think the soft landing is still alive, but the risks are two-sided. Soft landings don’t materialise by waiting too long.”
– George Catrambone, head of fixed income and trading at DWS
“The characteristics that make a quality company do not change over time. But the type of companies that may qualify can change.”
– Terry Smith, CIO at Fundsmith
Global News
- The Federal Reserve kept interest rates on hold as expected on Wednesday, but signalled cuts are getting closer unless progress stalls on getting inflation back to target. Jerome Powell said policymakers will keep watching the data closely, but that, if everything keeps moving in the direction it is now, then “a reduction in our policy rate could be on the table as soon as the next meeting in September”. A September rate cut by as much as 50 basis points in order to catch up with the loss of momentum in the economy, may now be up for discussion. Gold prices hit a two-week high on Thursday on hopes for the September rate cut.
- US consumer confidence improved in July, driven by positive expectations for the economy and labour market, despite less favourable views of current conditions. The Conference Board’s confidence index rose to 100.3, up from June’s revised 97.8, which was slightly above economists’ expectations. The outlook for the next six months was the most optimistic since January, with more consumers anticipating better business conditions.
- Gold is the best portfolio hedge should Donald Trump retake the White House, according to the latest Bloomberg Markets Live Pulse survey. For every one person among 480 respondents who saw the dollar as a safe bet, two voted for gold. Just over 60% of those surveyed see the greenback ultimately weakening in the event the Republican candidate secures another presidential term.
- Vice President Kamala Harris has wiped out Donald Trump’s lead across seven battleground states, according to the latest Bloomberg News/Morning Consult poll. With less than 100 days left in one of the least predictable campaign seasons in recent history, Democrats are redrawing their map to victory, hoping the prospect of the first Black and Asian woman president can motivate Democrats to the polls.
- The euro-area economy grew more than expected in the second quarter, with GDP gaining 0.3% in the three months to June. That exceeded the 0.2% median forecast of economists as both France and Spain beat estimates and Italy kept growing, offsetting a 0.1% drop in Germany. GDP in the Eurozone is sustaining the same pace as it did at the start of the year.
- The Bank of England has cut interest rates for the first time since the COVID-19 pandemic, dropping them to 5%, a 25bps decline, in a five-to-four vote. The decision ends the joint-longest plateau for rates since the Bank of England was granted independence in 1997. The Bank’s decision came after CPI dropped to its target of 2%. Many economists expect the Bank to continue cutting borrowing costs in the coming months.
- China took another step to conceal information about overseas funds going into and out of its sagging stock market, saying it will stop publishing daily flows data in the middle of August. This follows a move in May to stop sharing data on money flows during the day with Hong Kong. Investors will lose the ability to calculate net flows at the end of each trading day from 18 August.
- Nvidia’s wild ride this week is headed for the record books. Declining by 6.5% on Thursday, the company had added a record $330 billion in market value on Wednesday, surpassing the single-day record that it has repeatedly set in the past few months. That 13% rally came a day after a 7% decline wiped out more than $193 billion from the now $2.69 trillion company.
- Meta Platforms reported better-than-expected sales for the second quarter, providing evidence that the company’s investments in AI are helping it sell more targeted and personalised advertisements. This sent the social media company’s shares up in late trading Wednesday and will buy time for CEO Mark Zuckerberg to invest in more future-looking products. The company has also agreed to pay $1.4 billion to Texas to resolve the state’s lawsuit accusing the Facebook parent of illegally using facial-recognition technology to collect biometric data of millions of Texans without their consent.
- Microsoft’s Azure cloud-computing service posted a slowdown in quarterly growth testing the patience of investors anxious to see a payoff from huge investments in AI products. Azure has been Microsoft’s main growth engine in recent years. Microsoft stock declined less than 1% on Wednesday as the markets opened in New York. As of the Tuesday close, the stock had gained about 12% so far in 2024.
- Amazon.com told investors on Thursday that it will be focusing on AI and not profit in the coming months. As a result of this and its projections for the third quarter, shares fell 7%. The company projected that operating income for the current quarter will be $11.5 billion to $15 billion in the period ending in September. Analysts, on average, were looking for $15.7 billion. Amazon spent $30.5 billion on capital expenditures in the first half of the year.
- Apple expects that its new AI features will spur iPhone upgrades in the coming months after it returned to revenue growth in the third quarter to the end of June. It reported an increase in sales of 5% to $85.8 billion. That beat the $84.5 billion analyst estimate. Sales from China fell 6.5% to $14.7 billion, missing the $15.3 billion projection from Wall Street. The company’s hope for growth in its iPhones could help Apple reemerge from a sales slowdown that has hit its China business especially hard.
- AMD shares gained as much as 11% after the chipmaker gave an upbeat revenue forecast, underscoring that its new AI processors are boosting growth. Revenue will be roughly $6.7 billion in the third quarter, the company said on Tuesday. Analysts estimated $6.62 billion on average. Second-quarter results also topped projections, and the company raised its forecast for so-called AI accelerators, chips used to develop AI models.
- Intel’s shares dropped more than 19% after it said sales for the current third quarter will be $12.5 billion to $13.5 billion, the company said yesterday. Analysts had projected $14.38 billion on average. Intel plans to get rid of 15,000 jobs to reduce costs and fund an ambitious effort to rebound from an earnings slump and market share losses. Intel has about 110,000 employees, excluding workers at units that are being spun out.
- Mastercard shares rose the most since January after profit beat analysts’ estimates on strength in customer spending and online payments. Global purchase volume in the three months through June jumped more than 7% from a year earlier, to $1.97 trillion, also higher than analysts expected. Higher revenue and profit in the quarter were supported by continued healthy consumer spending and robust cross-border volume growth.
- As at Thursday’s close the S&P 500 was 0.20% down for the week.
Local News
- In recent weeks, the Rand has demonstrated notable resilience, particularly when compared to other emerging market currencies, according to our research partner, Analytics Consulting. The Rand’s newfound strength can be partly attributed to the formation of the Government of National Unity (GNU) after the National Election, which has provided a short-term tailwind, but ultimately, sustained currency resilience requires a reduction in the risk premium linked to investing in the local currency, which is directly associated with South Africa’s economic performance. Over the long term, the Rand has experienced a weakening trend, typically depreciating by 5% to 6% annually. Consequently, the Rand spends the majority of its time being undervalued, achieving our calculation of fair value or stronger only 15% of the time. On the flip side, anticipated interest rate cuts by the US in September, along with improved fiscal discipline by the National Treasury and significant reductions in electricity outages are some factors that could assist in maintaining Rand resilience. (Taking all the above factors into consideration, we have currently been externalising client funds at an R18.20/USD limit.)
- The South African Reserve Bank has highlighted government debt and financial institutions’ exposure to that debt as a key risk to the country’s financial stability. Governor Lesetja Kganyago said what he called the “sovereign-financial sector nexus” is one of the areas being monitored as part of the bank’s efforts to ensure financial stability. This was during his address at the central bank’s 104th annual Ordinary General Meeting on Tuesday. (Dynasty has a strategic underweight exposure of 3 % to long-duration South African government bonds in its domestic multi-asset fund.)
- South Africa and the US have agreed on reviving the bilateral trade and investment framework agreement, governing trade relations between the two countries, Trade, Industry, and Competition Minister Parks Tau said on Tuesday. At the same time, Tau is confident that the US will allow South Africa to continue participating in the African Growth and Opportunity Act (AGOA) and that the US will reauthorise this preferential trade measure before it expires next year. However, the renewal of the Act is unlikely to occur before the 2025 expiration as it is still under consideration by US legislators. Lawmakers who support the law are set to lobby for its renewal to include South Africa.
- Busisiwe Mavuso, CEO of Business Leadership South Africa (BUSA), says Tau’s commitment to engaging with the BUSA business forum is heartening. She writes that, shortly after his appointment, he reached out to business bodies requesting that they share high-level issues faced by big business.
- The Bureau for Economic Research believes South Africa’s GDP can grow by more than 2% in 2025. This prediction was contained in its most recent macroeconomic outlook, presented on Wednesday. It sees 2.2% growth in 2025. This is a more optimistic tone than the Reserve Bank and the International Monetary Fund, which see growth at 1.5% and 1.2% respectively in 2025.
- Tshwane’s political head for utilities, regional operations and co-ordination, Themba Fosi, has lamented that there is a “water tanker mafia” that is adversely affecting the metro, which spends an estimated R98 million on water tankers a year. Gauteng’s three metros, the City of Ekurhuleni, City of Johannesburg and City of Tshwane, are battling a water crisis, while other parts of the country, including KwaZulu-Natal, are also under water stress. Asset manager Coronation has warned that water issues threaten potential investment inflows.
- Newly appointed Minister of Forestry, Fisheries and the Environment, Dion George, from the DA, has ruled in favour of the controversial Turkish powerships proposal for Richards Bay harbour, dismissing concerns from environmental groups. Ironically, the DA had been opposed to the deal, accusing the previous ANC government of “bending over backwards to ensure that the Karpowership deal is pushed through at all costs”.
- The Port of Cape Town, which is responsible for handling 55% of South Africa’s agricultural exports and ranked the worst in the World Bank’s Container Port Performance Index, will not follow the route taken by its Durban counterpart in inviting the private sector to help turn around the performance of its container terminal. It is implementing a turnaround strategy, the development of a liquefied petroleum gas terminal, refurbishment of dry docks, ship repair facilities and expansion of the port. Durban’s port issues and its bad reputation are hampering local tourism as Southern Sun diverts business to Maputo.
- Shoprite, South Africa’s largest grocer, managed another year of more than 10% growth in its local operations, helped by a rapid store expansion as well as a general pickup in volumes. Online sales from Checkers Sixty60 jumped 58% over the past year.
- Retailer Woolworths anticipates lower earnings for the full year as challenging trading conditions affected consumer discretionary spend across its businesses. Group turnover and concession sales from continuing operations for the 53 weeks to end-June grew by 6.2% and by 5.6% on a constant currency basis, it said in a statement on Wednesday.
- Africa’s largest mobile operator, MTN, has taken a financial hit of nearly R6 billion in its biggest market, Nigeria, as the weak naira hurt its bottom line in the six months to end-June. Most of those losses are linked to the company’s US dollar obligations, such as leases priced in dollars and financing costs. MTN is still confident of good earnings for the rest of the financial year.
- WeBuyCars shares have rallied more than 30% since the company was unbundled from Transaction Capital and listed on 11 April, allowing investors to recoup some of their losses from 2023. The rally has gained the company R2.67 billion in market valuation over the period, ending Tuesday at R11 billion.
- As at the time of writing the rand was 0.60% stronger and the ALSI was 0.15% down for the week.
Sources: Dynasty, Daily Maverick, BusinessLIVE, Reuters, CNN, Freight News, News24, Euronews, Bloomberg, BizNews.com, Daily Investor, Analytics Consulting, etc.
