Peregrine Treasury Solutions | Weekly wrap

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WALKING THE TIGHTROPE

Financial markets appear to have been living rather precariously since the start of the pandemic, and fears of a market correction or even a bubble seem to have made their way into everyday topics of conversation. Many have expressed concern that the market must be in a bubble, given the record highs achieved despite the generally gloomy global economic environment.

GLOBAL DATA AND POLITICS

Citadel Portfolio Manager Nishlen Govender pointed out in a recent article (read it here) that the stimulus injected across all economies is largely responsible for the current levels witnessed in risk assets such as equities. This stimulus has ensured that spending has still largely taken place, regardless of the pandemic. So, while a correction is on the cards, a complete meltdown is unlikely. 

Combined with the levels of Quantitative Easing (QE) seen across the board, expectations for an economic recovery driven by global vaccine rollouts have raised hopes for reflation. So, what is reflation and why does it matter?

Reflation can be defined as the turning point in an economy where inflation begins to rise. Reflation is typically identified by an increase in wages, as well as consumer goods. In the normal run of monetary policy, as inflation rises, so do interest rates, increasing the cost of credit (debt) to prevent prices from running away. This inflationary stage of the economic cycle then soon sees investments repositioned to optimise the yields received. To simplify, however, this means that should the interest rate hikes of Country A fall behind the hikes of Country B, Country A will become less attractive for investment in relation to Country B.

Market movements are often driven by the potential recoveries and reflation of economies, and this is currently largely supported by sentiment with regards to vaccinations and each country’s capacity to “return to normal”. It is therefore worth examining the progress that various economies have made in terms of vaccine rollouts.

Globally, at the time of writing, a total of 188 million doses have already been administered. To compare apples with apples, ranked by the number of doses administered per 100 people, Gibraltar is interestingly leading the pack with 80.21 doses per 100 people, followed by Israel with 75.99. Larger economies have found themselves lower on the list, with the UK coming in at sixth with 24.76 doses, and the US at eleventh with 17.15 doses. Meanwhile, large parts of Europe have administered less than six doses per 100 people.

Data such as retail sales, unemployment and wages all need to be taken into consideration when assessing whether economies are back on the right track or are returning to normalcy. This week’s major data releases were as below:

  Actual Previous Forecast or ∆%
US      
Retail sales YoY JAN 7.43% 2.53% ® 2.8%
PPI YoY JAN 1.7% 0.8% 0.9%
Industrial production YoY JAN -1.8% -3.2% ® -2.7%
Manufacturing production YoY JAN -1% -2.1% ® -2.3%
Initial jobless claims 13/FEB 861k 848K 765K
       
UK      
Inflation rate YoY JAN 0.7% 0.6% 0.6%
PPI output YoY JAN -0.2% -0.5% ® -0.4%
       
EU      
Industrial production YoY DEC -0.8% -0.6% -0.3%
GDP growth rate YoY 2nd Est Q4 -5% -4.3% -5.1%
Employment change YoY Prel Q4 -2% -2.3% -2.2%

GLOBAL EQUITIES

US futures traded lower on Thursday, with tech shares among the worst performers in pre-market trading. Investors continue to monitor high Treasury yields and await new economic data for a clearer picture on the strength and speed of the economic recovery.

On Wednesday, the Dow Jones rose 90 points or 0.3% to close at a new high of 31,613. The S&P 500 lost one point or less than 0.1% to 3,931. The Nasdaq shed 82 points or 0.6% to 13,966.

The UK based FTSE 100 traded 1% lower on Thursday, after two consecutive sessions of red on the back of a drop in Smith & Nephew PLC shares. This followed the med-tech business’ announcement that its 2020 pre-tax profit fell sharply owing to lower revenue.

The British Chamber of Commerce reported that almost a third (31%) of business-to-consumer firms say that they will run out of cash in the next three months as they deal with the economic fallout of the coronavirus pandemic. Three in every five firms (61%) have seen revenue from UK customers fall in the last three months. Meanwhile, Barclays reported a 38% drop in net profits for 2020, outperforming expectations.

European stocks continued to trade guardedly on Thursday, following two consecutive sessions of falls. This came as investors assessed mixed corporate results and remained concerned about EU’s lagging coronavirus vaccination program. Airbus operating profit fell 75% in 2020, and the company issued cautious guidance for 2021. Air France-KLM net loss was smaller than expected, although the Franco-Dutch carrier expects to fly at only 40% pre-crisis capacity in the first quarter.

The Nikkei 225 shed 56.1 points on Thursday, extending declines of 0.58% in the previous session as traders weighed the implications of the recent jump in US Treasury yields.

Year-to-date, as at the time of writing, the Dow is trading stronger by 2.85%, while the S&P 500 has added 4.19%. Looking towards Europe, the DAX is in the green by 1.47% for the 2021 year thus far, while the Japanese Nikkei has added 10.17% in the same period.

COMMODITIES

Gold continued to feel the pinch on Thursday, hovering near a three-month low of $1,780 an ounce, pressured by the combination of a stronger dollar and rising US Treasury yields. In addition, investors have rushed away from safe-haven assets on the back of expectations of a vigorous economic recovery fuelled by vaccine rollouts and more government spending. However, indications that the Fed will be keeping monetary policy extremely relaxed for the near future have lent some support to the gold bulls.

Oil prices extended gains on Thursday for the fifth session. This followed a larger-than-expected fall in US crude oil inventories and supply disturbances in the US. Traders are now looking to the weekly inventory reports by the US EIA due later in the day.

Commodities were largely green for the week, with the exception of gold, silver and coal prices, and platinum added 2.67%% while silver shed 0.49%. Copper ended the week in the green yet again, gaining 3.55% in the same period, while palladium saw an increase of 1.25%.

On Friday morning, gold traded at $1813.45, platinum at $1229.05 and palladium at $2345.50 an ounce.

SOUTH AFRICAN FUNDAMENTALS

With the parliamentary SONA debate now out of the way, we turn our attention towards Finance Minister Tito Mboweni’s National Budget Speech, as he is scheduled to take the podium on 24 February.

Finding solutions to the dire state of the government fiscus poses a significant challenge. Trouble has been on the horizon for the past three years, and a fully taxed environment and dwindling economy mean that it is rather difficult to imagine the shape of the rabbit that Minister Mboweni will need to pull out of his hat. Will government finally be backed into a corner and forced to make the tough decision to cut back on spending – especially in contentious areas such as the government wage bill and SOE funding? Or will it force South Africa one step closer towards the fiscal cliff, taking on more borrowings in order to fund the widening budget deficit?

Speculation is rife but it seems that there is at least consensus on some of the upcoming budget’s key points of focus, namely:

• The COVID-19 vaccine program
• Stabilising SOEs
• Improving tax (revenue) collection
• Cutting down on expenses (such as the wage bill, bailouts, and irregular expenditure etc)

Local sentiment has improved to some extent as South Africa has finally begun rolling out vaccines to frontline workers after weeks of rather chaotic encounters with manufacturers. While many are upbeat about the rollout, South Africa still faces the stumbling block of not only convincing majority of the nation to get vaccinated, but also securing and successfully rolling out the vaccines to over 40 million people – a tedious task that could take more than a year to complete.

Following a rally to a 52-week high that saw the local unit trade at R14.40/$, the rand, in line with other emerging markets, came under some renewed pressure this week. The rise in bond yields and a stronger dollar eroded some of its previous gains, causing the rand to shed 30c in merely a day, once again exposing the currency’s vulnerability to global factors.

SOUTH AFRICAN EQUITIES

The JSE All Share Index (ALSI) traded slightly lower at around 67,030 on Thursday, as investors continued to take profits from a recent rally while remaining cautious over the vaccination rollout and the more contagious variant of the virus.

Concerns about the country’s public finances have begun to rise ahead of the National Budget Speech next Wednesday. Additionally, traders will continue to monitor news about a major nationwide strike planned for the same day that Finance Minister Tito Mboweni is set to deliver his speech.

Reddit once again made news this week, as a user calling himself “the crazed crusader” released his plan to short the whole of South Africa, stirring fears that the Reddit equity battle could very well make its way to the local equity market. This comes after a group of Reddit traders caused havoc in the US-listed GameStop share price, effectively driving a short squeeze on hedge funds.

Looking at SA indices’ performance for the year to date:

• All Share (J203): 12.96%
• Top 40 (J200): 13.53%
• Resources 10 (J210): 14.92%
• Industrial 25 (J211): 15.17%
• Financial 15 (J212): 3.22%

LOOKING AHEAD

All eyes will be on Finance Minister Tito Mboweni on Wednesday as he navigates South Africa’s fraught national finances yet again.

We will also be keeping an eye on bond yields, as a continuous rise will negatively impact the local currency, as well as keeping an ear on the ground for any whispers of the long-anticipated Biden-administration fiscal stimulus package.

Data expected during the next week includes:

Monday:
• CN prime loan rate

Tuesday:
• ZA leading business cycle indicator and unemployment
• UK unemployment rate and average earnings
• EU inflation rate

Wednesday:
• ZA National Budget

Thursday:
• ZA PPI
• EU sentiment numbers
• US initial jobless claims and GDP The rand started the day trading at R14.62/$, R17.67/€ and R20.41/£.