Weekly Wrap: Between a rock and a hard place

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Bianca Botes,
director at Citadel Global

Sanctions against Russian resources, such as oil and gas, might be aimed at Russia for its invasion of Ukraine, but they have had a global effect. Some countries are willing to put their principles first and take it on the chin, others are not quite up to the task.

Key themes for this week include:

·       German companies face massive output cuts

·       European Union (EU) factory production growth dips to a 22-month low

·       United Kingdom (UK) Inflation is at its highest level since 1982

·       Demand for government debt soars

·       South African inflation tops South African Reserve Bank (SARB) upper band

RUNNING OUT OF GAS

Globally, the shift away from Russian resources, in particular gas and oil, has seen many countries seeking alternatives. The United States (US) is looking towards sanctioned Venezuela for oil, while Germany contemplates the use of less environmentally friendly solutions, as the possibility of running out of Russian gas looms.

Germany is moving closer to rationing its natural gas supply, as part of a three-phase plan to ensure supply security. The political move to cut 60% of Russian gas supplies, is set to place strain on manufacturing output by companies in the EU’s largest economic hub.

Meanwhile, as the US and Europe are both moving away from Russian oil and gas, China’s Russian oil imports soared by 55% year-on-year in May. Russia has now bumped Saudi Arabia off the top spot as China’s largest oil supplier. Last week, South African minister of Energy, also announced that the department is considering importing oil from Russia, as global oil prices, and as a result, local petrol prices soar, which is adding immense pressure on the already burdened South African consumer.

South Africa has recently also become Europe’s alternative to Russian coal, as imports from Russia come to an end in August. According to data released by Reuters, roughly 40% more tons of coal were exported to Europe, from South Africa’s Richards Bay Coal Terminal (RBCT) between January and May of this year, than the total number of tons for 2021.

DATA IN A NUTSHELL

The S&P Global Eurozone Manufacturing PMI (Purchasing Managers Index) dropped to 52 in June, from 54.6 in May, its lowest level in 22 months and below market expectations of 53.9. Output fell for the first time in two years and the rate of decline is expected to accelerate in July, amid decrease in new orders received during June.

The number of Americans filing new unemployment benefit claims dropped to 229 000 in the week ending 18 June, below market forecasts of 227 000, yet again, indicative of a tight labour market. The 10-year US Treasury note yield extended its decline towards the 3% mark, a level not seen in two weeks, as investors continued to flock to safe-haven assets, as investor concerns grow around tightening financial conditions tipping the US economy into a recession. On Wednesday, US Federal Reserve (Fed) Chair, Jerome Powell, said that the Central Bank is fully committed to controlling prices, even at the risk of an economic slowdown.

The annual inflation rate in the UK increased to 9.1% in May, up from 9% in the previous month. Although its highest level since 1982, it was expected. Costs accelerated for housing and utilities, transport, food and non-alcoholic beverages, furniture and household goods, as well as alcoholic beverages and tobacco.

The composite leading business cycle indicator for South Africa fell by 0.3% month-on-month, following an upwardly revised 1% rise in March, as decreases in five of the ten available component time series outweighed increases in the remaining five. The largest detractors were a deceleration in the six-month smoothed growth rate of new passenger vehicle sales and a decrease in the US dollar-denominated export commodity price index. To add to the country’s woes, the annual inflation rate in South Africa accelerated to 6.5% in May, from 5.9% in April and March, and above market expectations of 6.2%. This reading breaches the upper limit of the SARB’s target range of 3% to 6%. It was the highest reading since January of 2017, as prices continued to accelerate mostly for transport on account of fuel price hikes, and food and non-alcoholic beverages and sunflower oil. Costs were also higher for housing and utilities, namely electricity and other fuels, as well as miscellaneous goods and services.

WALLSTREET IN THE GREEN

All three major US stock indices opened in the green on Thursday as investors re-evaluated the outlook of rising interest rates, amid slowing economic growth. Powell, expressed to lawmakers, during the Fed’s Senate hearing on Wednesday, that the Fed remains committed to reigning in inflation. Powell, however, cautioned that higher interest rates could eventually tip the economy into a recession, stating that it is “certainly a possibility.” These comments seemed to calm some nerves, assisting riskier assets.

Europe’s major stock indices saw sporadic trade in both directions on Thursday, returning to red towards the end of the trading session, as the risk of recession looms. The DAX lost over 1% and the STOXX 600 wiped out 0.5%, with drag coming from real estate and banking stocks. In individual stocks, real estate company, Aroundtown SA, slumped more than 7% after JP Morgan analysts downgraded the stock to “underweight”.

The FTSE 100 retreated on Thursday, extending a near 1% decline in the previous session, dragged down by commodity-linked stocks, amid growing recession risks. Online gambling firm, 888, shed more than 4%, after saying that it expected to report lower half-year revenue. By-elections in two former conservative seats will provide clues on how popular Boris Johnson’s government remains. 

The JSE FTSE All-Share index extended losses for the second consecutive session on Thursday, trading to its lowest level since October 2021. The risk of a recession, and the aggressive tightening by the Fed continued to weigh on risk appetite.

COPPER POINTS TO TROUBLE

Brent Crude continued its decline, dipping to $110 per barrel on Thursday, hovering near a two-week low, as economic growth concerns dampen demand outlooks. As the globe struggles to come to grips with rising fuel prices, US President Joe Biden called on Congress to temporarily suspend the federal gasoline tax to provide Americans with some relief. In addition, Cecilia Rose, Chair of the Council of Economic Advisers, on Wednesday, stated that China and India may be buying more Russian oil than previously expected, which will ease a supply crunch in global markets.

Gold treaded water and lost some ground, as it traded towards the $1 830 level per fine ounce on Thursday, wiping the headway made in the previous session. Powell’s comments, that the Fed will do “whatever it takes” to ensure price stability, even if that means hiking rates by more, at a quicker pace, weighed on the precious metal. Gold is used as a hedge against inflation and as a safe-haven asset during economic crises, however, higher interest rates increase the opportunity cost of holding non-yielding bullion.

Copper plummeted to below $3.90 per pound, its lowest level since early 2021. The copper price, which is believed to be a good indicator of economic wellbeing, is down more than 20% since its peak in March, as fears of a global economic slowdown mounts. Meanwhile, copper stocks held by the London Metals Exchange currently stand at 117,025 tonnes, down 35% since mid-May.

ALL EYES ON US JOBS DATA

The euro continued to hover near $1.05 for the month of June, remaining near a five-year low of $1.04, as bets remain high that the European Central Bank will not be able to hike rates as quickly and as aggressively as their peers. The European economy faces severe headwinds, in the wake of the Russia-Ukraine war.

The British pound also continued its descent, trading to $1.22, approaching a two-year low. The sustained weakness comes after the latest Consumer Price Index report indicated that inflation rose to a fresh 40-year high, fuelling bets that the Bank of England will need to be more aggressive in their monetary tightening, despite the looming risk of a recession.

The dollar index traded around 104.1 on Thursday, as it struggled to gain back recently lost ground, while tracking Treasury yields lower. Based on current economic data, analysts expect the Fed to hand down another 75-basis point rate hike in July, followed by a 50-basis point increase in September.

The South African rand was trading around R16,00/$ on Thursday, remaining close to a one-month low of R16.10 hit on 13 June, amid expectations of prolonged aggressive interest rate hikes by the Fed. Global interest rate action by central banks, will continue to set the tone for the rand.

The rand is trading at R15.91/$ R16.76/€ and R19.57/£.