A turning tide

Written by Citadel Global Director, Bianca Botes

Financial markets are dynamic, driven by an ever-changing global landscape. From growth to inflation, to climate change. Nothing is guaranteed, and nothing is static. This week we focus on two of the changes that are in play at the moment.

Key themes for this week include:

  • Light at the end of the tunnel for South Africa
  • Slower pace of future rate hikes expected from the United States (US) Federal Reserve (Fed)
  • US economy contracts in the second quarter
  • US oil inventories dip
  • Dollar inching towards one-month lows


South Africa has endured 14 years of erratic power outages on the back of loadshedding and the country’s electricity crisis. While South Africa will likely continue to endure these dark spells for years to come, this week saw a step in the right direction. On Monday, South African President Cyril Ramaphosa, opened the ability for the private sector to build power plants of any size, generate and supply electricity to the grid, of any quantity, without a license, while also allowing houses with solar panels to generate electricity and sell units to the grid.

The announcement comes after the recent crippling period of loadshedding, which left the country without power for up to six hours a day. During his speech, President Ramaphosa noted that the shortage of electricity is a massive constraint on the country’s ability to grow and solve unemployment. While there are many questions as to how Eskom will pay for the additional units supplied by the private sector, and exactly how this new policy will impact on the political ranks within the ANC, the announcement marks a step in the right direction for South Africa and provides the country with, literally, a light at the end of the tunnel.

Another notable change this week is the tone of the Fed on interest rate hikes. Over the past few months, we have all become accustomed to the hawkish tone of the Fed and its message that interest rates will be hiked as much, and as quickly, as needed to fight inflation. This, despite the potential negative effect it will have on economic growth. On Wednesday, the Fed proceeded to hike interest rates by 75 basis points, which was expected, however, the Bank shifted its tone to a less hawkish one. While Fed Chair, Jerome Powell, acknowledged the slowdown in economic activity, saying that it will likely “become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation,” he highlighted the fact that the US economy is still performing extremely well in areas such as employment. Powell also noted that, “preliminary gross domestic product numbers should generally be taken with a ‘grain of salt’,” emphasising that preliminary numbers are due to be adjusted quite significantly.

While markets certainly paid attention to the less hawkish stance, and risk sentiment is improving, the real shift in risk appetite will depend on an actual decrease in inflation, which we are yet to see. Another noteworthy change in the statement from the Fed, was that it made no mention of COVID-19, which is the first statement since 2020 not to contain a reference to the virus and the impact it had on the economy.


Preliminary European Union (EU) data showed consumer prices in Germany, Europe’s largest economy, advanced 0.8% from a month earlier in July, compared to market expectations of a smaller 0.4% increase. Early Purchasing Managers Index (PMI) surveys indicated that the eurozone economy is set to contract in July, while the Ifo Business Climate Index for Germany showed the country is on the cusp of a recession. The economic sentiment indicator (ESI) in the euro area declined for a fifth consecutive month to 99 in July, its lowest level since February last year, down from 103.5 in June, and below market forecasts of 102. Sentiment deteriorated across all sectors, as the war in Ukraine and the energy crisis continue to impact economies, and interest rates and inflation keep growing.

Meanwhile, in the United Kingdom (UK), the latest PMI data showed the British economy fared much better than the euro area in July and retail sales in June decreased less than expected. UK car production increased 5.6% year-on-year in June, rising for the second consecutive month, amid signs that supply chain shortages are beginning to ease, although output remains 33.2% below 2019 levels.

The American economy contracted by an annualised 0.9% quarter-on-quarter in the second quarter, following a 1.6% drop in the first quarter, and is technically entering a recession, the advance estimate showed. Most investors were expecting 0.5% growth although some were betting on a negative reading. Inventories and business investment were the main contributors to the downward drag. Inventories declined mostly at general merchandise stores as well as motor vehicle dealers. Residential investment sank 14%. At the same time, personal consumption expenditures slowed and only grew 1%, with spending on goods falling 4.4% and government consumption dipping by 1.9%, partially reflecting the sale of crude oil from the Strategic Petroleum Reserve. On the other hand, net trade made a positive contribution for the first time in two years, as US exports jumped 18%, led by industrial supplies.

New orders in June for US-made durable goods rose 1.9% from a month earlier, their highest increase since January and the fourth consecutive monthly increase. Figures beat market forecasts for a 0.5% decrease, indicating that business spending plans remain strong despite higher interest rates and inflation.

The composite leading business cycle indicator in South Africa dropped by 0.7% month-on-month in May, following an upwardly revised 0.8% drop in April, dragged down by decreases in US dollar-denominated export commodity price index and in the number of residential building plans approved. On the other hand, the largest positive contributors were an acceleration in the six-month smoothed growth rate in the job advertisement space and a widening of the interest rate spread. The indicator collects data on vehicle sales, business confidence, money supply and other indicators, to gauge the outlook for the South African economy. Annual producer inflation in South Africa broke a fresh record high for a fourth consecutive month reaching 16.2% in June, above market forecasts of 15.8%. The main upward pressure came from petroleum, chemical, rubber and plastic products, food products, beverages and tobacco products amongst others.


US stock futures tracked the broader market, to trade mostly sideways on Thursday, as investors reassessed the outlook for tightening monetary policy against additional preliminary evidence that the world’s largest economy is falling into a recession. Turning to the corporate side, social networking company, Meta Platforms, shed more than 4% in premarket trading due to disappointing quarterly results. Virtual healthcare company, Teladoc Health, plummeted over 25% after taking another enormous impairment charge. On the flip side, car manufacturer, Ford, gained 5% after positively surprising investors.

The UK’s FTSE 100 traded marginally softer after a good start on Thursday, as investors digested mixed earnings and the relief provided by the Fed’s monetary policy decision faded. Multinational Bank, Barclays’s share price fell more than 4% after posting a 48% year-on-year slump in the second quarter’s net income, citing costly trading errors in the US, meanwhile trading platform, CMC Markets, plunged 20% after warning of higher costs. On the positive side, petrochemical giant, Shell, climbed almost 2% after posting an all-time high profit of $11.5 billion in the second quarter and extended its share buyback program, as refining profits tripled and amid strong gas trading. Spirits group, Diageo, was also up nearly 2% after reporting a 24% jump in full-year sales.

Europe’s major stock indices were mixed on Thursday afternoon, with the DAX trading 0.2% softer and the STOXX 600 gaining 0.6%, as investors digested a slew of earnings and economic data, while interest rate woes faded. On the corporate side, Santander Bank’s second quarter profits missed the mark amid a 50% surge in net loan loss provisions and downside pressures from Brazil. Aircraft manufacturer, Airbus, also fell into the red after cutting delivery targets citing supply issues. Meanwhile, multinational food and beverage company, Nestle, improved its sales outlook but warned about potential profitability issues.

Japan’s Nikkei 225 Index rose 0.36% while the broader TOPIX Index edged up 0.16% on Thursday, with both benchmarks paring back most of their post-Fed gains from earlier in the session, as investors remained cautious about the domestic corporate outlook. Strong gains were seen from chemical company, Shin-Etsu Chemical, which was up 4.2%, vehicle manufacturer, Mitsubishi Motor, which gained 10.9% and medical information services, M3 Inc, up 13.9% on upbeat earnings reports.

The local JSE/FTSE All Share Index traded firmly higher on Thursday, heading towards its highest level in seven weeks, as higher metal prices boosted shares of major mining companies, while investors digested more earnings. Steel company, ArcelorMittal South Africa, posted a 36.4% jump in net profits for the first half of the year, boosted by a 20.4% increase in revenues from steel operations, as higher prices offset a 30% drop in steel output.


Brent Crude Futures climbed toward $108 per barrel on Thursday after rallying 2.1% in the previous session, as US crude inventories dipped after risk sentiment improved with the Federal Reserve policy announcement. International Energy Agency data released on Wednesday indicated that US crude stockpiles fell by 4.52 million barrels last week, while exports rose to a record 4.55 million barrels a day. US gasoline demand also increased 8.5% week-on-week, with inventories declining by 3.3 million barrels. Oil prices also received an added boost on the back of a less hawkish Fed. Commodity markets have been enthralled by fears that aggressive rate hikes would lead to demand destruction. Persistent supply-side issues and various disruptions have, however, kept the global market tight and energy prices elevated.

Gold rose to just above $1 750 per ounce on Thursday, extending last session’s rebound after second quarter GDP data showed a contraction in the US economy. Bullion prices were assisted by Fed Chair, Jerome Powell, stating that it will likely become appropriate to slow the pace of interest rate increases, depending on the inflationary and economic picture. These less hawkish remarks weighed on the dollar and Treasury yields while supporting gold prices. Meanwhile, the World Gold Council (WCG) lowered its outlook for physical gold demand in the second half of 2022, citing slowing growth in the biggest markets, as China and India both face economic headwinds. The WGC also warned of weakening investment demand due to aggressive global monetary tightening.

US natural gas futures corrected to around $8.50/MMBtu (one million British Thermal Units) as investors unwound some long positions, following an aggressive rally that pushed prices to record levels of $9.70/MMBtu earlier this week. However, even with the recent correction, the commodity has more than doubled in value in July, putting it on track for one of the best monthly performances on record, with higher domestic and international demand being the primary driver.


The US Dollar Index dipped 106.5 on Thursday, inching closer to its lowest levels in almost a month, on the back of the less hawkish Fed. Investors then turned their attention to US GDP data which revealed that there was, in fact, a contraction of the US economy, of 0.9% in the second quarter of this year, which put further pressure on the dollar.

The euro remained on shaky ground, trading around $1.012, moving toward the $1 parity hit earlier in the month as lingering recession concerns, exacerbated by the ongoing energy crisis in Europe, weighed on investors’ moods, while inflation in the economic zone showed no signs of peaking.

The British pound hovered around $1.20, just above the two-year low of $1.176 hit mid-July, as investors braced for aggressive tightening from the Bank of England (BoE) in response to the highest inflation rate in four decades. BoE governor, Andrew Bailey, opened the door for a 50 basis point hike in August, which would be the largest since 1995, saying that the bank remains fully committed to bringing inflation down to the central bank’s target of 2%.

The South African rand traded mostly sideways on Thursday morning, before staging an impressive rally against all three majors on the back of the economic contraction in the US. Investors continue to digest reforms in the power sector and a more hawkish SARB stance against lingering macroeconomic risks. While the rand is on the front foot as this week draws to a close, there are still many risks on the horizon, and these levels should not be taken for granted.

The rand is trading at 16.47/$, 16.82/€ and 20.08/£.