Weekly Market Wrap – 21 May 2021

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Written by Citadel Global Director,
Bianca Botes

HOLY GROUND

There are two things that one is always supposed to steer clear of in a conversation- politics and religion, and with good reason. These topics go further than mere opinions. They are engrained into the very fabric of who we are. They form the core of our belief systems and our moral compasses, they are the essence of our humanity. So, when religious conflicts meet with politics, matters become heated, quickly, and there is little room for compromise.

GLOBAL CURRENT AFFAIRS

Israel and Palestine have been at odds since the establishment of Israel in 1948.  This month’s flair up has seen the conflict sneak back in to headlines with many lives being lost. In addition, there is the fear of a spill over into neighbouring countries. Many of which are central to the world’s oil supply.

The conflict, that flared up on 6 May, started as a protest, after the Israeli high court ruled in favour of the eviction of six Palestinian families from their homes in East Jerusalem. The protest rapidly turned violent, with Jewish and Islamic protesters clashing, while Israeli police stormed the Al-Aqsa Mosque – which is the third holiest site in Islam – firing rubber bullets and dispersing teargas.

Then, on 10 May, following Israel’s rejection of a proviso to evacuate Israeli forces from the Temple Mount complex and Sheikh Jarrah , two Palestinian militant groups, Hamas and Palestinian Islamic Jihad, started discharging rockets into Israel from the Gaza Strip, hitting multiple residences and a school.

Israel retaliated by initiating crusade of airstrikes against Gaza. By the beginning of this week, a slurry of over 950 attacks, have destroyed at least 18 buildings, 40 schools and 4 hospitals in both Palestine and Israel. While the infrastructure damage will impair the lives of many, the many killed in the conflict is a much larger loss. At the time of writing, it was reported that at least 253 Palestinians, including women and children and 12 Israelis, including 1 child, have lost their lives in the conflict..

Calls by Hamas on 13 May for a ceasefire was rapidly rejected by the Israeli Prime minister, while France, Egypt and Jordan moved to file for a United Nations Security Council resolution for a ceasefire.

While the war rages on in the Middle East, geopolitical tension, often driven by religion and migration has been part of the global landscape for some time and will be for the foreseeable future. This will be exacerbated by an intensification of radical religious views, and the increase in refugee numbers across various regions of the world. Reports of discrimination and hatred ranging from religious intolerance in parts of Europe (EU), to migrant laws in the United States (US), pose not only a threat to human life and freedom of religion, but also to the economic sustainability of the countries involved. While war always has a winner and a loser, and economic growth is always due to return, the violent conflict brings a rapid halt to progress on a socio-economic level and there are is a lot of suffering during the years, if not decades, of economic rebuilding. 

DATA, ECONOMICS AND POLITICS

As the week draws to a close, we are starting to feel like a stuck record, with inflation and accommodating monetary policy continuing to be flavour of the week for the umpteenth time. This week however, we saw the US Federal Reserve (the Fed), during the Federal Open Market Committee (FOMC) minutes on Wednesday, initiate the discussion of tapering asset purchases, as the US economy continues to show signs of growth, and inflation ticks up.

While Fed Chair, Jerome Powell, has insisted that the Fed is not yet considering any form of tapering, an extract from the minutes said, “A number of participants suggest that if the economy continued to make rapid progress toward the committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”. It seems that many of the members are leaning towards a potential tapering of the $120 billion worth of asset purchases a month. While nothing is set in stone, and the US economy still has a way to go before we can conclude a recovery, this is the very first indication from the Fed that the discussion will be tabled in its upcoming meetings.

Tax was top of the agenda this week in the EU, as the EU commission revealed the tax outline to drive recovery in the eurozone post pandemic, as well as align the region with the digital and green transformation strategies. According to Paolo Gentiloni, EU Commissioner for economy, the EU loses €46 billion in tax evasion from individuals, and between €35 billion and €70 billion in tax avoidance from companies, every year.The EU Commission wants to make it easier for companies that operate in more than one member state to pay their taxes. Currently, cross-border business operations can face up to 27 different national tax systems, a daunting prospect that can deter small companies from scaling up.

Countries across Europe continued their reopening efforts, with France and Austria allowing non-essential business activity to resume this week, while Cyprus, Greece, Germany, Italy, the Netherlands, Portugal and the UK started to open their borders. Also, EU countries agreed on Wednesday to ease COVID-19 travel restrictions on non-EU visitors ahead of the summer tourist season.

Meanwhile the European Central Bank (ECB) warned the UK that a sharp upturn in its economy this year should not be confused with a standard economic boom. Gertjan Vlieghe, ECB policy maker, reiterated that the Bank of England (BoE) forecasts that inflation was likely to overshoot its 2% target later this year, due to temporary bottlenecks and base effects, but stressed the BoE would look to the medium term when setting interest rates.

South Africa received a lashing from Moody’s as the ratings agency warned that slow economic growth, high unemployment, and poor fiscal metrics continue to dim the outlook for the country. Meanwhile the South African Reserve Bank (SARB) on Thursday, moved to keep interest rates on hold, even as inflation soared to a 14-month high in April. The SARB adjusted the expected growth rate for South Africa to 4,2% for 2021, while noting that inflation is expected to remain stable, despite the jump in April.

Herewith follows an overview of the week’s key data:

  Actual Previous Forecast or ∆%
US      
Initial Jobless Claims 15 MAY 444k 473K ® 451K
EU      
Inflation Rate YoY Final APR 1.6% 1.3% 1.6%
Construction Output YoY MAR 18.3% -5.4% ® 17%
GB (UK)      
Unemployment Rate MAR 4.8% 4.9% 5%
Inflation Rate YoY APR 1.5% 0.7% 1.4%
PPI Output YoY APR 3.9% 2.3% ® 3.5%
PPI Input YoY APR 9.9% 6.4% ®  
ZA      
Inflation Rate YoY APR 4.4% 3.2% 4.2%
Retail Sales YoY MAR -2.5% 2.2% ® 2.1%
Interest Rate Decision   3.5% 3.5%
CN      
Industrial Production YoY APR 9.8% 14.1% 10%
Retail Sales YoY APR 17.7% 34.2% 26%
Unemployment Rate APR 5.1% 5.3% 5.3%
Loan Prime Rate 1Y 3.85% 3.85% 3.85%

EQUITIES

US futures extended losses for a fourth consecutive session on Thursday, with contracts on the Dow Jones falling almost 200 points, as worries over inflation and the tapering of asset purchases by the Fed littered the market. On Wednesday, the Dow Jones shed 0.5% to 33896, while the S&P 500 dropped 0.3% to 4116 and the Nasdaq ended flat at 13300.

The UK-based FTSE 100 edged 0.4% higher on Thursday, partially recovering from a 1.2% drop during the previous session, as investors appear to focus on optimism over the economic reopening, while shrugging off concerns over inflation. Multinational electricity and gas utility, National Grid, reported an improved profit for the fiscal year and multinational retailing company, Kingfisher, raised its first-half profit outlook.

European stocks retreated to trade flat on Thursday, following the release of German producer prices which rose by the most in nearly a decade in April. The EU has signed a third contract, with pharmaceutical companies BioNTech and Pfizer, for an additional 1.8 billion doses of the coronavirus vaccine.

After Wednesday’s losses of 1.28%, the Nikkei 225 closed 0.19% up on Thursday, , as investors proved optimistic amid stronger than expected local data. The week saw chipmakers track the Philadelphia Semiconductor index’s higher, with Tokyo Electron rising 2.05% and Advantest jumping 3.5%. In other data, the Reuters Tankan index hit a more than two-year high in May, as firms benefited from stronger overseas demand, while Japan posted a trade surplus of JPY 255.3 billion in April, as exports jumped 38% year-on-year,  while imports rose at a softer 12.8%.

The FTSE/JSE All Share Index traded marginally stronger at 66,200 points on Thursday, following sharp losses in the previous session, amid some recovery in mining shares. Locally, consumer inflation – which the South African Reserve Bank monitors closely when deciding on interest rates – rose at its fastest pace in more than a year in April but remained within the Bank’s 3% to 6% target band.

COMMODITIES

Spot gold prices traded flat on Thursday, as the US dollar firmed, while US Treasury Yields rose, following the release of the FOMC minutes on Wednesday night. US gold futures fell 0.7% to $1,869.20 per ounce, after hitting their highest level since January 8 at $1,889.75 on Wednesday.

Oil extended its losses for the third session to three-week lows on Thursday, with West Texas Intermediate (WTI) crude futures down almost 2% to below $62.50 a barrel on rising Coronavirus cases in Asia and prospects of oversupply. Concerns over the Coronavirus situation in India plagued the market, as almost two-thirds of people tested showed exposure to the virus. Meanwhile, the US-Iran nuclear talks reportedly will enter their fifth phase early next week. Success of these talks could result in sanctions on Tehran being lifted and more supply coming to the market. The oil market is however still up almost 30% this year, after recovering to pre-pandemic levels in mid-March, on expectations fuel demand will rebound sharply with the rollout of COVID-19 vaccines and the reopening of more economies.

Copper futures were trading around $4.60 per pound, as China’s effort to curb commodity prices, possible Fed tapering, and inflation fears offset hopes demand will continue to provide support. On the supply side, miner, Glencore, will restart operations at the currently idled Mutanda copper mine in the Democratic Republic of Congo in 2022 while top producer, Chile, faces a possible strike at the world’s largest copper mine, Escondida, which threatens output. Despite the price adjustment from a record high of $4.90 per pound reached in May, the copper cost is expected to remain high.

On Friday morning, gold traded at $1875.80, platinum at $1203.00 and palladium at $2844 an ounce.

CURRENCIES

The euro traded around the $1.22 level, remaining close to an over four-month peak of $1.224 hit on Wednesday, assisted by dollar weakness and the prospect of a solid economic recovery in 2021. On the economic data front, German producer prices rose in April by the most in nearly a decade, adding to signs of growing inflationary pressure in Europe’s largest economy.

The British pound traded around the $1.41 mark, after touching its strongest level since April 2018, on Tuesday. Investors are digesting a slurry of data released this week and hoped for a solid economic recovery in 2021. The UK inflation jumped to 1.5% in April, the highest since March 2020. Elsewhere, sterling has also been supported by broad dollar weakness.

The rand traded rangebound for the week, struggling to find sufficient momentum to rally below the R14.00/$ mark, as US inflation and monetary policy remains in the spotlight. Commodity prices remain supportive.

We started the day trading at R13.98 /$, 17.10/€ and R19.85/£.