Weekly Market Wrap – 9 April 2021

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Written by
Citadel Global Director, Bianca Botes.

THE TOLL OF TERRORISM

Terrorist attacks are nothing new, and since the World Trade Centre fell in 2001, a number of radical Islamic attacks have taken place across the globe. The latest crisis, however, is closer to home than ever before, as our neighbour Mozambique grapples with an Islamic State-linked insurgency.

GLOBAL CURRENT AFFAIRS

Driving through the streets of Mozambique, the scars of the past are still visible following the civil war that lasted from 1977 to 1992. To this day, the country is still struggling to rebuild, and now finds itself facing another battle. This time, however, the battle is not between political factions but rather against religious extremists. Shocking footage of ISIS-linked attacks in our neighbouring country has flooded news stations, with news of trapped South Africans capturing local headlines.

Mozambique is on South Africa’s doorstep and we share a 493km border, further giving rise to fears of a geopolitical spill-over. The South African National Defence Force (SANDF) thus moved swiftly to assist in the fight against the militants and to ensure the safety of South African citizens.

But safety concerns are not the only issue at play. South Africa has become one of Mozambique’s largest trade partners, and recently published data indicates that South African applicants own approximately 5,500 national trademarks in Mozambique. This is second only to applicants from the United States, who own approximately 5,850 national trademarks.

Additionally, it is worth noting that the country has become an attractive investment destination of choice owing to its vast resources, and one of the latest development projects is that of the Total natural gas project in Afungi, situated near Palma in the northern part of Mozambique. Unfortunately, however, this $20 billion project has come to a complete standstill following the complete withdrawal of all employees from the area in the wake of the attacks.

While employees are expected to gradually return now that the militants have been driven out of the area by government forces, allowing operations to resume, one cannot discount the effect that the attacks have had on the operational ability of the plant, as well as on the mental state of the employees and their desire to return to work. It is also impossible to say with absolute certainty that the extremists will not return.

So, while the humanitarian crisis is catastrophic, the economic implications are just as noteworthy – especially given the strain that the global economy is already under as a result of the pandemic. Ultimately, these attacks have not only lead to numerous deaths, but will also act to drive further poverty as a result of business closures, the withdrawal of investments and job losses, with the total cost of economic damage running into the billions.

It is therefore positive to see that the South African Development Community (SADC) has rallied around Mozambique, holding a double troika summit with officials from six countries to discuss plans going forward, including potential military intervention, the sharing of intelligence and assistance with maritime monitoring and surveillance.

DATA AND ECONOMICS

The Federal Reserve released the minutes of its March Federal Open Market Committee (FOMC) meeting on Wednesday, which indicated that the central bank will not look to tighten policy anytime soon. The minutes highlighted that while the inflation target rate is 2%, it will tolerate moves above this level until such a time as its economic objectives are met. One of the Fed’s key focus areas is the labour market and its ability to reach pre-pandemic levels. At the meeting, the Fed’s policymaking arm voted to keep short-term borrowing rates anchored near zero and to continue buying at least $120 billion in bonds each month.

In addition, the committee adjusted its economic growth and inflation outlook upwards. The median outlook for GDP in 2021 rose to 6.5% − a significant upgrade from the 4.2% forecast in December. Policy makers also indicated that the unemployment rate could fall to 4.5% by the end of the year and that inflation could run to 2.2%, slightly above the Fed’s traditional 2% target.

The US Treasury Department published a report this week describing President Biden’s new tax plan. The report indicated the new plan would bring back around $2 trillion in corporate profits into the US tax net and noted that only 45 large companies would pay the proposed 15% minimum tax.

Meanwhile, the International Monetary Fund (IMF) and World Bank kicked off their annual meetings this week, with special drawing rights (SDRs) taking centre stage. Kristalina Georgieva, Managing Director of the IMF, noted last month that a new $650 billion allocation of SDRs would provide a cash injection to poorer countries without adding to their debt burdens, freeing up much-needed resources for member countries to help fight the pandemic. But while the Group of Seven (G7) nations support the proposal, many countries are opposing the matter, noting that countries that have put off development and reforms should not be handed free money.

The UK, despite being one of the leading nations in the vaccinations race, remains in lockdown, and the AstraZeneca vaccine is now facing yet another setback in both Europe and the UK as health officials have found a link between the vaccine and possible rare blood clots. The suspension of the use of these vaccines in the two regions poses a significant setback to vaccination rollouts, as this particular vaccine is currently the most broadly administered. Notably, it is far cheaper and easier to store than some of the alternatives, making it the vaccine of choice in over 111 countries.

Taking a look at currencies, the euro has regained momentum, passing the $1.19/€ mark on Thursday to reach its strongest level since 24 March 2021 after rebounding from last week’s five-month low of $1.17/€. This came as markets focused on the prospect of a strong economic recovery, despite the uncertainty around rising infection rates and the slow rollout of vaccines. EU leaders agreed on the need to urgently accelerate the vaccination campaigns last month, but said that they would keep restrictions in place for the time being, including on non-essential travel.

The British pound weakened towards $1.37 on Thursday, trading around its lowest level since 24 March 2021, as investors feared that the slowing pace of the COVID-19 vaccinations in the UK could delay the government’s plans to reopen the economy.

The South African rand traded around R14.50 against the greenback on Thursday, its highest level since 25 February 2021. This came on the back of a softer dollar, as the Fed released minutes from its most recent meeting which reinforced the US central bank’s commitment to an accommodative stance.

Examining some of the data released this week:

  Actual Previous Forecast or ∆%
US      
Markit Services PMI Final MAR 60.4 59.8 60
ISM Non-Manufacturing PMI MAR 63.7 55.3 59
Initial Jobless Claims 03/APR 744K 728K ® 680K
EU      
Unemployment Rate FEB 8.3% 8.3% ® 8.2%
Markit Composite PMI Final MAR 53.2 48.8 52.5
PPI YoY FEB 1.5% 0.4% ® 1.1%
CN      
Caixin Composite PMI MAR 53.1 51.7 52.8
ZA      
IHS Markit PMI MAR 50.3 50.2 50.6
SACCI Business Confidence MAR 94 94.3 94
Manufacturing Production YoY FEB -2.1% -4.2% ® -3.2%

EQUITIES

US futures traded marginally higher on Thursday, after the S&P 500 booked a record close in the previous session, as investors digested the recent FOMC minutes and prospects of strong global growth. On Wednesday, the Dow Jones added 0.1%, while the S&P 500 rose 0.2% to a record 4,080. The Nasdaq, however, shed 0.1%, falling to 13,689.

The UK-based FTSE 100 rose more than 0.5% to trade above 6,900 on Thursday – its highest level since February 2020 – following a 0.9% gain in the previous session driven by improvements in global optimism.

European equities traded broadly higher on Thursday, with markets tracking positive sentiment in Asia and the US.

Meanwhile, in terms of the local bourse, the FTSE/JSE All Share Index (ALSI) also traded slightly stronger at around 67,300 on Thursday, tracking Asia and the US higher amidst the release of the dovish Fed minutes.

COMMODITIES

Gold consolidated around $1,740 an ounce on Thursday, reaching the near two-week high hit earlier this week, bolstered by a weaker dollar and movements in US Treasury yields (which retreated from over one-year highs). Still, robust economic data from China and the United States, and accelerating vaccination rollouts raised hopes for a faster economic recovery, capping much of the bullion’s upside momentum.

WTI crude futures remained below $60 per barrel on Thursday for a fourth consecutive session, after touching an over two-year high of $67.98 during the second week of March. Oversupply concerns and fears surrounding extended restrictive measures in Europe, slow vaccine rollouts and rising COVID-19 cases in the top consumer nations of India and Brazil could further hit the recovery in fuel demand.

Last week, major oil producers agreed to increase output by 350,000 barrels per day (bpd) in May, 350,000 bpd in June and 400,000 bpd in July. Meanwhile, talks between the US, Iran and other powers aiming to revive the 2015 nuclear deal continue, with the prospect that Tehran may see some sanctions lifted.

Copper has been trading above $4.00 per pound since the third week of February, a level not seen since August 2011. This is on the back of supply disruptions in some South American mines, alongside robust demand from China and prospects of a global economic rebound.

Copper production in top producer Chile has continued to decline since mid-2020 due to COVID-19 disruptions, and the country now faces a slew of collective bargaining as prices have emboldened unions while companies battle to keep costs in check. Also, a new coronavirus wave in Chile prompted the closure of its borders, raising further concerns over mine supply risks. Simultaneously, the arrival of the peak consumption season and a strong US economic rebound, combined with President Biden’s $2 trillion dollar infrastructure plan, continue to provide optimism to the copper bulls.

On Friday morning, gold traded at $1751.55 platinum at $1225.85 and palladium at $2629.00 an ounce.

LOOKING AHEAD

Locally, investors remain cautious over the evolution of the pandemic given predictions that the country will likely see a third wave of COVID-19 infections in late April or mid-May, as the country heads into winter. We will also continue to keep a close eye on developments in Mozambique, as increased tension in our neighbouring country might spill over into local investor appetite.

The local currency remains largely range bound following its recent rally, struggling to breach the R14.50/$ mark, with a range of between R14.59 and R14.48/$ prevailing.

There is little new by way of market drivers as we head into the weekend, and we start the day at R14.56/$, R17.32/€ and R19.99/£.