Weekly Wrap – 18 June 2021

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Written by Citadel Global Director,
Bianca Botes

A HAWK’S EYE VIEW

After much talk and speculation about price pressure in the United States (US), the US Federal Reserve (the Fed) finally ripped the band-aid off. It made for quite an eventful market environment on Wednesday evening.

Key themes for the week were:

  • The Fed voices concerns over price pressure
  • US Dollar makes a comeback
  • Gold sheds almost 4%

FED IN FOCUS

Markets reacted swiftly on Wednesday night as the Fed, for the first time since the US economy started showing signs of a recovery, made mention of the potential threat of price pressure. Their message was that interest rates might need to be hiked sooner than expected.

As the meeting was dominated by interest rates, there was no mention as to when the Fed will start tapering back on the current quantitative easing program. Fed Chairman, Jerome Powell, did however mention that it is being discussed amongst members of the committee, by stating that, “You can think of this meeting that we have had as the ‘talking about talking about’ meeting.”

As anticipated, the Federal Open Market Committee (FOMC) unanimously voted to keep the benchmark short-term borrowing rate as is, near zero. Officials did, however, surprise the market by indicating that rate hikes could come as soon as 2023. This followed an earlier statement in March that indicated that increases will be delayed until at least 2024. The so-called “dot plot” of individual committee member expectations indicated a large likelihood of two hikes by late 2023.

The Fed also increased its headline inflation expectation to 3.4%, a full percentage point higher than the March projection, following the biggest rise in consumer prices in about 13 years.

A BROADER VIEW

Meanwhile, the rest of the world are all also slowly making their own strides, clawing their way to post-pandemic economies.

The Consumer Price Index (CPI) for the eurozone came in at 2% year-on-year in May 2021, the highest since October 2018, attributed to the low base from the previous year and a significant rebound in demand following the re-opening of the economy. The biggest increases are attributed to energy, services, and non-energy industrials.

Canada’s annual inflation rate accelerated to 3.6% in May 2021, up from 3.4% in April, exceeding market expectations. The reading was the highest jump in consumer prices since 2011, with the largest attributers to the increase being the low base year effects in consumer goods such as gasoline.

Hong Kong’s seasonally adjusted unemployment rate dwindled to 6% in the March to May period, the lowest number since the same period of 2020, resulting from the economic recovery.

On Thursday afternoon, the number of jobless claims in the US, unexpectedly increased to 412 000 last week, the first increase in over a month. However, the number is expected to decline as the US economy continues its recovery.

Bond yields broadly traded higher following the Fed announcement on Wednesday evening, with the yield on the benchmark 10-year Treasury Note trading higher at 1.57% on Thursday, creeping even further away from a three-month low witnessed last week. This amid increasing concerns over inflation in the US, while the UK 10-year Government Bond rallied to 0.81%, the highest level since 7 June 2021. The German 10-year Bund Yield, also followed suit, jumping to the highest level in over three weeks.

STOCKS RESPOND TO FED

US futures traded softer on Thursday as investors digested the more hawkish tone from the Fed and higher-than-expected claims figures. Following Wednesday’s address, all three main US stock indices shed value, with the Dow Jones dipping by 0.8%, while the S&P 500 declined by 0.5%. The tech-dominated Nasdaq followed suit by shedding 0.2%.

The UK-based FTSE 100 dropped around 0.3% on Thursday, falling from Wednesday’s 16-month high, with mining companies topping the list of worst performers, as a stronger dollar dampened commodity prices.

European equity markets were largely down on Thursday, breaking a nine-day rally, the longest in three-and-a-half years, with the DAX shedding 0.2%.

The Japanese Nikkei 225 fell 0.93% on Thursday, extending losses of 0.51% in the previous session and declining further from five-week highs, as risk sentiment diminished on the back of the Fed meeting on Wednesday.

The South African JSE FTSE All Share Index tracked lower against global equity markets on Thursday, hitting its lowest level since 27 May 2021. The move is largely attributed to the Fed announcement, however the move to lockdown level 3 in the country, should not be discounted.

DOLLAR DIMS COMMODITIES’ SHINE

West Texas Intermediate (WTI) crude futures traded below $72 a barrel on Thursday. This is due to a stronger dollar coupled with news that Beijing would issue new rules on the management of price indices for key commodities and services, as of 1 August 2021. This announcement dampened sentiment. However, refinery output in China rose by 4.4% year-on-year in May to reach record highs. This week, the Energy Information Agency (EIA) reported that US crude oil inventories fell to 7.355 million barrels in the week of 11 June 2021, the largest drop since the last week of April.

Gold prices plummeted to five-week lows, trading below $1 800 a fine ounce on Thursday as both the greenback and US Treasury Yields soared, following the Fed’s revised inflation and interest rate forecasts.

Copper continued its decline, trading at $4.30 per pound, as China is set to take measures to curb any further rise in commodity prices. However, even at these levels, copper prices remain close to the all-time high of almost $4.90 per pound recorded in May, as trillions in dollars of economic stimulus to support post-COVID recovery continues to bolster demand.

Palladium futures traded above $2 750 per troy ounce, near the record high of $3 017 reached on 4 May 2021, as suppliers faced ongoing constraints to mining operations and demand remained strong. In South Africa, mining houses have been hit by ongoing loadshedding by power utility, Eskom. Breakdowns at several of its coal-fired power stations, as well as the increased winter-demand, put pressure on the system.

DOLLAR MAKES A COMEBACK

The dollar index rallied to an eight-week high of 91.8 on Thursday, on the back of the adjusted timeline for interest rate hikes and increased inflation outlook by the Fed.

The euro depreciated below $1.20, touching its weakest level since mid-April, as the hawkish Fed saw the euro succumb to a stronger dollar. European Central Bank (ECB) President, Christine Lagarde, stated earlier this week that both monetary and fiscal stimulus should remain in force, until there are clear signs of a “firm, solid and sustainable” economic recovery. The ECB agreed on Thursday to maintain an elevated pace of bond purchases.

The announcement by the Fed on Wednesday, also saw the pound come under pressure, with the currency dipping below the $1.40 mark, touching its weakest level since the 9th of May 2021.

The South African rand, tracked the euro softer against the dollar, shedding 2% overnight on Wednesday, to trade above the R14.00 mark. This followed weeks of a rather buoyant rand. While the local currency is largely driven by the global landscape, concerns around level 3 lockdown as well as the continuous power outages are filtering through.

We start Friday trading at R14.07 /$, 16.77/€ and R19.59/£.