Weekly Wrap – 28 May 2021

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Written by Citadel Global Director,
Bianca Botes

ON IT GOES

Another rather uneventful week has come and gone. The world remains steadfast in its focus on the global economic environment, with inflation and guidance from the United States (US) Federal Reserve (the Fed) continuing to set the tone for global markets.

CRYPTO-FAD OR FUTURE?

Cryptocurrencies have been all the rage for a while now. And when it comes to cryptocurrencies, there are three types of people. On the one hand we have those who believe that cryptocurrencies will ignite a revolution in the way the global financial system operates. On the other hand, we have those that believe they are merely a fad that will soon see its end. Then in the middle we have those who see potential, but they remain sceptical about whether it will replace the financial system as we know it.

This week, the Danish Central Bank Governor, Lars Rohde, dubbed cryptocurrencies as a “speculative fad that can probably be ignored”. The statement by Rohde, comes just a week after deputy governor at the Bank of England (BoE), Jon Cunliffe, warned about the implications that private payment providers could have on global financial stability. BoE governor, Andrew Baily, also had something to say, when he warned earlier this month that people should only invest in crypto should they be willing to lose their money.

In the private sector, tweets from the very influential Elon Musk, has also caused concerns about the “chaotic” and “unsafe” nature of the crypto market. The South African-bred billionaire took the crypto market by storm, when he announced that Tesla would invest $1.5 billion in bitcoin earlier in February. At the time, the price of one bitcoin soared to a record a high, breaching $50,000. However, Musk changed the narrative earlier this month, noting the environmental cost of mining bitcoin. As such, Musk moved to announce that Tesla would no longer accept payment in the crypto currency, and the price rapidly crashed.

Analysts are now questioning the veracity of cryptocurrencies, especially if their value can be bolstered or tanked by a single person’s tweets – regardless of how influential that person is.

But does that mean that cryptocurrencies are not viable in totality? While many countries are banning crypto for a variety of reasons, ranging from environmental concerns to financial stability issues, others are embracing the technology, but in a controlled environment. Sweden and China, for example, are both in the process of developing their own versions of cryptocurrencies as cash becomes less and less popular amongst consumers.

Whatever the future holds for the cryptocurrencies, and whether they will prove to be a fad or not, one thing is certain, they have certainly assisted in shaping the future of financial systems and will continue to do so. Regulators, however, now have the challenge of keeping up with ever changing technology, while cheaper and more efficient solutions are constantly being developed and tested by consumers.

As for an asset class? The regulatory space, coupled with the grey areas of how to value the “asset”, continues to make it hard for the financial sector to accept it as a viable investment option, leaving room for fly-by-night crypto prophets to sell a dream that often ends as a nightmare to those looking for some returns.

The bottom line for us, however, is that while there is room for cryptocurrencies as a payment mechanism, we are still a long way away from having it deemed a credible investment class, and until regulators can efficiently protect those making use of or investing in cryptocurrencies, one should approach them with caution.

IT’S ALL ABOUT GROWTH

Whether you find yourself in China, Europe or the US, emphasis remains on growth, with inflation, stimulus and commodity prices being the buzzwords of the week.

Commodity prices recently soared, and while many have welcomed the rise in commodity prices, others have voiced concerns.  China has pointed out the effect of the rising commodity prices on small businesses and inflation, while Morgan Stanley economist, Robin Xing, warned that “Commodity prices are disconnecting from fundamentals, building up downside risks”.

The Fed has been in the spotlight for some time now and will continue to remain there, as markets await clear direction from the Bank with regards to tapering of Quantitive easing (QE), as well as US monetary policy going forward. This week saw yet another indication that the Fed will start discussions around tapering QE as we head towards the second half of the year. The expectation is that the tapering could see a negative effect on risk appetite, and as a result, risk assets could come under pressure. However, for the time being, the Fed’s talk about tapering is merely suggestion, and we will in all likelihood only see real efforts being made in this direction in August, when the Jackson Hole Economic Symposium kicks off.

From a data perspective, new US durable goods orders decreased unexpectedly by 1.3% month-on-month in April of 2021, defying market forecasts of a 0.7% increase. The number of Americans filing new unemployment benefit claims decreased by 38 000 to 406 000 in the week ending 22 May. This was the lowest level since March 2020, bringing the US closer to employment levels that would be satisfactory for the Fed to start reviewing policy.

European Union (EU) economic data, released earlier this week, indicated German business morale hit its strongest level in two years in May, while consumer sentiment, heading into June, came in below market expectations.
United Kingdom (UK) factories produced 68 306 cars in April 2021, a significant increase from just 197 a year ago when Covid restrictions all but halted manufacturing. Production however remained 3.8% below the April 2019 output. When compared with a five-year average, production was down 42.9% for the month and -31.1% for the period January to April, reflecting the scale of the challenge facing the industry as it seeks to recover from the pandemic.

The UK’s Monetary Policy Council (MPC) central projection in May indicated that the first rate hike by the BoE will only take place well into next year, with some conservative tightening to follow from there. According to BoE forecasts, Britain’s economy is expected to grow by 7.25% in 2021, before slowing in 2022 to return to its sluggish pre-pandemic pace.

Producer prices in South Africa rose by 6.7% year-on-year in April, following a 5.2% rise in March. This is noted as the highest producer inflation rate since November of 2018, driven by a rise in prices of coke, petroleum, chemicals, rubber and plastic products. 

EQUITIES TAKES A BREATHER

US stock futures settled lower on Thursday after slight gains the previous session. On the bond market, the US 10-year Bond Yield held above its three-week lows of 1.579% on Wednesday. Looking at individual stocks, Snowflake shares shed 5% in extended trading after the data-analytics software company reported broadening losses, while tech company, Nvidia, dropped 0.96% even as reporting sales grew by 84% in the first quarter compared with last year.

The UK’s FTSE 100 traded flat on Thursday, tracking a cautious mood in the Asia-Pacific region and Europe, as investors continue to weigh prospects of a strong economic recovery and runaway inflation. Among single stocks, HSBC declined after the bank announced it will exit most of its US retail banking.
The Frankfurt-based DAX eased further from its record-high levels on Thursday, after recent data showed disappointing consumer morale numbers going into June. Other major European bourses traded along a flatline.

The Japanese Nikkei 225 shed 0.33% on Thursday, extending declines of 0.31% in the previous session. This after Tokyo Governor, Yuriko Koike, and numerous other prefectural leaders on Wednesday called on the Japanese government to extend its COVID-19 state of emergency, noting that conditions have not improved enough to lift the measure. The country’s infection rates remain at high levels and the situation is still severe.

The South African FTSE/JSE All Share Index traded higher at 66 491 points on Thursday, assisted by a 6% increase in the share price of fashion discount retailer Mr. Price Group, after the company reported a strong recovery in its full-year profit. Locally, South Africa could soon be moving to an adjusted Level 2 lockdown as members of the COVID-19 Ministerial Advisory Committee warned that tighter restrictions are needed ahead of a third wave.

COMMODITIES REMAIN HIGH

Gold stabilised around US$1 900 an ounce on Thursday, near its highest level in more than four months, as investors await further cues on the next US monetary policy moves.

Oil prices dipped on Thursday after gaining slightly in the early session in Asia. Traders are cautious on whether a recovery in demand would be enough to absorb any increase in Iranian oil exports should the nation’s nuclear deal be revived. Goldman Sachs noted that the case for higher oil prices remains intact, even if a breakthrough in negotiations between Washington and Tehran materialises. In inventory news, the American Petroleum Institute (API) reported that crude oil inventories in the US fell by 1.662 million barrels in the week of 21 May, above market forecasts of a 1.05 million fall.

Copper futures traded around $4.50/£, the lowest level since end April, after China said it will strengthen its management of commodity supply and demand to curb any “unreasonable” increases in prices. 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 in Chile, a possible strike at the world’s largest copper mine, Escondida, threatens output.

On Friday morning, gold traded at $1894.1, platinum at $1184.2 and palladium at $2819 an ounce.

DOLLAR REMAINS UNDER PRESSURE

The euro traded around $1.22 at the end of May, not far from an over four-month high of $1.2265 hit on Tuesday, supported by solid economic-recovery hopes and a broad dollar weakness.

The dollar index traded in the region of 90 on Thursday, marginally higher than 89.5 touched early in the week as investors await fresh Personal Consumption Expenditure (PCE) inflation due today. The new reading will provide an update on price pressures that market players believe will persist. The Fed, however, has been reiterating that they are transitory. Stubbornly high inflation would force the Fed to tighten monetary policy sooner rather than later.

The British pound gained to $1.417 Thursday afternoon, not far from an over three-year high of $1.423 hit last week, after BoE policymaker, Gertjan Vlieghe, signalled that the UK central bank might start raising interest rates sooner than expected in 2022, should a stronger than forecast economic rebound in the UK materialise.

The South African rand extended its gains for the sixth consecutive session to trade at R13.70 against the greenback on Thursday, its highest level since February 2019, aided by the dollar deteriorating to near four-month lows. The currency has been supported by the Fed’s dovish stance, rising commodity prices, the positive outlook delivered by the South African Reserve Bank last week, and after credit rating agencies S&P Global Ratings and Fitch maintained South Africa’s sovereign rating and outlook.

We started the day trading at R13.77 /$, 16.79/€ and R19.55/£.