Weekly Wrap – 08 December 2023

THAT’S A WRAP

This has been a challenging year all round. Global economies cooled on the back of high interest rates, as central banks looked to tame record-high inflation numbers. Now as we reach the end of one cycle, the next is about to start.

Key themes for this week include:
  • South African GDP (gross domestic product) contracts more than expected,
  • Gold steadies while oil feels the pinch of demand woes
  • Rand struggling to find its footing

NAVIGATING THE FINANCIAL LANDSCAPE: A RECAP OF 2023 AND A LOOK TOWARDS 2024

In a tumultuous year, marked by many global challenges, financial markets have had to navigate the storms of geopolitical tensions and economic uncertainties, while being supported by technological advancements, most notably Artificial Intelligence (AI). As we reflect on the events that unfolded in 2023, it is evident that the financial landscape has been shaped by both local and international forces.

ALL EYES ON THE US

The world’s largest economy, the US, took centre stage as the Federal Reserve (Fed) aggressively tightened monetary policy to combat inflation. The Fed’s decisive actions, initiated in March 2022, led to a significant surge in interest rates, which reached their highest level in 16 years. While intended to curb inflation, these measures triggered a banking crisis, with several US regional banks, as well as Credit Suisse, almost collapsing, which sparked fears of a broader global banking crisis. US economic growth and inflation numbers have continued to be closely monitored throughout the year, and continue to take centre stage, as market participants anticipate the Fed’s next move at its December Federal Open Market Committee (FOMC) meeting.

THE RISE OF AI

Amidst numerous geopolitical and economic developments, AI emerged as a transformative force in 2023. OpenAI’s release of Chat GPT-4 in March underscored the rapid evolution of AI, inviting speculation about its profound implications for the future. The integration of AI into various sectors signalled a paradigm shift in how we perceive and interact with technology. The significance of technological advancements is evident on the S&P 500, as seven tech stocks – Apple, Microsoft, Alphabet (Google’s owner), Amazon, Nvidia, Tesla and Meta — account for a third of the value of the S&P 500, resulting in the index being the most concentrated it’s been since the 1970’s.

GLOBAL TURBULANCE ON MULTIPLE FRONTS

The conflict in Ukraine persisted for a second year, contributing to increased fragmentation among nations and escalating geopolitical tensions. The war cast a shadow on international relations, with a growing East-West divide, prompting concerns about its broader impact on the global economy, while the International Criminal Court’s issuance of an arrest warrant against Russian President, Vladimir Putin, added another layer of complexity to the issue. Simultaneously, the trade conflict between China and the US ensued, with many trade fragmentations opening up. Israel’s formal declaration of war on Hamas, following a surprise attack, further underscored the fragility of geopolitical dynamics. Locally, South Africa grappled with its own set of challenges, as the “Lady R” story reverberated through the market, raising concerns about the country’s diplomatic ties with Russia.

ONGOING SOUTH AFRICAN CHALLENGES

South Africa has also faced a lot of internal turbulence, marked by continuous load shedding, logistical constraints – especially at the country’s ports – and the ongoing struggles of state-owned enterprises. The country’s economic woes have persisted, with dismal growth and an increasing fiscal deficit. The Financial Action Task Force’s decision to greylist South Africa for deficiencies in its anti-money laundering and counter-terrorism financing further strained the nation’s economic standing on the global stage.

Looking ahead: Elections, central banks, and global dynamics

As we approach 2024, global attention turns to impending elections. Both South Africa and the United States are gearing up for pivotal votes, with the US election particularly closely watched by market participants. In addition, the Taiwan election in January is expected to set the tone for tensions between China and Taiwan.

Market commentators will closely monitor central banks, as they anticipate a shift towards interest rate cuts in the coming year. The evolving economic landscape, combined with geopolitical developments, will undoubtedly shape the trajectory of financial markets in 2024.

In this volatile environment, adaptability and a keen understanding of global and local factors will be crucial for investors and financial professionals alike. As we navigate the complexities of an interconnected world, staying informed and agile will be key to making sound financial decisions in the face of uncertainty.

MIXED SENTIMENTS PREVAIL AHEAD OF US JOBS REPORT

US stock market futures exhibited a lack of clear direction on Thursday, with the three major averages hovering around a flat line. Traders remained cautious, refraining from making significant bets as they await the highly anticipated US non-farms payroll report scheduled for release today. Initial jobless claims in the US rose slightly less than expected, and continuing claims fell more than forecasted. However, the US Challenger Job Cuts report indicated increased job cuts by companies in November. Investors also closely scrutinised clues about the global monetary policy outlook, particularly focusing on comments from the Bank of Japan (BoJ), which suggested the possibility of an earlier-than-expected interest rate hike. This development added an additional layer of uncertainty to the market. On the corporate front, technology giant, Alphabet, saw a 2.6% gain in premarket trading following the release of its most advanced AI model. Global semi-conductor company, Advanced Micro Devices (AMD), also experienced a 2% increase after tech companies, Meta, OpenAI, and Microsoft announced their intention to utilize AMD’s newest AI chip. In contrast, gaming and electronics retailer, GameStop, faced a significant setback, tumbling over 8% before the bell, due to a revenue miss against estimates.

In the United Kingdom (UK), the FTSE 100 traded lower, with precious metal miners down by 0.9%, travel and leisure shares dropping over 0.5%, and oil and gas companies experiencing a slight decline. However, auto stocks bucked the trend, rising by over 1%. Notably, media company, Future’s stock plummeted by more than 18%, impacted by lower-than-expected earnings, while global insurance firm, AIG, fell 3% following a JP Morgan analyst downgrade.

Frankfurt’s DAX 40, retreated slightly, retracing from Wednesday’s historic peak. Germany’s industrial production unexpectedly declined in October for the fifth consecutive month, contributing to the cautious sentiment among investors.

On the JSE All Share Index, South Africa mirrored the global trend, experiencing a slight dip below 75,050. Heightened risk aversion prevailed ahead of the US payrolls data which is expected to provide insights into the future interest rate path of the world’s largest economy. As markets, globally, await the US jobs report, uncertainty and caution remain prevalent, shaping the trajectory of financial activities across various sectors. Domestically, South Africa’s current account showed a sharp narrowing in the third quarter of 2023, contrasting with a separate report indicating increased consumer pessimism ahead of the festive season.

COMMODITY MARKETS NAVIGATE TURBULENCE: BRENT CRUDE AND GOLD IN FOCUS

Brent Crude futures staged a technical rebound, surpassing $74.50/barrel on Thursday. However, the rebound comes after five consecutive sessions of decline, leaving prices close to their lowest levels since late June. The latest blow to oil prices came with official data revealing a significant 5.4 million barrel increase in US gasoline inventories, their largest surge in nine weeks, signalling weaker demand. Compounding the challenges, data from the Bureau of Economic Analysis highlighted that US crude exports reached a near record of six million barrels a day in October. Flows to Europe and Asia demonstrated a consistent upward trend. In November, the Organization of the Petroleum Exporting Countries’ (OPEC’s) total production dipped slightly to 27.81 million barrels per day, a 90,000-barrel decrease from October. While Saudi Arabia maintained output close to 9 million barrels, Iran saw an increase, despite OPEC+ members announcing additional cuts of 2.2 million barrels per day last week. Voluntary reductions by Saudi Arabia and Russia accounted for over 1.3 million barrels. Year on year, Brent Crude is trading 1.68% softer, reflecting the challenging conditions faced by the oil market.

Turning to the precious metals sector, gold steadied around $2,030/ounce on Thursday, finding stability after its recent volatility. Investors are closely monitoring US jobs data which revealed a 2.5-year low in US job openings in October, coupled with private payrolls rising less than expected in November, signalling a cooling labour market. Market sentiment suggests a 60% chance of a Fed rate cut in March, with traders increasingly betting on a rate cut by the European Central Bank (ECB) as well. Dovish remarks from ECB member and head of the Bank of France, Francois Villeroy, heightened expectations, stating that “disinflation is happening more quickly than we thought.” At the time of writing, gold has shown resilience, recording a significant year-on-year increase of 13.9%, emphasising its status as a safe-haven asset amid economic uncertainties and shifting central bank policies. As commodity markets navigate turbulence, investors remain vigilant, adjusting strategies in response to evolving economic indicators and geopolitical developments.

GLOBAL CURRENCY MOVEMENTS REFLECT ECONOMIC UNCERTAINTIES

The global currency landscape witnessed significant fluctuations as investors eagerly await key economic indicators and central bank decisions. The US Dollar Index dipped below 104 on Thursday, reflecting caution among investors ahead of the release of the crucial US non-farms payroll report today. Market expectations anticipate an increase of 170,000 jobs in November, maintaining the jobless rate at a 22-month high of 3.9%, with wage growth slowing to 4%, its lowest level since June 2021.

The Japanese yen experienced a notable surge of over 1.5%, reaching its highest level in three months. This movement followed clear indications from Japanese monetary policy authorities hinting at a potential policy shift. Conversely, the euro extended its decline below $1.08/€, marking its lowest level since mid-November. Dovish remarks from ECB conservative, Isabel Schnabel, reinforced the belief that the Central Bank might expedite interest rate cuts, especially after the euro area’s inflation rate fell to 2.4% in November, below market expectations.

The British pound remained below $1.27/£, with investors processing final Purchasing Managers’ Index (PMI) data and assessing the monetary policy outlook at both the Bank of England (BoE) and the US Fed. Britain’s private sector activity returned to growth in November, contrasting with expectations of a rate cut by the BoE by June, while the Fed is anticipated to act in March.

In South Africa, the rand is facing challenges, testing the R19.00/$ mark earlier in the week and hovering around R18.80/$ for most of the week. Local inflation accelerated to 5.9% in October, approaching the upper limit of the South African Reserve Bank’s target range of 3% to 6%. Policymakers are grappling with the delicate balance of curbing inflation while supporting economic growth amid challenging economic conditions. The rand has been facing selling pressure even before Wednesday’s GDP data surprised the market to the downside. Any optimism about the rand should be tempered given the country’s ongoing challenges. The delicate economic balance and the need for careful policymaking underscore the complexities faced by South Africa.

As global currencies respond to economic indicators, central bank signals, and regional challenges, investors remain watchful, adjusting their strategies to navigate the uncertainties prevailing in the international financial landscape.

The rand starts the day at R18,75/$, R20.22/€ and R23.60/£.

HAPPY HOLIDAYS

This is our last weekly wrap of 2023, and we will resume our commentary on 19 January 2024. We would like to take this opportunity to wish all of our readers a safe and happy festive season and we look forward to sharing our insights with you again in the new year.

Sources: Bloomberg, Refinitiv/Reuters, Trading Economics and Investing.com.

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