ALL EYES ON CHINA
- China makes all the right noise
- South African Mining Indaba in the declining sector
- Oil posts fourth consecutive session of gains
- Currencies dance to central bank tunes
ENTER THE DRAGON
With the Chinese New Year being celebrated from Saturday for a week, the Chinese say goodbye to the year of the Rabbit and welcome in the year of the Dragon, a year of evolution, improvements, good luck and abundance… or so they hope.
Chinese authorities, however, are gearing up for a gunfight, as they try to quell the volatility gripping their stock market. Premier Li Qiang is advocating for “forceful” measures to restore stability. This call to action signals a decisive shift in strategy, akin to breaking out the big guns, as China mulls mobilising a staggering two trillion yuan ($281 billion), primarily sourced from the offshore accounts of its state-owned enterprises, to stabilise markets.
The shake-up doesn’t stop there. China’s acting Vice Mayor of Shanghai, Wu Qing, colloquially known as “the broker butcher”, due to his zero-tolerance stance towards market irregularities and unscrupulous traders, has now assumed the mantle as chairman of the securities regulator, which is poised to steer China’s financial landscape towards calmer waters. This bold move underscores the government’s commitment to bolstering investor confidence and revitalizing market sentiment.
Against this backdrop of uncertainty, Wednesday’s data unveiled a stark reality: China’s consumer prices plummeted at their fastest pace in 15 years. However, analysts remain cautiously optimistic, attributing the downturn to seasonal factors surrounding the Lunar New Year and are anticipating a potential rebound in the coming months.
Amidst mounting apprehension, the prospect of economic stimulus has emerged as a beacon of hope, catalysing a surge in Chinese stocks. The People’s Bank of China (PBoC) has further fuelled this rising sentiment with an unexpected, larger-than-anticipated, reserve requirement ratio cut. PBoC Governor, Pan Gongsheng, has also fanned the flames of optimism with ambitious plans ranging from establishing a new credit market department to slashing interest rates on low-cost funds.
Yet, amidst the flurry of grand gestures, the pressing question lingers: will these extraordinary measures suffice to win back the trust of disillusioned investors and reignite China’s economic engine, let alone propel it towards double-digit growth once again?
As China navigates this delicate balancing act, the efficacy of its policy interventions and the resilience of its economy will stand as a litmus test in an era defined by uncertainty and flux. The path to stability and prosperity remains fraught with challenges but with strategic foresight and decisive action, China endeavours to chart a course towards sustained growth and prosperity. Welcome the Year of the Dragon!
REFLECTIONS FROM SOUTH AFRICA’S MINING INDABA 2024
Recent revelations at the Mining Indaba 2024 shed light on the precipitous decline in mining output plaguing South Africa. Production has plummeted to levels 13% below those observed in the 1980s. This stark reality underscores the seismic shifts reshaping the sector’s landscape.
Mining, once hailed as the bedrock of South Africa’s economy, remains a cornerstone of prosperity, employing over 477,000 individuals and contributing significantly to government coffers through tax and royalties amounting to over R140 billion annually. However, the sector’s enduring significance belies its current challenges, exacerbated by a confluence of factors.
The echoes of a bygone commodity boom, which buoyed the nation’s finances and bolstered economic resilience in the face of adversity, have faded into obscurity. In their wake, a tempest of load-shedding, logistical hurdles, plummeting commodity prices, and escalating labour costs have engulfed the industry, exacting a heavy toll on its viability.
The latest data from the Minerals Council of South Africa paints a sobering picture of the sector’s plight, with a staggering 12% decline in its contribution to GDP in 2023, primarily attributable to the electricity and logistics crises gripping miners. Particularly vulnerable are the platinum group metals (PGMs) miners, grappling with the dual onslaught of declining prices and exorbitant operational costs.
The intricate web of challenges facing PGM miners is compounded by the antiquated infrastructure that characterises South Africa’s mining landscape. Platinum mining shafts, among the deepest and most expensive to operate globally, bear the brunt of this burden.
In response to this crisis, discussions surrounding the imperative of restructuring unprofitable operations have gained momentum, which could result in potential job losses ranging between 4,000 and 7,000 in South Africa alone. Compounding this predicament is the curtailment of production by PGM miners and others, driven by a dual imperative to mitigate costs and navigate the logistical quagmire constraining exports.
Despite these adversities, glimmers of resilience emerge, as South Africa’s mining output, while in decline since the 1980s, has exhibited signs of acceleration since 2010. Notably, while gold and platinum production languish or stagnate, the ascent of chrome and manganese production offers a ray of hope, with annual growth rates averaging 8.2% and 8.4%, respectively, since 1994.
In the face of unparalleled adversity, South Africa’s mining sector stands at a crossroads, navigating a precarious path fraught with challenges, yet pregnant with opportunity. The imperative of strategic realignment, bolstered by concerted efforts to enhance operational efficiency and embrace innovation, emerges as the linchpin for charting a course towards sustainable growth.
MARKET RECAP
Mixed sentiment across global indices
On Thursday, the S&P 500 and the Nasdaq 100 hovered around record highs, exhibiting little change, while the Dow Jones edged up by 50 points. Investor focus remained fixed on corporate earnings, with entertainment company, Walt Disney, stealing the spotlight as its shares surged over 9%, propelled by raised guidance and robust earnings that surpassed expectations. Semi-conductor manufacturer, Arm Holdings also made waves, jumping nearly 36% after issuing a bullish profit forecast. Conversely, international tobacco company, Philip Morris, saw a dip of about 1.5% after missing earnings forecasts and providing a cautious outlook for 2024. Meanwhile, energy and petroleum giant, ConocoPhillips, remained relatively steady despite beating earnings and revenue projections. Investment giant, Megacap, saw its stocks including Microsoft, Amazon, and Meta experienced slight declines.
In Europe, the FTSE 100 rebounded thanks to positive corporate updates, with fast moving consumer goods company, Unilever’s shares soaring over 3% following increased fourth-quarter sales and a significant share buyback plan. British American Tobacco also made notable gains, contributing to the index’s nearly 2% rise.
In Frankfurt, the DAX 40 maintained stability as investors awaited key speeches from policymakers. Multinational technology company, Siemens, saw a modest uptick, despite challenges at its flagship factory automation unit, with first-quarter profits slightly surpassing expectations.
In Asia, the Nikkei 225 Index rallied to its highest level in over three decades, propelled by strong corporate earnings and dovish remarks from a Bank of Japan official. Integrated telecommunications firm, SoftBank surged 11.1%, while its subsidiary, Arm Holdings, rose 20% in after-hours trading following an upbeat quarterly report.
In South Africa, however, the JSE All Share index faced downward pressure for a second consecutive day, trading below 74,100. Investors adjusted rate-cut expectations by the United States (US) Federal Reserve (Fed) while also scrutinising corporate updates. Miner, Anglo American Platinum led losses, dropping over 7%, while British American Tobacco emerged as the top performer, gaining over 5%.
BRENT CRUDE ON THE UP AND UP
Brent Crude futures surged above $79.50/barrel on Thursday, marking the fourth consecutive session of gains. The narrative around the oil price is largely unchanged with the recent gains, once again, being fuelled by escalating tensions in the Middle East. Israeli Prime Minister, Benjamin Netanyahu’s rejection of a ceasefire offer from Hamas, coupled with concerns over potential US military actions against Iranian forces, intensified supply disruption fears. On the demand side, official data revealed a significant drop in US gasoline inventories, by 3.15 million barrels last week, far surpassing forecasts. However, US crude stockpiles saw a substantial increase of 5.5 million barrels, exceeding market expectations.
In contrast, gold prices dipped to around $2,020/ounce on Thursday, coming under pressure from a strengthening dollar and Treasury yields. Investors continued to weigh the trajectory of monetary easing by the Fed amidst upbeat economic data from the US and hawkish comments from bankers. Despite resilient job market indicators, such as a larger-than-expected decrease in initial jobless claims to 218,000, Fed officials like Boston Fed President, Susan Collins, reiterated their stance on potential interest rate cuts only later in the year. This sentiment diminished the appeal of bullion, reflected in the markets’ reduced probability of a Fed rate reduction in March, which is currently priced in at less than 20%.
DOLLAR CLAWS BACK RECENT LOSSES
The US Dollar Index saw a rebound to above 104.3, recovering from recent losses as data reinforced the Fed’s reluctance for rate cuts. With initial jobless claims falling to 218,000 and continuing claims decreasing to 1.871 million, market sentiment shifted towards a more hawkish tone.
Meanwhile, the euro rebounded slightly, to trade above $1.075/€, after hitting a two-and-a-half-month low on 5 February. Cautious statements from major central banks in Europe and the US, including European Central Bank board member, Isabel Schnabel’s emphasis on patience when considering interest rate adjustments, influenced market sentiment. Eurozone consumer inflation expectations decreased to 3.2% in December, their lowest level since February 2022, adding to the cautious outlook.
Similarly, the British pound remained steady at $1.26/£ after touching a seven-week low. Bank of England (BoE) Deputy Governor, Sarah Breeden, hinted at a shift in focus towards maintaining current interest rates, signalling a delay in potential rate cuts. BoE Chief Economist, Huw Pill, echoed this sentiment, suggesting that the timing for the first cut is still distant. Robust economic data from the Royal Institute of Chartered Surveyors and UK financial services company, Halifax, indicated ongoing resilience in the UK housing market, further stabilising the pound.
On the South African front, the rand traded range bound for most of the week, remaining near a two-week low, as the dollar’s strength persisted amidst hawkish remarks from Fed policymakers. The South African Reserve Bank’s decision to keep rates steady at 2008-highs reinforced the notion of rate stability, as the central bank awaits a dip in headline inflation before it will consider rate cuts.
Key Indicators:
USD/ZAR: 18.94
EUR/ZAR: 20.41
GBP/ZAR: 23.91
Brent Crude: $81.51
Gold: $2,033.23
Sources: Refinitiv, Bloomberg and Trading Economics.
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