NAVIGATING THROUGH UNCERTAIN TIMES
The recent collapse of the Francis Scott Key Bridge in Baltimore, coupled with the biggest earthquake in 25 years to hit Taiwan, once again highlights how quickly things can unexpectedly go wrong and have a significant impact on global markets.
- Supply-chain woes far from over
- Gold at record highs, copper prices at 14-month highs
- Bond yields remain high amid interest rate cut uncertainties
- Equities digest central bank cues
- Dollar blows off steam
NAVIGATING TUMULTUOUS SEAS: SUPPLY CHAINS IN AN EVER-CHANGING WORLD
In the vast realm of global commerce, supply chains have long been the unsung heroes—quietly orchestrating the seamless movement of goods across continents. These intricate networks, akin to invisible threads connecting factories, warehouses, and markets, have weathered storms and stood resilient. But recent times have tested their mettle, revealing vulnerabilities that threaten to disrupt the flow of goods worldwide. Let us embark on a journey through these tumultuous waters, where resilience and adaptation collide with adversity.
THE BACKDROP: RISING TIDES AND SHADOWS
Our voyage begins against a backdrop of rising tides. Inflationary pressures and economic uncertainties have cast a shadow over consumer spending, altering the course of supply and demand. Labour shortages, remnants of the COVID-19 pandemic, have added further complexity—like rogue currents disrupting a once-predictable sea. When the delicate balance falters, the gears of commerce grind against unforeseen obstacles.
GEOPOLITICAL STORMS AND LOGISTICAL BOTTLENECKS
As our ship sales further from the safety of the shoreline it finds that geopolitical tensions have roiled the waters. Trade routes, once serene, now face turbulence. Shipping delays ripple across the oceans, and port congestion resembles traffic jams at sea. Logistical bottlenecks emerge, hindering the smooth operation of global trade. The invisible threads start to strain, threatening to snap.
THE BRIDGE COLLAPSE: SHOCKWAVES ACROSS THE INDUSTRY
Then a sudden, catastrophic event rocks our vessel— the collapse of the Francis Scott Key Bridge in Baltimore, its impact reverberates throughout the global shipping industry, disrupting crucial trade routes. Baltimore, a bustling port on the East Coast of the United States (US), has ground to a halt. Ships have been rerouted, cargo is languishing on board or at the port, and businesses are facing logistical nightmares. The bridge’s demise has left a chasm in the supply chain’s backbone.
TAIWAN’S EARTHQUAKE: A TREMOR FELT WORLDWIDE
Amidst this chaos, another crisis has emerged on the horizon. Taiwan, a technological powerhouse, experienced a seismic jolt—a 7.4 magnitude earthquake. The ground trembled, and Taiwan Semiconductor Manufacturing Company (TSMC), a titan in chip production, is facing disruption. Its factories have suspended operations, and the supply of microchips looks to falter. The world is holding its breath—TSMC’s fate is intertwined with global tech giants and supply interruptions are not an option.
RESILIENCE AND ADAPTATION: THE HUMAN SPIRIT PREVAILS
But this tale isn’t one of despair alone. Amidst the wreckage and uncertainty, stories of resilience emerge. Supply chains adapt— they find alternate routes, diversify suppliers and recalibrate expectations. The invisible threads, though severely strained, hold firm. TSMC will reopen its factories, and ships will chart new courses. The human spirit prevails—a testament to our ability to adapt, pivot and navigate treacherous waters.
As we sail onward, we recognise that supply chains are more than mere logistics—they are the critical lifeblood of international commerce and global economies.
DIVING INTO THE MARKETS
EQUITY TRADERS DIGEST FED REMARKS AND AWAIT KEY JOBS REPORT
On Thursday, stock futures in the US opened on an optimistic note, with contracts on the three major averages showing gains of approximately 0.3%. Investors closely monitored the latest statements from US Federal Reserve (Fed) Chair, Jerome Powell. Yesterday, at Stanford University, Powell emphasised that inflation figures had not significantly altered the overall economic landscape. He indicated that it would likely be appropriate to begin lowering the policy rate at some point during this year. However, policymakers remain cautious, seeking more confidence that inflation is sustainably trending toward the 2% target. Some of the corporate highlights included pre-market gains for tech companies, Nvidia, Micron Technology, and Advanced Micro Devices.
In Europe, Frankfurt’s DAX 40 index experienced a slight decline of 0.1%, hovering around the 18,380 level. Investors digested cautious remarks from Fed officials and processed the European Central Bank’s meeting minutes, which indicate that the case for European Union rate cuts was gaining momentum. Beyond the benchmark index, German medical software company, Compugroup, surged by an impressive 7.5% following an upgrade from Morgan Stanley.
Over in the UK, the FTSE 100 traded slightly higher, reaching levels not seen since February 2023, with investor sentiment remaining cautiously optimistic. Speculation of potential interest rate cuts by central banks emerged as inflationary pressures eased. Precious metals miners contributed to the index’s gains, fueled by record-high gold prices, while financial services holding company, Cab Payments, stood out, surging over 10% after obtaining a payment service provider license in the Netherlands.
Japan’s Nikkei 225 Index rebounded, closing 0.81% higher at 39,773. The broader TOPIX Index gained 0.94% to 2,732 as investors took heart from steadier US stocks after a recent sharp drop. Powell’s remarks about inflation confidence also influenced sentiment. Japanese economic data, due today, including household spending and the leading economic index, will be closely watched. Index heavyweights such as energy utility company, Tokyo Electric Power, financial services group, Mitsubishi UFJ, vehicle manufacturer, Toyota Motor, semiconductor manufacturer, Advantest, and telecommunications group, SoftBank Group contributed to the rebound.
The South African JSE All Share index edged up, trading above the 74,500 level, with gains driven by Resource-linked stocks and financials. Globally, traders continued to assess remarks from various Fed officials, reinforcing expectations of US rate cuts. Domestically, a fresh PMI survey revealed South Africa’s private sector slipped back into a modest contraction in March.
A TALE OF OIL, GOLD, AND COPPER
Brent Crude futures are currently above $89.50/barrel, buoyed by output cuts by OPEC+ (the expanded Organization of Petroleum Exporting Countries), supply disruptions, and a robust US demand outlook. Amidst geopolitical tensions, with Ukrainian drone attacks on Russian refineries and fears of the Israel-Hamas conflict escalating, the oil market faces turbulence. Yet, the resilient US labour market is increasing overall consumption, boosting oil prices, despite a surprising increase in US crude inventories.
Gold, a safe haven in stormy markets, is holding near $2,300 an ounce, an all-time high. Investors are digesting remarks from Fed officials, with the Fed Chair indicating the need for more evidence of sustainable inflation before cutting interest rates. A slowdown in US services growth supports rate-cut expectations, weighing on the dollar and bolstering the gold price. Analysts suggest investors may be hedging against depreciation in non-US dollar currencies.
Copper futures surged to above $4.20/pound, lifted by a weak US dollar and increasing supply risks. Lower US interest rates are putting pressure on the dollar, lifting purchasing power for key importers and triggering a sharp increase in bids. Improved manufacturing data from China is also challenging concerns of a demand slump. However, disruptions in major copper-producing mines are creating a major headwind for supply, driving Chinese smelters to consider a 10% joint reduction in output.
BOND YIELDS SAILING IN HIGH WATER
The yield on the US 10-year Treasury note is hovering at 4.36%, remaining at levels unseen since late November, as traders assess the monetary policy outlook, digest key economic data, and consider comments from Fed officials. Chair Powell has reiterated that the Fed does not expect to lower the policy rate until policymakers have greater confidence that inflation is moving sustainably down toward 2%. However, he has stressed that it will likely be appropriate to begin lowering the policy rate at some point this year.
The UK 10-year government bond yield surged to 4.1%, touching its highest level since early March. Stronger-than-expected US job openings and manufacturing data have raised doubts about the Fed’s timeline for interest rate cuts and whether US officials could deliver three cuts this year. In the UK, recent data indicates that shop price inflation declined to 1.3% in March from 2.5% in February, marking the smallest annual increase since December 2021. Additionally, house prices experienced a 0.2% decline last month, contrary to market expectations of a 0.3% rise.
South Africa’s 10-year government bond yield is hovering around 10.85%, remaining close to a five-month high of 10.90%, reached on 2 April. Domestically, the South African Reserve Bank (SARB) is expected to maintain interest rates at their current levels for a longer period, due to concerns about looming inflationary pressures.
CURRENCY CROSS CURRENTS
The US Dollar Index extended its decline to 104, reflecting a third consecutive session of losses. Traders’ sentiments are leaning towards expectations of a looser monetary policy by the Fed later this year. Heightened jobless claims and increased job cuts in March, coupled with a slowdown in the services sector as indicated by the ISM Services PMI, underscore the challenges facing the labour market. All eyes are now on today’s Non-Farm Payrolls Report which should provide further insights into the strength of the labour market.
The euro remains near $1.08/€, close to a seven-week low, amid growing expectations of a rate cut in June, fueled by lower-than-expected inflation figures in the Euro Area. Similarly, the British pound struggled below the $1.26/£ mark, reflecting anticipation of more interest rate cuts by the Bank of England compared to the Fed. Recent data shows that declining UK shop price inflation and house prices have further weighed on the pound’s performance.
Contrasting economic indicators between the US and UK are contributing to market uncertainty. While US factory activity unexpectedly expanded in March, with job openings surpassing forecasts, the UK witnessed declining shop price inflation and house prices. Money markets are currently pricing in a higher likelihood of rate cuts in the UK compared to the US, reflecting diverging monetary policy expectations.
The South African rand maintained its position around R18.70/$, benefiting from a weaker US dollar following unexpected slowdowns in services growth and smaller rates in price growth. However, locally, SARB opted to leave interest rates unchanged at 8.25%, citing elevated inflation risks. Recent inflation data in South Africa shows it approaching the upper limit of the target range, which underscores the challenges ahead for the economy.
Key Indicators:
USD/ZAR 18.69
EUR/ZAR 20.24
GBP/ZAR 23.60
Brent Crude $91.17
Gold $2282.61
Sources: Bloomberg, Reuters, Trading economics
Weekly Wrap content provided by Citadel Pty Ltd.
