Week in Review: The Good, the Bad and the Ugly

The news is good from an economic standpoint, but has reduced optimism for a dovish pivot by the FED.  Investors focused their attention on the release of producer price inflation (PPI) data on Friday morning. The PPI figures surprised moderately to the upside, up 7.4% yoy versus consensus expectations of 7.2%, which sent stocks lower on the day.All eyes turn to the week ahead where investors cautiously await two important US macro data points: the US consumer price inflation (CPI) print for November (released on Tuesday) and the final FOMC meeting on Wednesday which will determine the final interest rate decision for 2022.Over the pond, UK Prime Minister Rishi Sunak announced that the UK has agreed to double imports of US gas over the next year, in an attempt to stabilise soaring energy prices. The agreement would look to bring down gas prices for British consumers and help mitigate Europe’s reliance on Russian energy. Under the agreement, the UK aims to import 9-10 billion cubic meters of liquefied natural gas (LNG), which accounts for approximately an eighth of the gas the UK uses every year. High levels of inflation and an ailing economy have added pressure on the newly formed Sunak government to take decisive action to curb rampant inflation.

Staying in the UK, services related business activity contracted again in November, as new orders fell. The S&P Global/CIPS UK Services PMI Business Activity Index came in at 48.8 in November, remaining in contraction territory. Housing prices continued to decline for the third consecutive month and at the fastest pace since the 2008 financial crisis. Average housing prices were down 2.3% in November as mortgage rates surge in the UK.Renewed fears of a recession caused European shares to also fall this week as inflation and central bank policy continue to increase uncertainty. Not dissimilar to the US, Eurozone economic growth came in slightly stronger and above market expectations. The Eurozone economy expanded 0.3% for the third quarter, above estimates of 0.2%. This was boosted by business investments and an increase in household spending.  The reopening and lifting of covid restrictions in China, which have weighed heavily on economic growth, is a positive development out of the region. Despite a rapid rise in cases, the Chinese government has eased various quarantine and lockdown measures this past week, allowing for asymptomatic or mild covid symptom cases to now quarantine at home, as opposed to centralised quarantine facilities. The rising number of cases, brought about by increased mobility, has raised concerns that China may face a difficult winter ahead from a public health perspective. The surge in recent cases has caused a shortage of medical supplies in Beijing. The Dow Jones (-2.77%), S&P500 (-3.37%) and Nasdaq (-3.99%) all ended the week in the negative. Similarly, the Euro Stoxx 50 (-0.89%) and FTSE 100 (-1.05%) ended lower, but to a lesser degree. In Asia, the Hang Seng had another strong week up (+6.45%), the Shanghai Composite Index (+1.61%) and Japan’s Nikkei 225 Index (+0.44%) also ended the week in the green.

Energy shares tumbled over the week as international oil prices reached their lowest levels since January, erasing the gains made by the sector since the invasion of Ukraine by Russia earlier this year. Brent crude oil was down -10.79% for the week.

Market Moves of the Week:

The South African political environment remains ugly. Following the speculation last week that President Ramaphosa would likely resign given the findings of the section 89 panel, he has now mounted his defence by filing papers on Monday afternoon with the Constitutional Court, seeking to have the recommendations of the report reviewed, and potentially declared unlawful and invalid.

His leading argument is one of inadmissibility of evidence, which his legal team believes should have been rejected. The evidence in question was made public by former spy boss Arthur Fraser. The panel did not apply any of the mandatory legal provisions about the admissibility of evidence that may have been unlawfully obtained. President Ramaphosa’s affidavit argues that the panel failed to properly engage with the hearsay nature of Fraser’s allegations, and incorrectly allowed for hearsay evidence to be included in their findings.

It is yet to be determined whether these findings have weakened the President’s position in the ANC. Given the support of the NEC over the past week, it would seem that he is still in the running for re-election later this month. However, the risk of him not sitting through a full second term has now increased as we await the hearing and ruling from the Constitutional Court.

South African GDP surprised on the upside, rebounding sharply over the quarter. Output expanded by 1.6% qoq in the third quarter, after a 0.7% qoq contraction in Q2. The latest increase in economic activity was broad-based, and well above market expectations for growth of 0.4% qoq. The recent GDP print has pushed the South African economy above the pre-pandemic level, the largest it has ever been, albeit by a relatively small margin.

Once again, SA was plunged into darkness with the implementation of Stage 6 loadshedding on Wednesday afternoon. The power utility stated that this was due to a high number of breakdowns at various plants, as well as the need to preserve the remaining emergency generation reserves.  Despite the political and energy uncertainty, the rand strengthened against the US dollar (-1.19%), trading at R17.34/$ by Friday close. The JSE All-Share Index (+0.30) posted a modest gain for the week, largely driven by the rand-hedge industrial sector (+1.11%). The softness in commodity prices and rand appreciation saw the resource sector ending the week in the negative (-0.95%), while financial ended relatively flat (+0.02%). The SA listed property sector also posted muted gains for the week (+0.20%).

Chart of the Week:

South African bond yields have risen to their highest level since the infamous “Nenegate” saga of 2015. Markets dread political instability, and the potential of another negative political outcome was quickly priced in. The 10-year sovereign rand-bond yield rose 74 basis points to 11.54%. Source: Bloomberg.