June 2022

June 2022

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May 2022

International overview 

Hawks and doves 

Central banks remain on high alert as pricing pressures across the world remain high. US inflation for May surprised to the upside at 8,6%, pulling the rug from under investors that saw March to be the peak in inflation. This in turn weighed on consumer confidence, with the preliminary University of Michigan consumer sentiment index for July reaching an all-time low of 50,2 points while inflation expectations 12 months ahead also ratcheted up. This laid the foundation for a 75bps interest rate hike from the US Federal Reserve, the largest hike since 1994. While forward guidance from the Federal Reserve is currently taken with a pinch of salt, Chair Jerome Powell indicated a preference to bring inflation under control, even at the expense of growth, further driving recessionary fears. 

The ECB kept policy rates unchanged but used the June meeting to communicate a decidedly hawkish pivot, indicating that it would end its bond-buying programme in July and commence its policy rate hiking cycle the same month with 25bps, with the possibility of more aggressive actions should the inflation outlook deteriorate. European government bond yields rose on the news, with the yield on the 10-year German bund breaching 1,7%, a high since 2014. More concerning to policy makers, however, was the spike in bond yields of peripheral countries such as Italy, relative to German bond yields, with the spread between these two reaching its highest levels since 2013. Seen as a key measure of financial stress in Europe, the ECB responded with an emergency meeting and a pledge to address the divergence in borrowing cost with a new “anti-fragmentation instrument”, details of which have not yet been revealed. 

In another about turn, the Swiss central bank surprised markets by hiking interest rates by 50bps against expectations of no change, enacting the first hike in fifteen years. The Bank of England (BoE) increased interest rates by 25bp, its fifth consecutive hike. The Bank of Japan and People’s Bank of China are now the lone doves, both maintaining an accommodative stance, at least for the time being. 

Energy prices remain in the spotlight, no less so because of its impact on high inflation figures. OPEC+ agreed to increase oil production at a slightly faster pace. Price movement on the announcement was limited, given the inability of the group to meet even the lower targets of late. Markets did however pay attention to fears of weaker global growth, especially with flash PMI releases for June suggesting weakening in activity for developed economies. In addition, proposals from the G7 nations to introduce a price cap on Russian oil and gas, possibly using the provision of shipping insurance as leverage, contributed to the c.6,5% decline in the price of Brent crude oil over the month. 

Market perfomance (USD) 

Markets had a brutal month, quarter and first half of 2022, with the latter being one of the worst six-month periods since the 1970s, as the US 10-year bond yield increased by c. 150bps since the start of the year and tighter financial conditions took hold. The S&P 500 dipped into official bear market territory several times in, ending the quarter down 16,1% and bringing the first half number to -20,0%. The technology heavy Nasdaq 100 fared even worse, losing 29,2% in the first six months of 2022. European indices slumped on higher inflation prints and higher vulnerability to recession given the ongoing Russia-Ukraine war, which was further emphasised as Russia decreased supply of natural gas to Europe in the month. Chinese activity gauges, while still on the weak side, appear to be stabilising, as cities such as Shanghai and Beijing ease lockdown restrictions. Improved mobility and a recommitment from President Xi Jinping to the 5,5% growth target helped the Hang Seng Index gain 3,0% over the month, although the zero-tolerance approach to COVID is likely to remain in place. The USD stands out as one of the main beneficiaries of the current environment, having appreciated by 9,1% on a trade weighted basis this year. Global bond market volatility remained elevated as the US 10-year bond yield peaked at close to 3,5%, before giving way into month end. In US dollar terms, the Bloomberg Global Aggregate Bond Index declined by 8,3% in the second quarter and 13,9% year to date. 

Domestic overview 

Market performance (ZAR) 

Lights out 

First quarter GDP printed at 1,9%, exceeding market expectations, with the economy now back at pre-COVID levels. The expansion was broad based, with strong contributions from the manufacturing and trade sector, and robust consumer spending as the economy reopened. This provides a good starting point for the year and will help offset what looks set to be a tougher second quarter, with weak prints for mining and manufacturing production in April confirming the disruption and damage from the flooding in KwaZulu Natal, strikes in the mining sector and persistent loadshedding. Local PMI data for May, however, suggests a lingering impact but also recovery post the natural disaster. A record decline in business confidence for the second quarter echoed the above pain points. 

Loadshedding at Eskom worsened in June, in part due to industrial action amid tense wage negotiations. More constructively, the SOE announced 18 winning bids for renewable projects in Mpumalanga, which will lease land from Eskom and generate an estimated 1800MW of energy to be wheeled across the grid. While this will not alleviate the immediate energy crisis, it is illustrative of the energy reforms slowly being enacted. 

Headline inflation surprised to the upside at 6,5% y-o-y in May, a breach of the 6% upper target of the SA Reserve Bank and the highest figure since 2017. While food and fuel remain meaningful drivers, food prices were a key source of the upside surprise. Producer price inflation again exceeded market expectations with a 14,7% increase over the year. Global market volatility weighed on the local bond market and the currency with the All Bond Index declining 3,7% over the quarter. Despite a quarterly depreciation of c.11,4% against the US dollar, the Rand proved more resilient year to date, depreciating by c.1,7%. Local equity markets lost ground over the quarter with the FTSE/JSE All Share down 11,7%. Outside of industrials, most sectors were down in June with notable weakness in the last month from resources, with a downdraft of 17,2%. The big news in June was corporate activity from Prosus and Naspers, which will see the company sell part of their stake in Tencent to fund a buyback of company shares to narrow the discount to net asset value and unlock value for shareholders. This helped Naspers and Prosus gain 42,3% and 32,6% over the quarter respectively. 

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