Market and economic wrap - Risk-off sentiment dominates markets amid fears of stagflation
Investors continued to worry about sustained high inflation and, importantly, the risk that central bank actions to bring inflation back under control will cause a steep downturn/recession in the global economy. Although the annual rate of increase moderated, an above-consensus rise in US consumer inflation during April did not help sentiment. The Chinese authorities zero-COVID policy has meant prolonged lockdowns, and this has damaged the Chinese growth and worsened the global supply chain bottlenecks. These concerns meant that safe-haven assets were again in demand, with the more cyclical investment plays, including key commodities and stock markets, under pressure.
Data out of China yesterday morning highlighted the detrimental impact these prolonged lockdowns are having on economic activity. Fixed asset investment, industrial production and retail sales were all under heavy pressure in April. Ahead of the April data releases, the Chinese authorities took some steps on Friday to ease the pressure on the Chinese economy. Without providing much detail, the government announced that the extended lockdown in Shanghai will start to be relaxed later in May. In addition, over the weekend, the mortgage rate for first-time homebuyers was cut by 20bps.
In terms of local economic developments, besides the weak impulse from the rest of the world, the incoming SA-specific news remains downbeat for GDP momentum. For starters, we appear to be facing sustained load-shedding, and although this was exclusively implemented in the peak evening hours (between 17h00 and 22h00) last week. this is bad news for after-hours retail trade and the hospitality sector. In addition, evening load-shedding escalated to stage 3 at the start of this week.
Secondly, Numsa-affiliated workers starting a strike at local steel producer ArcelorMittal. This comes while the prolonged industrial action at Sibanye’s gold mining operations continues.
And finally, there has been a sustained rise in new COVID-19 cases in SA, with the 7-day rolling average increasing to above 7 500 (6 500 the previous week).
Against this backdrop, global equities faced another volatile week. Stocks fell sharply earlier in the week on the back of higher-than-expected inflation figures in the US, reinforcing expectations that the Fed would turn even more hawkish to tame inflation. Over the past four weeks, global equities remain deeply in the red, with the NASDAQ and S&P 500 down -11.6% and -8.4%, respectively.
The pullback in major SA export commodity prices had a detrimental effect on the JSE AlSI for most of what was a volatile trading week. A strong bounce back on Friday saw the JSE end the week in positive territory.
In the currency market, the US dollar continued to be one of the main beneficiaries of the current risk-off environment. Given the dollar’s strength, it was not surprising to see the rand exchange rate remain on the back foot. The rand declined for the fifth successive week as general risk-off sentiment Looking at key events ahead, on the domestic front the focus will be on the SARB's Monetary Policy Committee meeting on Thursday. The temporary reduction in the general fuel levy in April and May helped shelter the impact of elevated oil prices on fuel costs. However, the normalisation in the fuel price from June onwards, combined with elevated oil prices and a weaker currency, is expected to add further upward pressure on consumer inflation. Furthermore, global food inflation remains high, driven by supply shortages and increased demand for key agricultural commodities. It is also important to note is that South Africa is well behind the curve compared to its emerging market peers in the hiking cycle. Therefore, considering the many uncertainties around the inflation outlook, the SARB will likely increase the repo rate further.