Market commentary

In a week that saw further stimulus packages being rolled out across various parts of the globe, gold took the opportunity to break above the $1,800 an ounce level, as investors seemingly grow more and more wary of the value of money in a world swimming in debt. US-China trade war tensions also started to take a personal turn, as the US took aim at foreign students studying on US shores, while the Covid-19 pandemic continues to cast a shadow over a global economy that yearns for revival. 

 

FED EXTENDS SUPPORT FOR US BANKS

This week saw the Federal Reserve (Fed), backed by funding from the US Treasury Department, buying up to 95% of specific Main Street loans from banks to relieve pressure from some of the larger banks. The Fed has effectively said that it is willing cover up to $75 billion in losses from any of these bigger banks as the loans are within their risk-tolerance parameters.

Additionally, the Fed’s new mid-sized extension of Main Street’s lending facilities will also include new client five-year loans of between $250,000 and $300,000, of which the capital payments will only need to start being repaid after two years -giving the borrower effectively a two-year capital repayment holiday. Although this sounds attractive, so far only Bank of America and Wells Fargo have indicated interest in buying into this new client loan program. Citi and JPMorgan have said that they will register, but not necessarily take on new loans at this time. The risk of using someone else’s leverage to help boost the economy does not seem to be sitting too well with the banks.

Meanwhile, the Trump administration announced on Monday that any foreign student studying in the US and currently doing their courses online needs to go back to their home country. This move comes after China also recently announced stringent measures on who may return to the country in the wake of recent global lockdowns.

To place the impact of this on the US economy in context, around 1.1 million foreign students were enrolled at various higher education institutions across the US in 2018, representing just under 6% of all US tertiary education students. These foreign students generated close to $45 billion for the US economy that year, of which just under 60% was funded directly by these foreign students’ families, and around 40% was loans or bursaries from US institutions.

Interestingly, while Chinese students make up the vast majority of this foreign student demographic, India and Saudi Arabia follow close behind. Moreover, these students support around 450,000 jobs in and around their geographic location of study, mainly in the real estate and retail sectors.

US initial jobless claims have seen over 50 million new claims being filed since the beginning of the lockdowns brought on by Covid-19. Over the last week another 1.3 million US citizens filed for unemployment benefits, although this number has been gradually slowing. With the next earnings season still on its way, investors will slowly start to see the impact of unemployment towards the end of 2020 reflected in various company financial reports.

US:

  • ISM non-manufacturing orders for June came in at 61.6 vs 41.9 the previous month.
  • ISM non-manufacturing employment for June came in at 57.1, up from the previous month’s 45.4. Analysts expected 50.1 (above 50 is expansionary and below 50 is contractionary).
  • ISM non-manufacturing PMI came in at 57.1 in June vs 45.4 the previous month.
  • Baker Hughes Crude Oil Rig count dropped to 185 in June, from over 600 in operation in February.
  • Initial jobless claims came in at 1.3 million vs the previous period’s 1.4 million as at 04 July.

CN:

  • Foreign exchange reserves for June came in at $3.112 trillion, up from May’s previous $3.102 trillion.
  • Inflation rose marginally year-on-year to 2.5% for June from a previous 2.4% in May.
  • PPI year-on-year for June dipped by 3%. The market expected a 3.2% fall.

EU:

  • Setting records for the biggest swing in retail numbers, retail sales data revealed that the eurozone saw consumer spending soar 17.8% higher in June from the previous month.

UK:

  • New car sales came in 34.9% lower than the previous year for June
  • Construction PMI numbers also saw a massive boost from the reopening of the economy, coming in at 55.3 for June compared to the previous month’s 28.9.

 

SOUTH AFRICA’S UIF UNDER GROWING PRESSURE

It was a relatively quiet week on the local political front. However, Minister of Employment and Labour Thulas Nxesi has voiced his concern over South Africa’s dire situation when looking at the Unemployment Insurance Fund (UIF). SA logged a 30% unemployment rate number for Q1 2020, before the impact of the national lockdown has even had a chance to reflect in the numbers. Emerging from the lockdown, and amidst daily reports of businesses closing and job losses, South Africa is potentially set to face one of its worst ever unemployment rates, which could mean that the UIF may even need to turn to National Treasury for a lifeline.

With estimates placing unemployment between 41% and 54%, job losses could soon send shockwaves through the system. Thus far, around 1.5 million people are expected to lose their jobs during lockdown, and the UIF currently pays out between R3,500 and R6,000 per month.

Within the space of a month, the death toll of the coronavirus in South Africa has increased almost three-fold, likely as a result of the easing of lockdown measures and moving into Level 3. Data supplied by the University of Pretoria SA indicates that the country currently has around a 1.6% death rate, with over 1.9 million tests having been conducted so far. Health Minister Zweli Mkhize has warned that hospitals are now starting to fill up quite dramatically, although the estimated amount of beds thought to have been needed at the peak (mid-August/September) were overestimated. Having said this, the pandemic is still to not be underestimated.

Examining local data points, SA consumer confidence numbers came in at -33 for Q2 compared to -9 in the previous period, as lockdown measures hinder consumer spending and taint consumers’ outlook.

 

LOOKING AHEAD

Investors should keep a close eye on the US over the next week, as slight volatility starts to creep back into US equity markets. Locally, Covid-19 continues to weigh heavily on the economy’s shoulders, as we head from base camp towards the expected peak of local infection rates around September.

Emerging markets made additional gains yesterday supported by global appetite for risk, with the rand now setting its sights on testing a break below R16.80/$. However, with the rapidly changing dynamics, one should be careful now to allow greed to get the best of you, as markets flip flop between economic recovery optimism and fear of rising Covid-19 numbers.

Data to expect in the upcoming week:

US:

  • Inflation rate YoY
  • Industrial production numbers for June
  • Manufacturing production numbers YoY
  • Retail Sales MoM

CN:

  • Balance of trade for June
  • GDP growth rate for Q2
  • Unemployment rate

EU:

  • Industrial production data
  • New car registrations

UK:

  • Core inflation rate for June
  • PPI  output for June

The rand started the day trading at R16.88/$, R19.02/€ and R21.25/£.

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