Market commentary

Uncertainty has been the name of the game for the better part of 2020, given the numerous challenges posed by the pandemic and rapidly shifting geopolitical and trade landscapes. With so much up in air, all investors can do is patiently wait and see what the rest of the year might hold.

GLOBAL DATA AND POLITICS

As focus in the US turns to the November presidential elections, it is easy to lose track of the numerous other key events taking place that will dictate global direction for years to come. These events include stimulus packages, Federal Reserve policy, and rapidly evolving trade relations between the US and its trade partners.

While Joe Biden has officially been named as the Democratic Party’s presidential nominee, sitting President Donald Trump’s administration has terminated the bilateral agreements between the US and Hong Kong. This represents the latest escalation in the long-standing economic conflict between the US and China, and markets are closely watching for any signs of retaliation as the two powerhouse economies continue to antagonize one another.

Meanwhile, the highly anticipated minutes of Wednesday’s Federal Reserve meeting unfortunately offered little clarity in terms of the central bank’s plans for additional stimulus. The Fed reiterated that the US economy remains well below pre-pandemic growth and activity levels, and that additional assistance would be required from Congress. However, there was no clear

indication whether the Fed will move to deploy additional measures in September.

Turning to Europe, two of the most influential politicians in the bloc, President Macron of France and German Chancellor Angela Merkel, are due to meet to discuss pressing matters such as Brexit, anti-government protests in Belarus, tensions in Greece and, of course, the economic destruction caused by the pandemic. While Brussels and the UK are still at odds over the Brexit agreement, it is widely expected that Merkel (who also holds the rotating presidency of the EU) will act as the ultimate dealmaker in the ongoing negotiations as the deadline of 31 December fast approaches.

Focussing attention on the UK, Prime Minister Boris Johnson is yet again facing scrutiny from within his own camp following a white paper on his new proposed internal market for the UK. The proposed plan was met with severe resistance this week over concerns surrounding the sustainability of the UK’s union with Scotland and Wales. This comes as the Westminster government seeks to unilaterally control food and environmental standards for both these countries.

Whether it is the UK and EU, or China and the US, breaking up is never easy, and only time will tell what the effects will be on the global economy and the already volatile political landscape.

It’s been a rather quiet data week, with the following releases drawing some attention:

US:
• Initial jobless claims disappointed yet again, exceeding expectations by reaching 1.106 million claims for the week

CN:
• PBoC left loan prime rates on hold at 3.85%

EU:
• CPI met expectations of 0.4% year-on-year in July

UK:
• CPI ticked up to 1% year-on-year in July

SOUTH AFRICAN FUNDAMENTALS

South Africans are finally experiencing a taste of normality as the country entered lockdown level 2 on Monday, following the stringent lockdown regulations imposed in March. The new level will see South Africans enjoying a drink with dinner at their favourite restaurant, and fitness fanatics return to gym. The real highlight of the move to level 2, however, is the relief it will bring to industries such as tourism, fitness and entertainment. With tourism directly accounting for almost 3% of local GDP, many will celebrate the resumption of domestic travel, but with international borders remaining closed, the tourism industry and local economy are far from out of the woods.

Forex trading as a means of generating additional income has become more and more popular in recent years, but unfortunately, many of these stories in reality often do not end well. The most recent scandal involves a local company called Mirror Trading International or MTI trading, which is currently under investigation by the Financial Services Conduct Authority (FSCA). While the company claims to have R2.9bn worth of client funds and achieve returns of 10% per annum, the FSCA is yet to obtain any confirmation of returns and the actual existence of these funds.

The FSCA also pointed out that the company is not registered as a financial services provider, and in order for it to conduct these type of transactions for clients, it needs to be registered, as well as comply with both FICA and FAIS regulations.

Wednesday saw the Department of Public Enterprises provide an update on State-Owned Enterprises (SOEs) to Parliament. Unfortunately, billions are lost to entities such as Alexkor, Denel, Eskom, Safcol, SAA and Transnet on an annual basis. The two most controversial companies of the group are perhaps SAA and Eskom, which have both repeatedly made news headlines for mismanagement, maladministration, and poor financial states. Eskom’s woes in particular are drawing the spotlight yet again, with the return of loadshedding coming at a time when economic efficiency is of utmost importance to ensure a post-pandemic recovery.

The local currency remained largely range-bound this week, with dollar performance determining the rand’s performance. The local unit continues to take its cues from global events, with market focus on the US recovery and potential additional stimulus by central banks across the world.

LOOKING AHEAD 

The general market themes remain unaltered as the week draws to an end. Ongoing concerns regarding the US economy, reinforced by fresh disappointing jobs data, continue to see the dollar under pressure while gold retains its status as the safe haven asset of choice.

We will continue to keep an eye on the US Congress for any possibility of reaching a COVID-19 relief package consensus. Expected retaliation from China in response to the termination of bilateral agreements with Hong Kong will also contribute towards some market nervousness this week, so we will be watching the US-China dynamic for any indication of yet another escalation in the tug-of-war.

We will also keep an eye on the following data releases and events:

Tuesday:

• US new home sales

Wednesday:

• Local CPI
• US durable goods orders

Thursday:

• CN industrial profit
• Local PPI
• US GDP Q2 and consumer spending

Friday:

• EU sentiment and confidence data

The rand started the day trading at R17.23/$, R20.46/€ and R22.80/£.

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