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U.S. major indexes ended the week lower, giving back a part of the previous week’s gains. The week had relatively few important economic releases or other drivers of sentiment, however markets needed to digest the statements from FED officials regarding stronger jobs numbers and further possible rate hikes. Within the S&P500 Index, most sectors were relatively uniform, with the exception of energy shares being the notable upside outlier.

This week, US Federal Reserve officials addressed the economic outlook, and consensus appears to have developed that more work still needs to be done by the FED before it can declare victory in the battle with inflation. If tight labour markets persist, a higher peak in the FED’s policy rate may be needed. Markets appear to have digested this information, pricing in an additional rate hike, and priced out any rate cuts before the end of 2023.

The U.K. economy narrowly avoided a recession in 2022, as new data released this week shows zero growth between October and December, this despite a sharp 0.5% fall in economic output during December, largely a result of national strike action. Chancellor Jeremy Hunt said the figures showed “underlying resilience” but mentioned that “we are not out of the woods”. The BoE still expects the UK to enter recession this year but expects it will be shorter and less severe than previously forecast.

In Europe, concerns around an overly aggressive central bank policy and the possibility of a prolonged economic downturn saw European equities weaken over the week. ECB policymakers reasserted their hawkish stance and continued to warn against complacency in the fight against inflation. The German Finance Ministry expects the winter slowdown to be mild given stronger industrial order books and easing of supply bottlenecks. Industrial orders rose 3.2%, the biggest increase in more than a year, thanks to strong domestic and Eurozone demand.

More than 22,000 people are now known to have died in Monday’s catastrophic earthquakes in Turkey and Syria. The full extent of the disaster is still unclear at this point as rescuers search through rubble for survivors. The tremor ranks among the deadliest natural disasters of the century and has been further exacerbated by freezing weather conditions. Thousands of buildings were levelled by the two quakes, measuring magnitudes 7.8 and 7.5. A major international relief effort is in motion, the World Bank has pledged $1,78bn in aid to Turkey including financing to rebuild basic infrastructure.

Tensions between China and the US flared up again this week over the controversial spy balloon incident. Chinese stocks recorded a slight decline for the second straight week as investors were reminded of the geopolitical risks of investing in the country. The incident raised the prospect of further sanctions on China from the Biden administration. In economic news, China reported a pick-up in its consumer price index (CPI) up 2.1% in January from a year ago, this was in line with estimates. This latest data shows that China is unlikely to experience runaway inflation similar to the US or Europe, expectation is for supportive policy from the central bank to bolster the economy.

The Dow Jones (-0.17%), S&P500 (-1.11%) and Nasdaq (-2.41%) all ended the week lower. The Euro Stoxx 50 (-1.41%) and FTSE 100 (-0.24%) also closed the week in the red. In Asia, the Hang Seng posted a second consecutive negative return this week down (-2.10%), the Shanghai Composite Index (-0.08%) was marginally negative. Japan’s Nikkei 225 Index (+0.59%) was the sole major global index in the green, posting a modest gain.

Global energy shares rebounded strongly as international oil prices bounced over the week. Brent crude oil was up 8.40% this week and was trading at $86.43/bbl by Friday’s close.

Market Moves of the Week:

On Thursday evening, President Ramaphosa delivered his seventh annual State of the Nation Address (SONA). The proceedings were marred with disruptions by the EFF, who were subsequently removed from the sitting. There were a few key takeaways from the President’s speech:

  • The declaration of a national state of disaster: Nkosazana Dlamini Zuma has already gazetted the declaration of the state of disaster, which will take immediate effect. The declaration comes as a result of the crippling energy crisis, and the existential threat to the economy as well as the social construct of the country. The Auditor General has been tasked to monitor funding and spending, to mitigate a repeat of the looting that took place during Covid.
  • Cost of living crisis: National Treasury will consider the feasibility of urgent measures to limit the impact of load shedding on food prices. Social grants will also be increased to cushion the poor against the impacts of rising inflation.
  • Unemployment crisis: Several programmes have been highlighted which will look to introduce young people to the world of work. An Employment Tax Incentive will be implemented, to encourage more businesses to hire young people.
  • Crime prevention: A significant increase in funding will be made available for the police, the NPA, and the SIU.

A state of disaster effectively means that the government is given additional powers to resolve the crisis with less bureaucracy, regulation and can access extra funding.

The JSE ALSI came under some pressure this week, both from global risk off factors, and SA specific power issues. The index closed the week down (-1.56%). The rand sold off aggressively this week, trading at R17.92/$ by Friday close, depreciating 2.58% against the dollar. All but one of the three major sectors ended the week negative, resources (-3.51%) and financials (-2.75%), whilst industrials showed some resilience given the weaker rand, ending the week marginally higher (0.14%). The SA listed property sector also posted negative returns for the week (-1.89%), given the weaker economic backdrop.  

Chart of the Week:
From being termed “un-investable” in 2022, Chinese equities have received the lion’s share of Asia net equity flows in 2023. The lifting of the zero-Covid policy has encouraged international money managers to take a punt on Chinese stocks. $14bn in net equity flows over a 6-week period.  Source: Macrobond & EPFR Global.

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