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Mid-November market report

The tech-heavy Nasdaq was largely driven up by the steep rise in Tesla shares which gained 43.65% in October.

Markets rebounded in October as investors mostly ignored rising inflation and the weak economic data coming out of the US and China. Instead, markets have been riding the wave of euphoria brought about by a promising start to the third-quarter earnings season. As a result, the MSCI All Country World Index rose 5.03% (in USD) in October. Developed markets outperformed their emerging counterparts with the MSCI World Index printing 5.59% against 0.93% from the MSCI Emerging Markets Index.

In the US, the Fed opening the gates to tapering was taken well by markets as it was largely priced in. The beginning of tapering has raised expectations for rate hikes to happen sooner than expected, however, Federal Chair Jerome Powell has stated that officials can remain patient on raising rates as further improvement in the labour market is needed. As such, the focus remains on upcoming economic data to signal the strength of the world’s largest economy, in particular inflation and employment data that could potentially advance policy rate hikes.

The overall dovish announcement caused US stocks to rally and yields to retreat. The US 10Y Bond yield is currently (at time of writing) sitting at 1.478% which is quite a way off the high of 1.706% hit in October. As for US equity, the major indexes took a liking to the risk-on mood following the announcement as well as the ongoing earnings reports. As such, the Dow Jones Industrial Average gained 5.84% in October, the S&P 500 Index ended up 6.91%, and the Nasdaq reported a whopping 7.90%. The tech-heavy Nasdaq was largely driven up by the steep rise in Tesla shares which gained 43.65% in October on the back of strong earnings and upbeat news surrounding the Hertz deal. Musk has since wiped some of those gains by taking to Twitter to decide if he should sell 10% of his Tesla stake. Nearly 58% said they support the decision, and the share price subsequently fell roughly 18% off recent highs.

China continues to battle ongoing issues such as Covid restrictions, supply-chain bottlenecks, chip shortages, and unprecedented regulatory crackdowns. As such, GDP growth for the third quarter slowed to 4.9% (y/y), missing expectations of 5.2% and marking the lowest growth since Q3 2020. On the other hand, Evergrande managed to make an overdue interest payment which eased fears over the indebted property sector. This in turn lifted the Chinese equities with the MSCI China Index printing 3.06% for the month.

Commodities continued their run in October with the Bloomberg Commodities Index edging 2.6% higher. Brent Crude oil hit a high of around $86 for the first time since October 2018 as supply shortages and increased demand continues to squeeze the market. Metals also posted a strong month following the decline in September. Gold printed 1.28%, platinum 4.72%, palladium 4.34%, and copper 4.40%. The uranium price also continues to be squeezed with it surging 5.86% in October.

Locally, Finance Minister Enoch Godongwana delivered his first Medium-Term Budget Speech (MTBPS) on Thursday and has followed in his predecessor’s footsteps by committing to fiscal consolidation and reducing the budget deficit. According to the MTBPS, the budget deficit is expected to narrow from 7.8% of GDP to 4.9% by 2024/25. To achieve this goal, the MTBPS stated restraint on public expenditure is of utmost importance and that Treasury is committed to limiting transfers to state-owned companies as well as additional allocations to municipalities.

The GDP forecast was revised up to 5.1%, however, still largely reflects base effects from the slump during heavy lockdowns last year. GDP growth is forecasted to be 1.7% per year over the next three years which shows that while many fiscal and economic reforms have been implemented we will only begin reaping the rewards in the next several years. Overall, the detail provided on the various reforms should be taken as a positive by market participants, however, the slow growth of below 2% projected for the next three years will likely hinder the progress towards fiscal and economic goals.

Turning to data, rising pressure on prices continues to weigh on both consumers and producers.  The Producer Price Index printed 7.8% (y/y) for September, beating forecasts of 7.3% and marking the highest reading in over five years. Consumer prices also rose in September with the CPI printing 5% (y/y), up from 4.9% the month before. The rise in prices was largely due to rising food and fuel prices. The persistent uptick in inflation has raised expectations of a possible 25 bps hike at Sarb’s November meeting.

Load shedding and a hawkish tilt from major central banks caused the rand to weaken for a second consecutive month in October. The rand lost 1.04% against the greenback, 0.59% against the euro, and 2.40% against the pound.

South African equities followed suit with global peers and ended October in the green, the JSE All Share Index printed 5.15%. Resources and industrials were the big winners owing to the strong rebound in commodities, printing 8.44% and 6.73% respectively. Financials lost 4.56%, followed by listed property with -3.21%. SA bonds tracked the weaker rand returning -0.48% in October.

Source: Investing.com

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Mauro Forlin

Global & Local Asset Management

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