By Bianca Botes, Director at Citadel Global
Wednesday’s United States (US) Federal Reserve Monetary Committee meeting was the key event of this week. Leading up to the announcement, the market anticipated a hawkish Fed, with emerging markets taking the hit as investors favoured the dollar.
Following the release of the March US inflation numbers, which revealed that US inflation has hit its highest levels in 40 years, market participants started bidding on a more hawkish Fed, and expected interest rate hikes to be as high as 0.75%. The potential aggressive stance by the Fed, saw investors retreat into risk-off terrain, which pushed the dollar to 20-year highs, while emerging markets felt the pinch. In addition, US economic activity dipped in the first quarter, increasing concerns over the chances of a global recession, which fuelled the rather frantic speculation in the market.
On Wednesday evening, however, the Fed put many of these exaggerated concerns to bed, noting that while economic activity dipped, household spending and fixed business investment remained robust. The Fed moved to increase interest rates by 50 basis points, debunking the rumours that a 75 basis point hike might be on the cards in coming months. The Fed stressed that although inflation remains high – and the current Ukraine war coupled with Chinese lockdowns are increasing supply chain pressure, that will push inflation higher – the bank remains confident that its approach is in line with bringing inflation back to the 2% target over the medium to longer term, while maintaining full employment.
At the moment, the Fed is confident that the current strategy will lead them to their goal. However, the monetary policy board will continue to monitor the economic environment to guide any adjustments should they become necessary. It is important to note, though, that these adjustments will not solely rely on inflation numbers, but also take into consideration a combination of readings, including labour market conditions, public health, and international developments.
The more subdued tone of the Fed quickly saw risk sentiment tip on Wednesday night, with emerging markets clawing back lost ground as the dollar took a tumble. The reaction by markets on Thursday however proved that even as the hawk’s wings have been clipped, we are nowhere near morphing into a dove just yet, and a series of interest rate hikes remain on the cards in the months ahead.
Data in a nutshell
The BoE raised interest rates by 25 basis points to 1% on Thursday morning, which is its fourth consecutive rate hike, pushing borrowing costs to their highest levels since early 2009. The decision came in line with expectations, although three members voted for a 50 basis point increase. Policymakers noted that global inflationary pressures have intensified drastically following Russia’s invasion of Ukraine, which has led to a material deterioration in the outlook for UK growth. The UK economy is estimated to have grown by 0.9% in the first quarter, but GDP is expected to be broadly unchanged in the second quarter and is expected to contract around 1% in the last quarter of the year. Household income will come under pressure stemming from the projected rise, of around 40%, in retail gas and electricity prices when the UK energy regulator, Ofgem, resets price caps in October.
The annual inflation rate in Turkey accelerated for the 11th consecutive month to 69.97% in April, its highest level since February of 2002, and surpassing market estimates of 68%. Main upward pressure came from food and non-alcoholic beverages and transportation, resulting from surging prices for energy due to the war in Ukraine.
The Eurozone S&P Global Manufacturing Purchasing Managers Index (PMI) was revised higher to 55.5 in April, from an initial estimate of 55.3. It remained the lowest reading since January 2021, as output increased only marginally and at the slowest rate in the current 22-month growth sequence.
Meanwhile, US S&P Global Manufacturing PMI was revised lower to 59.2 in April from a preliminary number of 59.7. The rate of overall factory growth accelerated for the third month and was at its strongest level since September, driven by a faster expansion in output, a softer deterioration in vendor performance, and a series-record rise in pre-production inventories.
South Africa’s S&P Global PMI dropped to a four-month low of 50.3 in April from 51.4 in the previous month. Output and new orders declined as load shedding and floods in the KwaZulu-Natal province weighed heavily on manufacturing businesses. There were also reports of material shortages due to the war in Ukraine and COVID-19 lockdowns in China.
European stocks on the up and up
European stock indices soared on Thursday, with Germany’s DAX gaining 1.6%, while the pan-European STOXX 600 added 1.3%. It was an extremely busy session, as investors had both US Fed and BoE interest rate decisions to digest, coupled with the release of a large number of corporate earnings. On the earnings front, Italy’s largest bank, Unicredit, added 6.5% after announcing a €1.6 billion share buyback programme, despite risking a massive €5.3 billion loss if it completely exits the Russian economy. Among airliners, Lufthansa nearly halved its first quarter net losses on soaring passenger numbers, while Air France KLM posted impressive earnings and expected a strong summer season. Lastly, oil giant, Shell’s first quarter profits surged to a 14-year high.
US stocks were subdued on Thursday after the major averages ended the previous session sharply higher following the Fed interest rate announcement. In after-hours trading on Wednesday, global online marketplace platforms, Etsy and eBay, tumbled 10.8% and 6.5% respectively on lighter-than-expected revenue guidance for the second quarter. In contrast, online travel platform, Booking Holdings, surged 10.6%.
The FTSE 100 added 1.3% on Thursday, staging a sharp rebound from a 0.9% decline in the previous session, to levels not seen in two weeks, keeping its bullish momentum following the rate hike by the BoE. In individual stocks, packaging group Mondi jumped 7% after reporting strong first quarter results and an upbeat 2022 outlook, even as the firm pledges to exit its Russian operations.
The FTSE/JSE All Share Index gained some ground on Thursday, following two consecutive sessions of losses, as investors digested the Fed’s decision to raise interest rates. Traders also monitored PMI reports and encouraging earnings results.
Renewed supply concerns bolster oil prices
Brent Crude futures edged higher to above $111 per barrel on Thursday, after rallying 4.9% in the previous session, as the EU proposed an embargo on Russian crude in six months and refined products by the end of 2022. The proposal also included a ban on all shipping, brokerage, insurance and financing services offered by EU companies for the transportation of Russian oil in a month. However, the EU faces the task of finding alternative supplies, as it imports about 3.5 million barrels of Russian oil each day. Several EU countries are worried that the halt would not allow them enough time to adapt. Meanwhile, the Organisation of the Petroleum Exporting Countries (OPEC) Secretary General, Mohammad Barkindo, reiterated that it was not possible for other producers to replace Russian supply and expressed concerns about slowing demand from top importer China due to COVID-19 lockdowns.
Gold gained 1% to trade at around $1 900 an ounce on Thursday, further extending gains from the previous session, after Fed Chair, Jerome Powell, assured Americans that the central bank will do what it can to curb surging inflation, while acknowledging that these measures could risk economic pain. The dollar and Treasury yields both eased from recent highs, increasing demand for bullion. Analysts expect real yields to put downward pressure on gold prices in the second half of this year, while noting that concerns around inflation, geopolitical risks, and slower growth could provide upside risk in the near term.
Lithium carbonate prices in China fell to 462 500 yuan per tonne in early May, its lowest level in two months, as demand declined on the back of continuous lockdowns in China. Carbonate supply has increased after the Chinese Ministry of Industry and Information Technology called for sustained supply and higher output from smelters and miners, while promoting the development of lithium ore resources. The latest figures indicated that production in China rose by 42% year-on-year and 41% month-on-month in March. Carbonate prices are 70% higher year-to-date and remain near a record high as volatile energy prices strengthened the appeal to shift away from fossil fuels, adding to the booming demand for electric vehicles.
Dollar weakness short lived
The US Dollar Index traded around 102.5 on Thursday morning after shedding nearly 1% in the previous session, as the Fed derailed expectations for even larger rate hikes ahead. The dollar depreciated the most against the antipodean currencies, the Australian and New Zealand dollars, as investors dialled back bets on larger US interest rate hikes, before clawing back all its lost ground in the overnight sessions. Investors continue to assess economic risks stemming from the Fed’s battle against surging inflation.
The euro gained against the dollar, to trade at $1.06, moving away from its recent lows after the Fed announcement. The common currency however remained subdued and near levels last seen in December 2016, as lingering concerns about the impact of the Ukraine war on the European regional economy continues to weigh on the euro. In addition, expectations that the European Central Bank will raise interest rates at a much slower pace than the Fed, make it difficult for the euro to attract investors.
On Thursday, the British pound weakened by 2%, to trade at its lowest level in almost two years against the dollar, breaking the $1.24 mark and set for its worst day since March 2020 after the BoE hiked interest rates and warned of a potential recession in the UK. The Sterling has been under strenuous pressure against the dollar on bets of aggressive tightening by the Fed and its safe-haven appeal amid a gloomy global economic outlook.
The South African rand made significant strides against the dollar on Wednesday night, following the Fed rate announcement, reaching levels as strong as R15.43/$ during early Asian trade on Thursday. The rand, however, retreated as the day progressed, losing just over 1.5% by the time US markets opened, to trade at R15.68/$, by this morning, all recent gains were completely eradicated-trading to a low of R16.08-, as the dollar cried king yet again.
The rand is trading at R16.04/$/$ R16.86/€ and R19.79£.