Market activity has been rather sluggish with volatility ticking up during
the week as investors had to deal with the development from macro
and stock levels. The big driver of mixed reactions was the improved
job numbers in the US. This was a positive development but also
encourages more interest rate hikes to tame off-demand inflation. As it
stands inflation is not as important as how labor performs going
forward because the consensus is that inflation peaked. Meanwhile
developed nations continue to be hawkish and raise rates to break
down demand. It is important to note that signaling a future slower
interest hike is not considered a dovish pivot.
What this means is that we can expect short-term yields to remain
elevated supporting the dollar. Meanwhile, the longer-term bond yields
to break down as economies continue to record slowing down
economic activity looking at recent economic reports. This will have the
bond highly inverted as it signals recession. The developments of this
action will negatively impact company earnings that are decelerating
from a Rate of Change and increasing the risk of credit risk events.
Our asset allocation remains within sectors that do well in cooling the
growth and inflation environment. We continue to take opportunities in
precious the metal sector and China-related stocks as the economy
recovers from lockdowns. However, our portfolio remains overall in a
defensive position as the reality of the recession is still within our
scenarios.
Global Data Picture
The macroeconomic picture continues to indicate pressure points
following recent efforts by central banks to cool down demand by
tightening the money supply due to higher inflation globally. This has
now already made its way into the real economy as business activities
are still not signalling a strong trend.
The latest surveys for the month of January 2023, in summary, state
that business activity in the service and manufacturing sector is noting
a slight uptick in overall activity along with confidence, supported by
easing inflation but buying remains low as new orders are still in
contraction (<50). Meanwhile, employment is also low.
The simple understanding of the above is that people are not getting
employed but getting fired, as announced by several businesses
globally. Therefore, fewer people can buy goods/services and still must
manage their debt repayments.
Locally
The Mining and Manufacturing sector remains in negative
performance, this was a result of the extensive rolling blackouts are
dimming a power-intensive sector the extensive rolling blackouts are
dimming power-intensive sectors. The annual productions have been
disappointing.
This has now seen the South African President Cyril Ramaphosa
during his State of the Nation Address announcing a state of disasters
in the energy sphere and appointing a minister of electricity in the
presidency office to oversee and work on restoring power to the grid
through various channels to help support the economy.
The stock market continued to record losses. The driving factor was
hawkish central banks. The weekly performance for the All-Share Index
was down at -1.5%. The loser was only the resource counters down
3,5%, driven by weaker commodity prices as the dollar raises above
103 supported by higher short-term yield as the central remain
hawkish.
South African 10-year bond yields were unchanged and traded around
9.7%. This was after appetite faded away, as investors realized the US
won’t be dovish on interest rate hikes. Therefore, making US bonds
more attractive.
Rand’s performance is a good indicator of confidence and a commodity
currency traded weaker against the dollar due to internal factors such
as ongoing energy crises that trigger a state of disaster in the country
and interest rate differential.
In the commodity market, the dollar weakness offered buying
opportunities in commodities as they are negatively correlated. Brent
crude prices traded higher for the week, positive sentiment was
supported announced Russian cut in production to outweigh western
price caps and by China’s demand recovery and supply disruption
taking place from Turkey and Norway. Currently, the oil trade is
bearish below its immediate support level of $90.
The Gold price also gained some momentum, as traders added Gold to
their portfolios as the price volatility was acceptable. Currently, the gold
chart is bullish from a trade and trend perspective. Bitcoin traded
sideways for the week along with risky assets.
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