This is quite a possible scenario considering that the stock market is pricing in bets that slowing inflation could yield loosening financial conditions and increase speculative investment supported by slowing volatility. Meanwhile, the more influential bond market is breaking down in yields as it is concerned about growth, especially with signs of a softer labor market (ADP/Job openings/Jobless rate) and slowing growth data and evidence in the latest forecasting projections from creditable institutions such as the IMF and the Atlanta Fed.
The first quarter of 2023 is behind us, and global markets posted gains in the 3-month period. However, upon closer inspection, all was not well, as the month of March was characterized by market weakness due to factors such as central bank actions that continue to focus on raising interest rates. The continued tightening of financial conditions has put a strain on the balance sheets of several companies, such as technology and venture capital firms, forcing them to withdraw a lot of money from their banks in order to maintain their operations.
These actions by business owners to withdraw large amounts of money triggered banking crises in small and medium-sized U.S. banks as customer withdrawals exceeded the bank's available cash, causing them to sell their bond portfolios at a loss, leading to two major bank failures; Silicon Valley Bank and Signature Bank were the largest failures since the 2008 financial crisis. These credit event risks were
also seen in Europe at banks such as Credit Suisse.
The credit risk triggered widespread panic among investors about whether banks were safe and led economic consumers to shift their money out of these regional banks and into large banks, selling bank
stocks and investing in large-cap technology companies and gold and bonds to gain safety. This caused longer-term bond yields to plunge along with the dollar as trade fell out of favor, while inflation continued to cool, as shown by core PCE inflation of 4.6%. The banking crisis forced the government to intervene in the market to bail out the banks through arranged sale agreements and guaranteeing the deposits of economic consumers to restore confidence in the banking sector.
However, the measures currently taken are unlikely to be sufficient, as the Fed plans to continue raising interest rates for longer. It recently raised rates by a further 25 basis points to between 4.75% and 5%, supported by the persistently low unemployment rate (lagging indicator) and very sticky inflation.
So we can expect bank lending to decline as lending standards become tighter, which should lead to a slowdown in the economy and an increase in corporate insolvencies as profits continue to slow, not
just in the U.S., but around the world as central banks such as those in the BOE, the U.K. and emerging markets continue down the same path of raising interest rates, leading to a slowdown in the economy.
According to the World Bank, the global economy is forecast to grow by 2.9% vs 3.2% projection in 2022.
In summary, the financial markets and the global economy are in a rather vulnerable position, as the economic environment is experiencing slowing inflation and growth rate (=Deflation), which is likely to be confirmed by the upcoming GDP growth figures for the second quarter, and as for the banking crisis, it can be seen as a sign of black smoke brewing.
For this reason, we are very cautious with the use of cash and invest our capital in gold and China consumer-related equities, among others.
Global Data Picture
The quarter-one global macroeconomic picture continues to cloud as growth and inflation rates cool as a result of central banks' efforts to tighten the money supply.
The latest data shows that inflation in the U.S. is cooling from 6.4% to 6%, but still above the 2% target. The situation is similar in the eurozone, where inflation continued to fall in March to 6.9%. The decline is due to the slowdown in food and energy price developments.
Retail sales, which account for over 70% of economic growth, fell short of expectations due to a decline in consumer confidence and personal spending as rising prices negatively impact consumer balance sheets.
While the U.S. and European manufacturing sectors continue to report recessionary business activity after slowing output, export sales, and employment, the services sector continues to provide support by continuing to see an expansion in economic activity as demand improves and supports business pricing capabilities.
In China, however, the picture is different from that described above, as the economy continues to grow in both the manufacturing and services sectors. Private companies have recorded a third consecutive month of expansion in business activity, from production to new orders to export sales, supported by the lifting of the remaining pandemic restrictions late last year.
Locally
The South African Reserve Bank (SARB) decided to increase interest rates by 50 basis points to raise the repo rate to 7.75% and the policy rate to 11.25%, which surprised many market participants. The reason for the aggressive stance was that the SARB continued to see stubborn inflation following growing credit balances and global events such as recent banking system instability in the U.S. and Europe did not help.
Currently, the consumer inflation print is 7% outside the SARB target band of 3-6%.
From a macroeconomic perspective, the decision had a positive impact on the rand as it appreciated below R18.00c, showing that the decision was correct as South Africa will remain competitive in the global economic environment to attract investor capital. South Africa relies heavily on foreign capital to increase investment and realize economic growth. On the other hand, the continued tightening of financial conditions is leading to tighter lending standards, which is limiting spending capacity and depriving businesses of confidence to hire and invest, which is likely to bring the economy to its knees over time as demand has declined.
Demand is cooling as most indebted consumers will be squeezed and limit their ability to spend on non-discretionary goods/services as they use more of their hard-earned money to pay debt service costs. This has already been reflected in the latest retail sales figures for January, which are now negative for the second month in a row. In the meantime, savers will continue to enjoy higher interest payments on their cash holdings.
The JSE posted a significant gain of 4.18% in quarter one, compared to a loss of 2.1% in the month of March. The JSE performance reflected the mixed factors driving the market, from fears of contagion in the banking sector to improved sentiment after key institutions offered support to stop the turmoil. Only the industrial metals and commodities index held its gains. Meanwhile, financial stocks were in the red as a result of the banking crisis.
Yields on 10-year South African bonds fell to 9.8%, a two-month low, as investors were encouraged to buy bonds by the surprise hike in interest rates, which was higher than expected.
The rand's performance is a good indicator of confidence, and a commodity currency traded stronger below R18.00, driven by the rise in interest rate decisions and the weaker dollar following the banking crisis and weaker economic data.
In the commodity market, the weak dollar was the main cause of positive price changes in all commodities. Brent crude oil prices traded higher at the end of the quarter as investors took the opportunity of the weaker prices, although they are still caught between optimism about the reopening of the Chinese market and nervousness about the impact of a hawkish Fed on the U.S. economy and the banking crisis that has occurred. Currently, the price of oil is below its immediate support level of $90.
Gold gained some momentum at the end of the quarter as traders added to their gold positions, supported by the long-term bond yield declines due to increasing concerns and credit risks in the banking sector and growth. Currently, the gold chart is still bullish from a trading and trend perspective as it hovers around the $2000 oz level. Bitcoin also traded higher as people found safety in the asset after the banking crisis.
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