Early in the week, financial markets sold off aggressively due to concerns that China may be embarking on currency devaluation measures as a retaliatory response to recently announced U.S. trade tariffs. China allowed the yuan to weaken beyond 7.0 to the dollar on Monday, after President Trump said he would impose more tariffs on Chinese imports. The United States Treasury answered by using its power under the 1988 Omnibus Trade and Competitiveness Act of 1988, labelling China a currency manipulator. The law specifically requires the Treasury to “consider whether countries manipulate the rate of exchange between their currency and the U.S. dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.”
Later in the week, Chinese officials however sought to reassure markets that they don't plan to embark in a currency devaluation campaign, which calmed markets. China also reported better than expected import data, despite the China-U.S. tariff struggle. China reported a trade surplus of $45.06bn in July. Markets were anticipating a trade surplus of $40.00bn.
U.S. bonds yields hit multi-year lows. The U.S. 30-year treasury yield closed in on its all-time low with yields hitting 2.12%. The all-time low was 2.09% in July 2016. The U.S. 10 year hit a low of 1.59% at one stage during the week.
Meanwhile, earnings season in the U.S. is coming to an end with 90% of the companies in the S&P 500 having reported results for Q2 2019. 75% of companies reported earnings above estimates. On average, companies reported earnings that were 5.7% above estimates. In terms of sales, 57% of companies reported sales above estimates.
Central Banks across the globe continue to cut interest rates. Globally, 65% of central banks are on hold, 35% are cutting rates, and no banks are hiking. This week saw New Zealand’s central bank surprisingly cutting its key interest rate by 0.50% to 1.0%, lower than the market expectation of a 0.25% rate cut. Other countries who have recently cut interest rates include the Philippines, India and Thailand.
For the week, global equity markets were softer. In the U.S., the Dow Jones (-0.75%), S&P 500 (-0.46%) and Nasdaq (-0.56%) Indices were all weaker. In Europe, the Euro Stoxx 50 (-1.26%) and FTSE 100 (-2.07%) both ended the week in negative territory. Similarly, Asian markets were also under pressure with the Nikkei 225 (-1.91%) and Shanghai Composite Index (-3.25%) both negative.
Market Moves of the Week
Locally, business confidence fell to the lowest level in four months in July, as concerns over political uncertainty and state companies’ finances outweighed the positive effects of the interest rate cut. The South African Business Confidence Index dropped to 92.00 in July, compared with a level of 93.30 in the previous month.
Ratings agency, Moody’s commented on Eskom this week, stating that the power utility urgently needs a plan to turn profitable or South Africa’s state-owned utility will collapse under mounting debt.
The JSE All Share Index ended the week down -1.31%. The resource sector (+0.95%) was stronger against weaker performances from industrials (-1.58%) and financials (-4.11%). The rand came under pressure, trading at R15.27 to the U.S. dollar by Friday close.
Chart of the Week
Rising global trade tensions are directly impacting manufacturing activity. Increasing tariffs are not just impacting U.S. manufacturing. We’re seeing a slowdown in global manufacturing activity as evidenced by the decline in many countries’ manufacturing PMI readings over the last 18 months. Within the G7, only the U.S. and Canada are currently showing expanding manufacturing sectors (51.2 and 50.2, respectively), with PMIs for the rest of the G7 having now slipped below 50.
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