On Monday U.S. financial markets sold off as growing fears of a slowing pace of economic growth, increasing delta variant infections, and heightened fears of inflation weighed on investor sentiment. Cases and hospitalisations have been rising steadily in parts of the U.S. especially in states with low vaccination levels.
Following Mondays sell-off U.S. equities staged a strong rebound, with the Dow Jones (+1.08%), S&P 500 (+1.96%) and the Nasdaq (2.84%) all ending the week firmly in the green. U.S. earning season helped improve investor sentiment over the week with strong second-quarter corporate earnings from several companies, so far results have been encouraging with 87% of those reporting beating estimates. Analysts now project second quarter year-over-year growth to total 74% and for full-year 2021 S&P 500 earnings to total $195. Investors' next major focus is the Federal Reserve’s two-day policy meeting next week.
Shares in Europe also rebounded as the European Central Bank (“ECB”) affirmed their dovish monetary stance. The bank's president, Christine Lagarde, issued a strong forward guidance that rates will remain at present or lower levels until the ECB sees "inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realized progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilizing at 2% over the medium term.” The ECB indicated that this process could involve a short period in which inflation goes moderately above this target.
In local currency terms, the pan-European STOXX Europe 50 Index ended 1.82% higher while the UK’s FTSE 100 Index ticked up 0.28%.
In Japan, the benchmark Nikkei 225 Index ended the week down 1.63%, ahead of the start of the Tokyo Olympics. In China the Shanghai Composite Index rose 0.3%. Chinese education stocks plunged on Friday after reports of a government crackdown on the sector that would require home-schooling or off-campus education companies to register for non-profit status. TAL Education, Gaotu Techedu and New Oriental Education, which are listed in New York all fell by close to 60% in the first hour of trading.
Market Moves of the Week
Financial markets' response to South Africa’s week of violent unrest was surprisingly quiet but rating agencies did warn that the riots pose risks to SA's economic recovery and could complicate efforts to improve public finances.
The Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) decided to keep the repo rate unchanged at 3.5% on Thursday. Sarb governor Lesetja Kganyago said it was a unanimous decision by the MPC. Kganyago also said recent unrest and economic damage could have lasting effects on investor confidence and job creation. “The direct and indirect costs of these events will likely further slow South Africa’s economic recovery. We estimate the unrest to have fully negated the 2021 Q1 (first quarter) growth outcome.”
The inflation forecast for 2021 was revised higher by 0.1pp to 4.3% while the 2022 forecast was revised lower by 0.2pp to 4.2%. With respect to growth, forecasts remained unchanged, at 4.2% for 2021 and 2.3% for 2023, and the MPC maintained its assessment of balanced risks to the growth outlook.
After selling down 2.59% on Monday, the JSE rebounded strongly over the week gaining 2.31%. The biggest winners for the week were the resource (+3.2%) counters and the industrial sector (2.5%), while the rand continued to weaken against the U.S. dollar over the week, ending at R14,85/$.
Chart of the Week
As per the chart above the trade-weighted US Dollar Index has been on an upward trend of late. Many economists expect the Federal Reserve to gradually start tightening its extraordinarily loose monetary policy on the back of a strong U.S. economic recovery and higher inflation, this coupled with the enhanced dovish stance of other major central banks, like the European Central bank and Bank of Japan, also collaborates with the dollars current positive momentum.