Weak US data, threat of ‘new’ trade war bad for risky assets

THE DOUBLE whammy of weak economic data in the US given Covid-19 and the war of words between President Trump and China on renewed trade sanctions had turned market sentiment for risky assets on its head.

Although US stocks traded for most of the week on their best levels since the big correction in March 2020, as the S&P 500 index moved again higher than 3 000 last Thursday, global markets and especially emerging markets equities, exchange rates and bonds turned negative and volatile at the end of last week.

US stocks traded for most of last week, after the Memorial holiday last Monday, on stronger levels, but started to fall on Friday as investors became nervous on the back of the devastating drop in consumer spending by 13.6 percent in April from the previous month. This is the biggest monthly fall on record.

This despite a sharp increase in US consumer income of 10.5 percent as Federal stimulus payments was paid out to US citizens.

Financial markets on Friday were also jittery as they waited for President Donald Trump’s latest response in his escalating feud with China. The yield on 10-year Treasuries also sank.

The uncertainty on the “new” trade war between the two biggest economies in the world over China’s hard stance against protesters in Hong Kong had led to nervous and volatile movements on South African share, bond and rand exchange markets. The Alsi ended the week on 50 483 points. This is only 0.67 percent higher than the previous Friday and only 147 points or 0.3 percent higher than the close at the end of April. Industrial shares traded down for the month of May and ended -1.6 percent lower. Financial shares were also weaker during last month by 4.7 percent, as uncertainty on consumer spending and unemployment in South Africa continues. Given that South Africa’s export of resources at higher dollar prices seems to pick up, the Resources 10 index gained 5.6 percent during May 2020. Listed property lost 1.2 percent over the month.

The rand exchange rate also moved rather sideways last week. After the currency had moved mostly stronger during the first part of last week, trading several times stronger than R17.40/$, the uncertainty on the US/China situation saw the rand to move weaker on Friday to levels again around R17.62/$, almost the same as the R17.71/$ level of the previous Friday. However, the rand had recovered sharply against the major currencies during the month of May 2020.

Against the US$ the rand had appreciated by 125 cents (6.6 percent) from R18.87 on April 30, 2020.

Against the pound, the currency had gained 184 cents (7.8 percent) from R23.60 to R21.76 on Friday and against the euro, the rand had strengthened by 116 cents (5.6 percent) from R20.76 a month ago to R19.60. On the capital market bonds continue to recover strongly after South Africa was downgraded to junk by Moody’s at the beginning of March 2020 and was left out of the Global Government Bond Index on April 30, 2020.

This coming week investors’ attention will concentrate on the release of the latest data by the Department of Customs and Excise of South Africa’s Trade Balance (April), the latest new vehicle sales (May), Standard Bank’s Manufacturing Purchasers Managers Index (PMI) for May and the Consumer Confidence Index (May). It is expected that all these figures will confirm that the South African economy is moving in one of its deepest recession quarters over the last 100 years.