Monday’s Bullseye: 22 June 2020

It has been a somewhat ugly week with ranges dominating, although some markets still managed to move cleanly. The dollar index rose for the second consecutive week as the pound slumped and euro weakened, although the greenback still fell against the Japanese yen and traded mixed against commodity currencies following a solid US retail sales report in mid-week. Gold and silver both recovered and were breaking to new weekly highs when this report was written, as yields fell thanks to more central bank stimulus and despite the rebound in the dollar. Crude oil and stock markets, meanwhile, once again refused to go down following the losses in the week prior, as a growing list of concerns were offset by a big jump in US retail sales and more central bank support. In other words, it was another “risk-on” week.

Looking Ahead

One thing that has become clear in recent weeks is that Mr Market has been increasingly resilient to bearish factors, including the still-rising global cases of coronavirus. It appears as though investors are hopeful that as medical professionals get closer to finding effective treatments and a vaccine for Covid-19 patients, that the pandemic might soon be declared over. Indeed, the UK has lowered its coronavirus alert level from four to three. But is the market pricing in the risks correctly?

Covid-19 new cases key risk

I, for one, think it is far too early to be overly optimistic – as the stock market participants apparently are. There is a real risk for a second wave of the virus returning. We have seen rising new infections in several US states, with Florida, Arizona, California and Texas, all reporting record-high single-day increases on Thursday. The problem hasn’t gone away either for some Latin American nations and several other developing economies, including India and Pakistan. And with European countries opening up their economies further, there is a real risk we could well see an unwelcome return for Covid-19 and an uptick in new cases here, too.

Central banks to the rescue
 

So, the potential for risk appetite turning sour is there in the week ahead, although the dips have so far been bought in global indices, with the FTSE for example rebounding as the Bank of England become the latest central bank to increase its bond buying programme, boosting it by a good £100 billion. The Bank of Japan also announced that it would be extending its corporate funding support from $700 billion to $1 trillion, while the Swiss National Bank re-iterated it would remain active in foreign exchange markets and intervene should the franc appreciate further.

Gold about to breakout?

The actions of the above central banks underscore expectations that they and others, including the ECB and Fed, will be there to keep long-term interest rates very low by their vast programmes of asset purchases, effectively implying they would support the stock markets and prevent sustained sell-offs. Their actions should continue to boost noninterest-bearing commodities such as gold and silver, too.

So, our featured chart of the week is gold, for we think it is about to break higher:

Source:  TradingView and ThinkMarkets

Economic highlights

Investors cheered news of further improvement in US data this week, with retail sales jumping by a record 17.2% in May following the biggest rise in employment we saw in the week prior. Economic data in Europe has far remained downbeat, but the potential for a big rebound is there due to pent up demand as economies re-open. With government spending surging already in response to the pandemic, we now need to see further sustained rises in consumer spending to fuel a sharp economic rebound in the months ahead. One- or two-months’ worth of data just won’t be enough. Here are the data highlights for the upcoming week:
 

Manufacturing PMIs most important data

So, the economic calendar is going to be fairly light in the coming week, but there is no doubt that the manufacturing PMIs will probably be the most impactful on the markets. Manufacturing PMI surveys released last month suggested the worst of the economic impact from the pandemic might be over. However, the PMIs remained well below the boom/bust level of 50, and very low by historical standards. For June, they are expected to improve further because lockdowns have eased significantly since April. But to have a meaningful impact, the PMIs will need to recover strongly to sustain expectations that the pace of global recovery is indeed going to be a speedy one.

South African Markets in Focus

By Kearabilwe Nonyana

The ebbs and flows of the local market continue. Global risks and tail winds are finding their way into the local South Africa market. It seems quite illogical that the market finds a new reason to be optimistic and then a trading day later uses a reason which is fully known to market participants and can be easily predicted to justify a sell off.

This sort of price action speaks to the risks that the market still must face in the future. Market participants have no solid foundation to their assumptions on how the market will react to a possible second wave of global Covid19 cases. The JSE Top 40 continues to rise on back of global risk sentiment favouring stocks which are COVID19 proof (Tech Stocks); Naspers heavy weighting in the index will dictate the price action going forward. The Top40 was up more than 2% on the week.
 
The Week Ahead

Minister Tito Mboweni will in the next week 24/06/2020 announce the revised budget this is because the Government will need to reprioritise spending due to the R500 billion stimulus package and revenue under collection due to increased job losses and lost income. Minister Mboweni told the National council of Provinces that South Africa faces a Sovereign Debt crisis if the countries spending and economical situation does not change. He predicts this could be as soon as 2024.

The local markets will trade sideways for the week up until Wednesday when the Budget deficit numbers and Debt to GDP numbers get announced ; I anticipate selling pressure towards the end of the week when Market participants will be able to map out the full picture of the South African Economic reality.