Monday’s Bullseye: 25 October 2021

Sentiment remained overall positive towards risk assets once again throughout much of this week, due, in part, to mostly better-than-expected earnings, ahead of a busy next week, and as Evergrande China narrowly avoided default. The S&P 500 hit a new record high, as too did Bitcoin, while the Turkish Lira slumped to a fresh low on Turkey’s bizarre policy response to surging inflation. The dollar weakened most notably against commodity dollars, as well as the Chinese Yuan and Russian Ruble. News that Evergrande has avoided a default for now, provided the Renminbi relief and supported global stock markets on Friday. The Rubel surged, driving the USD/RUB momentarily to below 70.00, following a larger-than-expected rate hike by Russia’s central bank on Friday. The Dollar Index fell but remained trapped between 93.50 support and 94.00 resistance.  Crude oil held near multi-year highs, while gold edged higher, and silver rose for the fourth consecutive week, even as yields on US 10-year bonds climbed higher.
 

 
Looking ahead to the wee ahead, central banks and tech earnings will take centre stage, while on the economic data front, there is not much on the agenda until the US GDP data is published on Thursday (see the economic calendar below, for more). Judging by the ongoing risk-on sentiment, we might see some further follow-through in risk-taking in the early parts of this week. Whether the markets will be able to kick on from there will depend, in part, by the outcome of the US technology sector earnings that will be released throughout the week (see below for more).
 

 
Away from earnings, reflation trade is the dominant theme given the rallying commodity dollars and equities in the face of rising inflation. Investors – judging by their collective actions as reflected in price on the global markets – reckon that a prolonged period of above-trend inflation, combined with weaker economic growth, is not very likely as the impact of temporary factors and supply bottlenecks are likely to subside in the not-too-distant future.

 
As such, the markets probably don’t expect central banks to tighten their policies meaningfully anyway – something that the Fed, BoE and others have indicated. This is something that the ECB, BOC and BOJ will all echo as well in the week ahead. Central banks wouldn’t want to choke off economic growth by being too aggressive when they tighten their policies especially as there have been some signs of weakening recovery of late.

This partly explains why the gold-silver ratio has dropped, with silver, being more of an industrial material has been able to shine more brightly of late, despite 10-year bond yields having remained elevated near their recent highs. But gold has also broken out above key resistance the 200-day average around $1800.

Figure 1: Gold daily chart
Source: ThinkMarkets and TradingView.com

If the breakout can be sustained, we might see the yellow metal come back more meaningfully.
 

 
It is a big week for technology stocks. We will hear from the likes of Alphabet, Apple, Amazon, eBay, Facebook, Microsoft. Heading into arguably the most important week of the earnings season, investors are expecting to hear decent numbers from these tech giants. The earnings season has started quite strongly with Wall Street banks producing results that beat expectations previously, while this week saw the likes of Netflix and Tesla shares reach for new highs following upbeat numbers. 

So far, positive earnings have kept the markets supported. However, the key risk is that the global supply chain bottlenecks and surging prices might prove to be a much bigger issue than expected, something which could hurt fourth quarter revenue and profits.

Company CEOs have not been shy discussing these matters abundantly in their earnings calls or reports. Apple, for one, is already expected to slash its projected iPhone 13 production targets for 2021 by a growing number of analysts. The prolonged chip shortage could see Apple miss as many as 10 million units of its flagship iPhone 13, which could ultimately hit its shares. Meanwhile corporates may have been forced to slash their ads campaigns, which could be particularly bad news for social media platforms like Facebook and Twitter and Google.  If Snap Inc is anything to go by then then the fourth quarter results could be weak as companies spend less on ads in the current quarter due to supply issues and other reasons.

So, as well as keeping a close eye on Q3 earnings, watch out for any major warnings about Q4 numbers by major companies reporting this week.  
 

 

 

 

 

The South African Market


Global markets continue to sit between two extremes. Global companies continue to produce stellar results in all sectors from mining, banking and tech even in the face of countries grappling with a resurgence of new Covid 19 cases. On the other extremes are supply and demand dynamics in commodities which are significant in the production of industrial output and energy sitting at all time highs threatening global growth and raising the ire of global central banks as they need to start modelling the inflationary impact of these commodities and may cause them to move faster on rates to contain inflation. The JSE Top40 is set to end of the week flat with industrials leading the market higher as Naspers and Prosus recovers in line with other Chinese technology companies and what negated the gains from the industrial sector were mining stocks which were the leaders last week with profit taking on the back of a recent run-in commodity prices. What was notable on the week as well was the decreased sales from mining counters as railway woes from Transnet continue to plague the logistics of offloading the commodities therefore affecting production.
 
The week ahead


The global markets remain intertwined, and the cause-and-effect nature of the market will continue. Globally what will be very important. In South Africa the economic calendar is very thin.


28 OCTOBER 2021

PPI DATA
On Thursday the 28 of October the Producer price Index which considers price increase of input into the production process will be release. In the previous week we could see that transportation cost caused by an increase in fuel costs contributed to a quickening CPI number. South Africa with an undeveloped rail system still relies heavily on road transport the higher cost of fuel will filter into factory gate prices.

US GDP FOR Q3
One of the more important data points which will be released will be the preliminary Q3 US GDP numbers. Results across different corporation in the US have been great and have beaten estimates which is sign of an economy which Is strong and coming out of lower economic growth. Q2 GDP data was incredible and economists in the US believe there will be a slow down in Q3 to 5.4% YoY. If there is a surprise to the upside, I am off the belief this will bode well for risk assets as it will sure up globally markets that the worlds strongest economy is emerging from the pandemic.
 
29 October 2021

Private sector credit extension
Credit extension is a good economic indicator to gauge the level of confidence capital provider like banks are willing to open the taps to consumers and business. In times of economic contractions, the credit risk metrics of capital providers change, and they become prudent in extending any credit to corporates and individuals. In recent Bank earnings it could be seen that lending had stagnated for the banks as there was little growth in the net interest income they were showing on their statements of profit or loss. In recent prints the stagnant nature of corporate credit extension due to uncertainties in the economic situation of South Africa has been quite concerning’s which household credit extensions have increased.