Market Commentary – 30 June 2022
US inflation numbers surprised the market in May, accelerating by 8.6%. To combat the inflation risks the US Federal Reserve (Fed) had to hike interest rates by a staggering 0.75%, the magnitude of which was last seen in 1994. Contributors to the US inflation acceleration came from a 50% price jump in fuel, natural gas being up 30%, and food items increasing by 10%. A worse than expected GDP print by the US economy, with a slowdown in consumer spending and continued inflation acceleration, further grew recession concerns, which triggered the massive sell-off in risky assets in June. The US equity markets continued to tank in the second quarter of the year, with the S&P 500 posting its worst first half of the year since 1970.
For the second quarter of the year, the MSCI World Index was down 16.2%, the MSCI Emerging Markets Index was down 11.1% and the MSCI USA Index was down 16.9% in US dollar total returns. The MSCI South Africa Index was down 22.9% during the quarter in dollar terms while the MSCI China Index was up 3.4%. The MSCI Europe Index was down 14.5% while the MSCI United Kingdom Index was also down 10.5% in US dollar total returns.
Demand for oil increased in China, as the country eased its hard lockdown while output from some of the Organization of the Petroleum Exporting Countries (OPEC) members had dropped and a planned strike in the energy sector in Norway was going to cut global oil supply by almost 10%. The Brent crude price ended the quarter at $109 a barrel, a 4.1% increase from the start of the quarter. The gold price came off the $2 000 level in March, on the back of the Russian invasion of Ukraine, but has since dropped, starting the second quarter at $1 937.23 and closing the quarter at $1 806.89, a loss of 6.7% over the quarter. As fears grew about the US economy being tipped into recession by the aggressive rate hikes from the Fed, the US Government 10-year bond closed the quarter at 2.97%.
In local markets, the FTSE/JSE All Share Index (ALSI) was down 8.30% for the first half of the year, a level last seen in 2000 and 2003. For the quarter, the ALSI was down 11.7%, while the FTSE/JSE Top 40 (-11.8%) and FTSE/JSE Capped Shareholder Weighted All Share (Capped SWIX) (-10.7%) indices were also massively down for the quarter. The South African Government 10-year bond yield closed the quarter at 10.56%, while the All Bond Index (ALBI) was down 3.7% for the quarter. The cash benchmark, the Alexander Forbes Short-Term Fixed-Interest (STeFI) Composite Index delivered positive money market returns of 1.2% for the quarter while the FTSE/JSE SA Listed Property Index (SAPY) was down 11.6% for the quarter.
Severe power cuts in South Africa and growing concerns about the ability of Eskom to power long-term growth in the country, along with political turmoil, put pressure on the rand. For the full quarter, the South African rand depreciated by 12.1% to the US dollar, closing at R16.38 to the greenback, R19.89 to the pound and at R17.12 to the euro.
In May, the South African Reserve Bank (SARB) brought to market the biggest interest rate hike (+0.50%) but in the same month the inflation numbers in the country still surprised. With the weaker rand and increased oil prices now trickling towards petrol price increases, another high inflation number has been forecasted for June, which would then clear the way for further increases in interest rates.