The new year commenced on a positive note in the global market, propelled by the Christmas rally. Anticipation of interest rate cuts, expected to begin as early as March, fuelled optimism. With global inflation decelerating and growth sustained by the service sector and advancements in AI technology, the MSCI world index registered a 1.5% gain. At month's end, the Federal Reserve confirmed the maintenance of current interest rates, citing improving consumer confidence and a decline in inflation.
Consequently, the dollar strengthened, exerting pressure on emerging market currencies. However, the area of concern remained particularly amidst concerns with the lacklustre business activity in the manufacturing and industrial sectors worldwide.
In addition, ongoing conflicts in the Middle East shaped investor sentiment to remain cautionary, especially concerning potential supply chain disruptions. This briefly drove up oil prices, posing inflationary risks alongside rising shipping costs. Despite delayed interest rate cuts, gold prices remained resilient above $2000.
Expectations suggest central banks will retain a hawkish stance to address inflationary concerns, prolonging elevated interest rates until latter half of the year. As AI supports the US stock market, a divergence in performance may occur, while local markets face pressures amidst disinflation in China and growth challenges in Europe not forgetting local infrastructural challenges.
Global Macroeconomic Landscape: Signs of Weakness
Globally, weakening demand, driven by central bank measures to curb inflation, is evident. Slowing US consumption and prolonged contraction in the manufacturing sector underscore these challenges, despite advancements in AI technology supporting tech companies' profitability levels higher. These tech company developments helped US stock markets higher. Along with other economic factors labor that remains resilient has also kept their inflation above 3%. The SP500 is up 3.3%, Nasdaq up 3.3%, and Dow Jones Industrials up 2.0%.
European Market Trends: Marginal Recovery Amidst Challenges
Europe narrowly avoided recession in 2023, but confidence remains subdued, with weak consumption spending reflected in retail sales. While inflation rates eased to 2.8% year-on-year in January 2024 from 2.9% in the previous month, in line with market expectations. Eurozone Composite PMI reached a six-month high of 47.9 in January, up from 47.6 in December, in line with initial estimates. While still below the critical 50.0 threshold, indicating a decline in Euro Area business activity, the rate of decline was the slowest since July. New business inflows reduced at the smallest rate in seven months while new business from external clients experienced the smallest decrease since April 2023.
However, the stock looked through this and benefited from the global narrative of interest cutting period within the site. The German index was 1.3% and CAC was up 1.7%.
UK Economic Challenges: Inflationary Pressures and Manufacturing Decline
The UK economy grapples with elevated living costs and consecutive rate hikes, leading to increased inflation back up to 4% , Wage growth in the UK slowed less than expected in December, especially for selected services, pointing to upside risks to inflation and triggering another increase in Gilt yields as markets push back expectations on the timing and extent of BoE rate cuts. Retail sales in the United Kingdom fell by 2.4% year-on-year in December 2023, following a revised 0.2% increase in the previous month and missing the market expectation of a 1.1% growth.
Manufacturing contraction persists matching December's contraction rate at 45.5, contrasting with strong private sector output growth driven by the service economy. Business optimism across the private sector reached its highest level since May 2023, buoyed by stronger output growth projections and expectations of favorable economic conditions domestically and internationally. The FTSE stock market was down 0.9%.
Chinese Economic Landscape: Growth Amidst Property Market Concerns
China faces tough economic conditions amidst a weakened property market and declining consumer spending confidence post the pandemic. Efforts to reignite growth through liquidity injections have yet to yield significant results, with consumer prices experiencing consecutive declines, in January 2024 consumer prices fell by 0.8% yoy.
Meanwhile, China General Composite PMI was at 52.5 in January 2024, edging lower from December's 7-month high of 52.6 while marking the 13th straight month of growth in private sector activity. The service sector expanded at a softer pace while factory activity-maintained growth for the third month running. New orders grew the least in 3 months; while employment stabilized, with the services economy outperforming manufacturing one. On the cost side, input prices increased the least in 7 months, with selling prices falling slightly due to efforts to boost sales.
Chinese equities are likely to face continued pressure in the coming months, with the Shanghai Composite down 3%.
South African Market Dynamics: Downward Pressure and Reserve Bank Decision
The initiation of the year witnessed South Africa's markets sliding downward, influenced by global factors, notably economic challenges faced by its largest trading partner, China. Domestically, there are aspirations for alleviating energy and logistical constraints to bolster growth prospects in the future. However, tangible signs of sustainable improvement are yet to manifest.
On January 25th, 2024, the South African Reserve Bank opted unanimously to maintain its key repo rate at 8.25%, aligning with widespread expectations and thereby maintaining borrowing costs at their highest levels since 2009. The bank underscored the persistent inflation risks while emphasizing a balanced assessment of risks to medium-term growth. Despite the anticipated gradual moderation, the return of inflation to the target rate has been sluggish. Headline inflation declined for a second consecutive month to 5.1% in December from 5.5% in November, albeit remaining above the preferred 4.5% midpoint of the central bank's target range of 3-6%. The inflation forecast for 2024 was retained at 5%, with a slight upward revision to 4.6% for 2025, compared to the previous estimate of 4.5% in November.
South Africa's annual inflation rate dipped to 5.1% in December 2023, down from 5.5% in November and slightly below market forecasts of 5.2%. This marked the lowest reading in four months, inching closer to the South African Reserve Bank's preferred midpoint target of 4.5% within the range of 3-6%.
Private sector credit expanded by 4.94% year-on-year in December 2023, surpassing market expectations of a 4.1% increase and representing the 30th consecutive month of growth in private credit. However, the growth rate remains notably below the historical average of 8%, reflecting reticence among banks to extend credit to mitigate their escalating bad debts and a lack of corporate demand amidst an environment of inflation and weak economic growth.
The seasonally adjusted Absa Purchasing Managers’ Index plummeted to 43.6 in January 2024, down from 50.9 in the previous month, signaling a renewed contraction in the country's manufacturing sector to levels seldom witnessed outside of the global financial crisis in 2008/09 and the pandemic-induced lockdown of 2020. The sharp decline in the new sales orders sub-index contributed significantly to the downturn, portraying a dismal start to the year for the local manufacturing sector.
The appreciation of the dollar, buoyed by robust economic data and delays in the timeline to reduce interest rates, exerted pressure on the South African rand, further weakening commodity prices and exacerbating local infrastructure challenges.
South African 10-year yields eased to 9.9% as investors' appetite for high-yielding bonds surged, bolstered by expectations of interest rate cuts in 2024, prompting investors to seek higher yields to fortify their portfolios.
Reflecting the formidable economic headwinds and investor sentiment, South African equities underwent a decline, with the JSE All Share index decreasing by 3% in January. Substantial declines were witnessed in resources, which plummeted by 5.8%, industrial down 0.94%, and financials down 3.5% respectively.
Looking ahead, South Africa's equity performance will encounter pressure to attract fixed capital inflows from investors as they navigate through a landscape of stagnant economic conditions.
Commodities Market: Mixed Trends in Oil and Gold
Oil prices see a bullish breakout due to ongoing Middle East tensions with a price range between $76-$83 on a trade basis, while gold prices remain positive its near-term outlook is to be more neutral at the back of delayed rate cuts. Most other commodities prices will remain under pressure due to deflationary trends in China and global industrial activity is yet to show signs of picking up due to global economic uncertainties.
