Market Update #2

JSE Top 40 Index: as at 20 Sep 2018

JSE Top 40 technical analysis consolidation support line

The JSE Top 40 Index consolidated over the past week just above the support line. It’s been trading within a larger triangle over the past year. Indicative of the muted market performance over the same period. If price can close above 51,238 level it puts the downward sloping resistance line in play. If price closes below the 49,281 level, breaching the support line, it could look to go lower to the April low around the 46,469 level.

JSE Financials Index: as at 20 Sep 2018

JSE financials index technical analysis consolidating triangle

The JSE Financials Index is nearing the apex of the consolidating triangle it’s been trading in for half of the last year. So far the index has had a muted effect to the Monetary Policy Committee decision to keep interest rates on hold. Price has bounced off the lower support line twice in the last week, specifically around the 16,000 level. Currently there is little to go on to hint at a direction and price may obey the technicals in absence of any catalysts.

JSE Industrials Index: as at 20 Sep 2018

JSE industrials index technical analysis support

Interestingly, despite Naspers representing more than 20% of the index and pushing up higher over the week, the Index moved lower. It’s tentatively testing the 69,500 level which is acting as good support so far. A break below this level is entirely possible but it’s a close below the April low of 68,360 that would need to occur before considering even further weakness.

JSE Resources Index: as at 20 Sep 2018

JSE resources index technical analysis upward channel hammer reversal

Last week we pointed out the hammer reversal formation that occurred and price seems to have pushed higher. This was probably buoyed by the expectation that President Ramaphosa should provide some clarity surrounding the Mining Charter, when he provides details about the stimulus package on Friday. If his presentation is less than market expectations, it could provide an ideal double-top set up around the 44,500 level.

MSCI World Index: as at 20 Sep 2018

MSCI world index technical analysis upward trend channel

The MSCI World Index continued to push higher over the last week. The next setup to watch is a possible double-top around the 2,190 level. The catalyst to for this setup is difficult to identify though. On the one hand it could be further tariff developments between the US and China (although the US has seemed to shrug off the effects of late), or perhaps the stellar run world equities have experienced this year may be cooling. We’ll keep an eye out for price action around said level.

USD/ZAR: as at 20 Sep 2018

USDZAR technical analysis repo rate response

The rand reacted positively to the Monetary Policy Committee’s decision to keep interest rates unchanged, strengthening by over 2% since the start of the day. The two circled areas are the swing highs that will provide the pivot points for the short-term going forward, with the possibility of a head and shoulders formation forming. Price would also need to close below both the short-term horizontal support line at R14.00, as well as the upward trend line. There would first need to be some shift in emerging market weakness as a whole.

Gold: as at 20 Sep 2018

Gold technical analysis trading sideways reaching downward trend line

Gold has been trading sideways over the past couple of weeks and has caught up with the downward trend line. Gold has historically been a safe haven asset, and in the context of strong developed markets combined with a strong dollar, the haven and price aspect has slowing eaten away at gold’s appeal. Possible catalysts going forward that may boost gold include adverse tariff effects as well as any emerging market contagion spreading through to developed markets.

Oil: as at 20 Sep 2018

Spot oil technical analysis ascending triangle bullish continuation

Oil has generally been trading higher over the past year and has recently come into short-term consolidation in the form of an ascending triangle. This setup may infer a bullish continuation if price can close above the 71.90 level. Even if this happens price would then be tested by a possible double-top around the 74.20 level. Further, the recent August swing low may allude to fading momentum, so the way in which price breaks through the 71.90 level could offer insight into how far Oil may climb.

Repo Rate

The Monetary Policy Committee kept the repo rate on hold at 6.5% on Thursday. This after inflation slowed from 5.1% to 4.9% in August on a year-to-year basis, but in the backdrop of emerging market weakness. Different to the previous meeting in which a hold of the repo rate was unanimous, the latest meeting saw three of the seven members in favour of a 25 basis point increase. Suggesting a more hawkish undertone.

Emerging markets have been hard pressed of late to arrest the weakness their economies have been subject to. Turkey and Russia have both made monetary policy decisions that have been more hawkish than anticipated, and the US seems very much on course with its tightening path.

The Monetary Policy Committee has been hard pressed recently to ensure their inflation targeting mandate is achieved, while faced with an ailing South African economy and weakening currency. To be frank, it’s an incredibly tricky position to be in. On the one hand, increasing rates may relieve some pressure on the rand, but the cost would be further pressure on the economy. On the other hand, lowering rates may be the catalyst sending the currency into free-fall with little benefit to business activity.

Economic stimulus

President Ramaphosa is penned to give some insight on the economic stimulus package recently adopted by cabinet. This package has been alluded to ever since South Africa fell into a technical recession. Although the details still need to be released, one widely expected item is more certainty regarding the Mining Charter, and just general policy certainty all round.

Historically South Africa’s economy has benefited from a weaker rand. This is due to SA being quite commodity intensive, an asset class that’s priced in dollars. However, with the continued policy uncertainty it’s resulted in significant pressure on the sector, so any clarity should be beneficial by this point.

Market Integrity

A major pillar for a market to function efficiently is for the market to have integrity. The perception of integrity results in investor confidence which buoys the market as a whole. Over the past week it’s been refreshing to see various South African banks standing their ground in otherwise trying circumstances, as well as the JSE acknowledging some weak points.

The Inquiry into State Capture heard presentations from Nedbank, FNB, Absa and Standard Bank. Each inappropriately pressured in various ways, and each staying true to maintaining their integrity. South Africa has an incredibly sophisticated banking sector functioning as the backbone of the financial industry. It’s reassuring that this sophistication extends beyond good operations, and there is respect for the law and their own independence.

The JSE also released a report stating that various measures need to be considered to address the events of the past year. The report comes on the back of the Steinhoff collapse, the Viceroy phenomenon and increased occurrences of margin calls on director’s stock. While nothing has been finalized in this regard, it’s good to see the JSE responding to these events.

Tariffs

Tariff rhetoric escalated this week with Trump declaring tariffs on about $200bn worth of Chinese goods. China has responded by threatening tariffs of around $60bn worth of US goods, leading the US to counter again with a possible extra $267bn. Which would leave very little untouched by the tariffs.

The ripple effects of the tariffs are yet to be fully seen, but it’s the kind of event that has far-reaching consequences.

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