Market Update #3

JSE Top 40: as at 27 September 2018

Top40(3)

The JSE Top 40 traded lower towards the its opening price one year ago. The index has been range bound for most of the year between the 55,200 and 46,600 handles. It is noted that since June price has tested the upward sloping trend line twice, with the most recent test occurring just over two weeks ago. Should price continue to obey this support line then a move upward to mid range of around 51,500 may be possible. Should price fail at this support, it would need to break through the upward trend line, as well as the opening price one year ago, to open up the possibility of reaching the most recent yearly low.

JSE Financials Index: as at 27 September 2018

Financials(3)

The JSE Financials Index continued to consolidate further within its triangle. With a stalling economy and weakening currency the index tends to falter, but the yield pickup offered by the index is still appealing as long as the various constituents can maintain their dividend behavior. Currently though, there’s no real indication of possible direction.

JSE Industrials Index: as at 27 September 2018

Industrials(3)

The JSE Industrials Index made its strongest move lower towards the yearly low of around 68,360. It’s difficult to determine the extent to which price could continue moving lower, but on the back of a weaker economy, strained consumer spending and faltering capital inflows into equity the possibility remains. A rejection of the low seen in April could see the index moving back to the mid-point of the descending triangle around the 74,000 area.

JSE Resources Index: as at 27 September 2018

Resources(3)

The generally weaker rand has helped boost the index over the last 6 months as commodities are priced in dollars. Out of the three main sectors, resources has had the best performance over the last 12 months. Recent price action may indicate slowing momentum though as price strongly rejected top channel resistance (a possible double-top), and even gapped lower after the initial rejection. With the recent strength seen in the rand, despite a Federal Reserve rate hike, it may result in price being pushed to the horizontal handle of around 41,000. This level proves to be particularly interesting as the upward channel and horizontal support converge. The last swing low (circled) rejected the horizontal with a classic hammer formation. Should price break through this area with decent momentum, it could spell the beginning of the end of the strength in the index.

World(3)

The MSCI WOrld Index has recently entered a price area that could translate into a double-top. Price has obeyed the upward channel consistently since March 2018 and the recent price action could be interpreted as waning upward momentum. As developed markets move closer towards tightening their monetary policy, as well as the ubiquitous effect of the trade wars, the index could be moving closer to consolidation. However, a further upward move cannot be ruled out with price being where it is compared to the recent yearly high around the 2,250 level. A move below the very short-term upward trend line (a trend within a trend if you will) would need to occur first though.

USD/ZAR: as at 27 September 2018

USDZAR(3)

The rand has encountered a significant support level recently at R14.50 to the dollar. Interestingly, the rand managed to strengthen both before and after the Federal Reserve raised benchmark the interest rate by 25 basis points. The pair is incredibly difficult to interpret currently as its behavior does not speak to the fundamentals. There are also mixed views among analysts as to whether it’s under or over-valued with arguments going both ways.

Gold: as at 27 September 2018

Gold(3)

The major factor affecting gold recently was the Federal Reserve rate decision. Most signs pointed to a somewhat softer dollar after the decision as market participants expected more dovish rhetoric. While the Fed did refer to a less accommodative approach, the rhetoric wasn’t as dovish as expected. Thus, gold went lower as the Fed increased the benchmark rate by 25 basis points. As developed markets move further away from easing, the anti-fiat commodity becomes less appealing. On the back of a strengthening dollar, it makes it more expensive for non-US investors as well. These aspects keep gold subdued.

Brent Crude: as at 27 September 2018

Brent(3)

Brent crude made a new high in just under four years over the past week, and continues to trade above the previous yearly high. The commodity is well supported to remain in the higher levels as Russia and Saudi Arabia have both decided against increasing output as stocks run lower. This combined with the upcoming sanctions on Iran keeps the sticky liquid well buoyed.

US Crude: as at 27 September 2018

Oil(3)

In comparison to the OPEC and co. area, US oil received some reprieve as US oil stocks came in stronger than anticipate. Officials also provided reassurances that the upcoming Iran sanctions wouldn’t have a major effect on US supply. As such, US oil has made modest gains but the overarching theme of lower global supply may eventually catch up with it.

Economy

Producer price inflation (PPI) came in at 6.3% in August versus 6.1% in July. This increase was widely expected as diesel and petrol prices increased for a fifth month on the trot. Viewed independently, the petrol and diesel inflation components for August were 25.3% and 27.7% respectively.

On Wednesday Statistics SA reported a decrease of 69,000 jobs for the second quarter of 2018. The survey covers all industries except agriculture and reported that the number of employed stood at 9,74 million at the end of June.

Gross earnings increased by 4.5% year-on-year at the end of June which was slightly behind inflation of 4.6% for the same period. The latest August inflation figure came in at 4.9% year-on-year, slowing from a previous reading of 5.1%.

On the back of slower-than-inflation gross earnings increase, comes a contraction in real disposable income for the first time since the end of 2013. Household spending, which makes up around 60% of GDP, decreased by 1.3%. This decrease is the first instance in two years.

The reasons for the decreased spending are attributable to fuel hikes and tax increases. The resultant decrease in disposable income was evident in slowing retail sector growth which is major indicator of consumer spending, and significant contributor to GDP.

The recent emerging market risk-aversion was evident in portfolio flows over the second quarter. On Tuesday, Reserve Bank data showed that the second quarter flows into bonds and equity decreased to R16.6bn from R89.4bn in the first quarter.

The decrease of foreign investment into local bonds was the most severe with inflows slowing to R3.8bn from R46.9bn. With equities not far behind going from R42.5bn to R12.8bn. The mechanics behind South Africa’s balance of payments relies on these inflows through the financial account to fund the current account deficit.

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