The Week That Was
US equities displayed a mixed performance on Friday, with traders and investors carefully analysing the latest US earnings reports amidst the expiration of various options. The Dow Jones managed to close slightly higher, achieving its 10th consecutive session of gains, representing its most extended winning streak since 2017. On the other hand, the S&P 500 experienced a modest uptick following the previous day's tech-related losses, while the Nasdaq saw a slight decline of 0.2% ahead of the Nasdaq 100 rebalance scheduled for Monday before the market opens.
Among the notable stocks, American Express faced a decline of 3.9% after the company maintained its forecast for full-year profit unchanged, leading to revenue falling short of expectations. Nevertheless, earnings came in better than anticipated. Meanwhile, CSX witnessed a drop of 3.7% due to disappointing financial results.
Fortunately, last week's US corporate earnings have helped alleviate concerns surrounding the resilience of the US consumer and the overall health of the financial system, particularly in the aftermath of the banking crisis in March.
For the week, the Dow and the S&P 500 both recorded gains of 2% and 0.6%, respectively, whereas the Nasdaq experienced a slight dip of 0.5%.
On Friday, the JSE FTSE All Share index hovered around the flatline, reaching 76 950 points, reflecting a cautious global market sentiment. Traders closely analysed the recent monetary policy decision where the central bank chose to pause its interest rate hikes but also signalled that this doesn't imply the end of the tightening cycle.
Among the top performers was Premier Group Ltd, recording a significant gain of 3.44%, followed by Mr Price with a rise of 2.06%, and Woolworths with a more modest increase of 1.03%.
On the other hand, the mining sector experienced losses, with Northam Platinum leading the decline with a drop of 2.57%, followed by Gold Fields with a decrease of 1.91%, AngloGold Ashanti with a decline of 1.81%, and Kumba Iron Ore with a slide of 1.63%.
Looking at the overall performance for the past week, the benchmark equity index in South Africa registered a decline of about 1.2%.
The Week Ahead
In the US, the Fed policymakers are expected to announce a 25bps rate hike on Wednesday, with many traders and investors predicting it will be the last one in the current tightening cycle. This decision comes as inflationary pressures have significantly cooled, and there are indications of a more relaxed labour market.
Economic data for the second quarter suggests that the US GDP is projected to have grown by 1.6%, representing the slowest pace of expansion since the recession recorded in the first half of 2022. Additionally, there will be a series of other economic releases.
Market participants will closely monitor the US earnings calendar, which includes major tech companies such as Alphabet, Microsoft, Meta, and Amazon, along with corporations like 3M, General Motors, Spotify Technology, Verizon Communications, Snap, Visa, AT&T, Automatic Data Processing, Boeing, CME Group, Coca-Cola, QuantumScape, Mastercard, McDonald's, Ford Motor, Intel, Chevron, Exxon Mobil, and Procter & Gamble.
In Europe, market participants are anticipating the European Central Bank (ECB) to raise its main interest rate by 25bps to 4.25%. They will be particularly attentive to any indications regarding future rate adjustments, especially considering recent dovish remarks from ECB officials and cooling inflation, which have sparked speculations that this might be the last rate hike in the current cycle.
Additionally, flash PMI data is expected to show a downturn in the Eurozone's economy during July.
In the UK, PMI data is expected to indicate that private sector output expanded at the slowest rate since March, primarily due to a deceleration in service sector activity and another fall in manufacturing production.
In Asia, all eyes will be on the Bank of Japan's monetary policy decision, as steady inflation and relatively robust growth may prompt the central bank to hint at future tweaks to its yield curve control policy.
In China, the Communist Party's Politburo is likely to convene and discuss plans aimed at boosting economic recovery.
Key Themes for the Week Ahead
FOMC Meeting
With a 99.6% probability of a 25bps rate hike on Wednesday, the focus of the upcoming Fed meeting lies on whether traders and investors believe this will be the final hike of the current cycle. The money markets have not fully priced in another hike with confidence, so they will be seeking clues to validate their belief that this could be a "one and done" scenario. However, the situation is not entirely clear, as the robust employment landscape and positive signs in the housing market may compel the Fed to refrain from signalling a terminal rate, despite the faster-than-expected decline in consumer and producer prices.
If the Fed does indicate the end of their tightening cycle, it could ignite positive risk sentiment, prompting dip buyers to re-enter Wall Street and driving the Nasdaq 100 above 16 000. Additionally, it might put downward pressure on the US dollar, leading to rallies in commodity currencies and gold prices.
Conversely, such a signal from the Fed could also result in Fed Fund futures pricing in with more certainty the possibility of a rate cut in Q1. This raises concerns about allowing these expectations to gain momentum, even if they are well-grounded, as the Fed aims to keep inflation expectations under control. Therefore, market participants should also remain vigilant for a scenario where the hike is ambiguously hawkish, potentially causing the US dollar to strengthen while putting downward pressure on Wall Street, currencies and gold.
In any case, the Fed meeting is likely to be the most significant event in the financial markets this week, with its outcome holding the potential to shape various asset classes and risk sentiment.
US PCE inflation, Q2 GDP
The FOMC meeting holds significant importance for the US, and the subsequent GDP and CPI inflation reports can play a crucial role in shaping expectations for the Fed's August meeting.
If the Fed adopts a cautious approach and maintains a more hawkish tone, a weak GDP and inflation report could swiftly undermine this stance. Consequently, markets might start pricing in the possibility of a pause in August's rate hikes and increase their conviction of a potential rate cut in 2024.
ECB Meeting
The situation with the European Central Bank (ECB) appears to mirror that of the Fed; it is highly likely that the ECB will raise rates by 25bps, but the real question is whether they will do so in September. Some ECB officials have indicated that another rate hike beyond the upcoming one is not a guaranteed outcome. One official even suggested that they prefer to avoid a recession and may take a more cautious approach.
The ECB has a reputation for being somewhat cryptic and not always straightforward in their communications during meetings. Similar to the Fed, they are probably wary of signalling a definitive end to rate hikes or anything too conclusive, especially while inflation remains higher than desired (as evidenced by core CPI surpassing expectations this week). As a result, those seeking definitive answers at the upcoming meeting may find themselves disappointed, as the ECB is likely to lean towards a "data dependency" approach, using incoming data to guide their future decisions.
BOJ Meeting
In January 2016, the Bank of Japan (BOJ) surprised markets by cutting rates from 0.1% to -0.1%, and they have remained at this level ever since. It is highly improbable that they will hike rates on Friday, as they may need to either expand their yield curve control (YCC) band or abandon it altogether before considering rate hikes.
There was some speculation building up that they might take such action this week, but the recent softer-than-expected inflation report has likely dampened those expectations. The BOJ's quarterly outlook will be closely monitored to see if inflation projections have been revised higher, as it could signal a shift towards dropping their ultra-loose policy.
However, given the recent subdued inflation data, it seems less likely that they will make any significant policy changes, which could explain the gradual uptick in USD/JPY. Nevertheless, if the markets receive a negative inflation report from Tokyo on Thursday (a leading indicator for nationwide CPI), it may prompt renewed bets of potential BOJ action, leading to a stronger yen and weaker USD/JPY.
US Earnings
Earnings will be massive this week as we get updates from 3M, AbbVie, Alphabet, Airbus, AstraZeneca, AT&T, Barclays, BASF, Biogen, BNP Paribas, Boeing, Boston Scientific, Bristol-Myers Squibb, Chevron, Chipotle Mexican Grill, Comcast, Exxon, Ford Motor, General Electric, General Motors, GSK, Hermes International, Honeywell International, Intel, Mastercard, McDonald’s, Meta Platforms, Microsoft, Nestle, PG&E, Procter & Gamble, Raytheon Technologies, Samsung Electronics, STMicroelectronics, Texas Instruments, Thermo Fisher Scientific, UniCredit, Unilever, Union Pacific, Verizon Communications, Visa and Volkswagen.
According to data from FactSet, an impressive 74% of the S&P 500 companies that have reported earnings so far have surpassed expectations. This strong performance in corporate earnings is generating a sense of optimism regarding the possibility of a soft landing for the economy.
South Africa
The South African Reserve Bank (SARB) decided to halt its tightening cycle but emphasised that this is not the definitive end. However, it is probable that this pause will hold, given that both headline and core inflation have comfortably settled within the 3-6% target range. The central bank now plans to base future decisions on data-driven analysis.
City of Joburg civil engineer and consultant, Johan La Grange, has officially confirmed that the explosion which devastated a significant portion of Bree Street in the Johannesburg CBD was caused by a pure gas leak. This revelation comes just days after the tragic incident occurred.
After months of speculation, it has been confirmed that Russian President Vladimir Putin will not be attending the August BRICS (Brazil-Russia-India-China-South Africa) summit in South Africa. This decision serves as a 'get out of jail free' card for Pretoria, as it eliminates the need to confront the challenging diplomatic and legal dilemma posed by his potential presence at the event.
Economic Calendar
In the upcoming economic calendar for this week, several significant events are scheduled to take place.
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