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Equity markets have advanced in June, with most major indexes rebounding from drawdowns seen in May. Market sentiment has improved as investors increasingly believe that central banks are nearing the end of their hiking campaigns. Adding to the optimism is the news that the US has reached an agreement to raise the debt ceiling, thereby avoiding default. Although several risks to economic growth persist, investors are currently focused on the aforementioned factors.
As a result, the MSCI All Country World index has risen by 5.1% month-to-date. Both developed and emerging markets have experienced gains, with the MSCI World and Emerging Markets indexes up by 5.0% and 5.9% respectively.
While the raising of the US debt ceiling has boosted markets, concerns persist regarding the potential drain of liquidity following the issuance of new Treasuries. Major banks estimate that Washington will need to issue approximately $1 trillion in Treasury bills by the end of 2023 to replenish the treasury general account (TGA) and fulfil other obligations. This issuance, all else being equal, would lead to a liquidity drain from the financial system, which generally does not bode well for risk assets. Although a reduction in the Federal Reserve’s reverse repo facility (RRP), currently valued at $2.1 trillion, could counterbalance the liquidity drain, it remains uncertain whether this will happen. On top of liquidity concerns, given the ongoing quantitative tightening by the Fed and the US continuing to run a budget deficit, the significant addition of new Treasury bill issuance may introduce volatility in the Treasury market in the coming months.
On the data front, the US economy is continuing to show signs of a slowdown. Both the ISM services and manufacturing PMI releases for May declined by more than expected to 50.3 and 46.9, respectively. On top of this, the labour market is also beginning to show cracks with the unemployment rate ticking up to 3.7% and initial jobless claims rising to a 21-month high.
The CPI report for May showed that prices barely rose. Headline CPI increased by a meagre 0.1% month-on-month in May, causing the annual figure to decrease to 4.0% from the previous month’s 4.9%. While encouraging, the core CPI number remains elevated at 5.3%. As expected, the Federal Reserve left interest rates unchanged at their meeting in June. Chair Jerome Powell stated that they require further information about the economy before making any decisions about future actions. However, investors were surprised by the committee members’ projections of two additional 25 basis point hikes before the end of the year. The news has sent yields higher, and the market is now indicating a 71.9% probability of another rate hike at the Fed’s next meeting in July. While the rerating may hurt risk assets, the S&P 500 is still up 4.6% month-to-date.
China officially reduced its key policy rate as the post-Covid recovery continues to show signs of deterioration. The People’s Bank of China (PBOC) cut its seven-day reverse repurchase rate by 10 basis points, injecting ¥2 billion in liquidity into the economy. This action is seen by economists as the beginning of a monetary easing cycle, with expectations that the PBOC will further decrease the borrowing cost of medium-term policy loans next. Consequently, Asian equities have experienced a boost, as evidenced by the Hang Seng index recording an 8.2% increase month-to-date.
The UK economy continues to display resilience, defying predictions of it being in a prolonged recession by now. Although the goods sector remains sluggish, the growth in the services sector is outweighing this weakness. Consequently, the economy experienced a 0.2% expansion in GDP (month-on-month) in April. While encouraging, elevated inflation at 8.7% and the possibility of higher interest rates will continue to put pressure on consumers and are casting a shadow over the economic outlook. UK equities have followed their global peers higher, with the FTSE 100 index up 2.1% in June.
Locally, the South African economy dodged a technical recession in the first quarter, with GDP expanding 0.4% quarter-on-quarter. Despite the modest growth, South Africa’s outlook is still dire for the remainder of the year as the power crisis, inflation, and elevated interest rates continue to hamper business and consumer sentiment.
On a positive note, the South African rand has continued to gain against the greenback. Reduced tensions between South Africa and the West regarding Russian relations and the slowdown of power outages have both contributed to improved investor sentiment. As a result, the rand has appreciated by 6.6% against the dollar in June, currently trading at around the R18.50 level. Additionally, the rand has also seen gains against the pound and euro, rising by 5.1% and 5.6% against the pair, respectively.
South African equities have performed well, with the JSE All Share Index up 4.0% month-to-date. The big winner has been financials returning 11.0%, followed by resources and industrials with 3.0% and 1.8%, respectively. South African listed property has also rebounded and is up 1.1% in June.
Data Source: Investing.com
Disclaimer: All returns data are in the respective currency of the region mentioned. All YTD and MTD returns are as at time of writing.
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