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International market overview – As at the end of September 2021

Risk-off sentiment dominated global equity markets in September, with several issues top-of-mind for investors. Chinese regulatory interventions continued and the state’s attempts to rein in leverage in the property sector triggered a liquidity crisis for the country’s second-largest property developer, Evergrande. Fears over the potential knock-on impacts of an Evergrande default, dominated rhetoric for a large part of the month. Other focus points for market participants included hawkish central banks, inflation fears compounded by a gas shortage in Europe, the US debt ceiling, slowing global growth, the continued spread of the Delta variant and slowing vaccine roll-out globally. Treasury yields moved up and the US dollar strengthened.

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Global outlook

  • The investment case for emerging markets is becoming increasingly risky, particularly as global growth is likely nearing a peak and China continues to underwhelm, as the credit impulse remains deeply negative.  
  • Precautionary savings will likely continue unwinding, although consumers’ spending power should be relatively lower compared to the first half of the year.   
  • We continue to believe that the dollar will depreciate amid its counter-cyclical nature with the reflationary growth cycle, although this may be nearing an inflection point.    
  • The vaccine roll-out is expected to continue boosting broader equity markets in the short term.  
  • Monetary policy is expected to remain accommodative in 2021, however, the US Federal Reserve is expected to communicate its tapering plans before the end of the year.   
  • Inflation is expected to rebound in 2021 and remain relatively sticky, particularly in the US.  
  • Commodities to remain elevated in the short term, amid relatively strong demand dynamics and supply-chain disruptions.     
  • Global yield curve movements have been sporadic amid uncertainty on future growth, inflation, and policy dynamics. However, we are of the view that there will likely be slightly higher yields in the short term amid a rise in bond issuance from the US Treasury, once the debt ceiling is resolved.       

Economic Overview

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In the US, data on balance was in line with expectations

On a preliminary basis, the IHS Markit US Composite PMI fell to 54.5 in September 2021, in line with expectations but pointing to the lowest growth in private sector activity since last year. Both manufacturing and services eased. Retail sales increased 15.1% y/y in August, from a revised 15.8% in the month before, sales were still above forecasts. The trade deficit narrowed to $70 billion in July, slightly below expectations, as exports were up 1.3% m/m while imports edged down 0.2% m/m. The unemployment rate dropped further to 5.2% in August – the lowest level since the pandemic began in March 2020. This was in line with market expectations as the labour market continued its steady recovery following business openings in the US. Annual inflation eased to 5.3% in August, from a 13-year high a month before – this was broadly anticipated. Fed officials said that a moderation in the pace of asset purchases may soon be warranted. The Fed also signalled that interest rate increases may follow more quickly than expected, with 9 of 18 policymakers projecting borrowing costs will need to rise in 2022.

Eurozone data pointed to a slowing recovery

Preliminary estimates showed that the IHS Markit Eurozone Composite PMI was down to 56.1 in September, below market expectations of 58.5, pointing to the slowest expansion in business activity in five months. Consumer confidence, however, improved – defying market expectations amid a recovery in sentiment on higher vaccination rates. The trade surplus narrowed to €20.7 billion in July 2021, from €26.8 billion in the same period last year, as global demand continued to consolidate its recovery from the pandemic. This was, however, well below market forecasts as imports were up at a faster 17.1% while exports rose 11.4%. The seasonally adjusted unemployment rate in the euro area edged down to 7.6% in July, as anticipated. Annual inflation was confirmed at 3% y/y in August – the highest levels since 2011 – and well above the European Central Bank’s (ECB), target of 2%. The ECB left interest rates at record-low levels but said it could start lowering the pace of net asset purchases under the Pandemic Emergency Purchase Programme (PEPP).

In the UK, data was mostly softer than expected

Britain's gross domestic product grew by 7.5% y/y in July 2021, following a 15.2% expansion in the previous month and missing market expectations of 8%. According to preliminary reports, the IHS Markit/CIPS UK Composite PMI edged down to 54.1 in September, from 54.8 in the month before, slightly below the forecasted 54.5. The slowdown in private sector activity was more pronounced in manufacturing, amid severe supply-chain disruptions. The GfK Consumer Confidence Index declined to -13 in September, compared to expectations of -8. Retail sales volumes were unchanged in August over the same period a year earlier, missing the market consensus of a 2.7% increase. The UK trade deficit widened to £3.1 billion in July, above the anticipated £2 billion – this was the region’s largest trade shortfall since December, as imports advanced 1.1% while exports fell 0.1%. The unemployment rate fell to 4.6% in the three months to July 2021, in line with market expectations, adding to signs of labour market recovery. Annual inflation jumped to 3.2% y/y in August – the highest levels since 2012 – above the forecasted 2.9%. During its September meeting, the Bank of England left its benchmark interest rate at a record low of 0.1%, and its bond-buying programme unchanged at a total of £895 billion by the end of this year.

Data out of China was mixed with regulation remaining in the spotlight

China’s composite PMI for August tumbled to 47.2 – the first contraction in private sector activity since April 2020 – following the resurgence in coronavirus cases in several regions. Retail trade rose by 2.5% y/y, easing sharply from an 8.5% gain in the previous month and missing forecasts of 11.5%. This was the weakest rise since August 2020 as consumption weakened yet again. China's trade surplus was at $58.34 billion in August, above the market consensus of $51.05 billion as both imports and exports hit record values. China’s surveyed urban unemployment rate stood at 5.1% last month, as anticipated. The annual inflation rate was unexpectedly lower at 0.8% – the lowest in five months amid a steeper decline in the cost of food. Regulatory intervention in the economy remained front and centre with further steps to curb leverage in the property sector setting off a liquidity crisis for China’s second-largest property developer, Evergrande.

Japanese data was decent and the BoJ maintained its dovish stance

The Jibun Bank Composite PMI reading was up to 47.7 in September, from a final 45.5 in the prior month, as shown by flash estimates. This was slightly ahead of expectations but signalled the fifth straight month of contraction in the private sector. Retail sales rose by 2.4% y/y in July 2021, above the forecasted 2.1% as consumption strengthened amid an acceleration of coronavirus vaccinations. Japan posted a trade deficit of ¥635 billion in August, compared with estimates of a ¥47 billion deficit. Exports rose by 26.2% y/y while imports jumped at a steeper 44.7% y/y. The unemployment rate fell unexpectedly to 2.8% – the lowest jobless rate in three months as the number of unemployed persons declined by 120 000. The Bank of Japan left its key short-term interest rate unchanged at -0.1% and maintained the target for the 10-year Japanese government bond yield at around 0% during its September meeting, as widely expected. Policymakers, however, offered a bleaker view on exports and factory output, amid supply-chain disruptions. The central bank reiterated that it would not hesitate to take further easing measures, if necessary.

In South Africa, economic data mostly improved 

South Africa’s GDP grew 1.2% q/q to June, following a 1% expansion in Q1 ‘21 and beating market expectations of 0.7% growth. The IHS Markit PMI increased to 49.9 in August from an 11-month low of 46.1 in July, when unrest and Covid-19 lockdown measures hurt the private sector. The current account surplus widened to R343 billion in Q2 ‘21, beating market expectations of R305 billion. It was the largest current account surplus since available records began in 1960. As a ratio of GDP, the current account surplus rose to 5.6% from 4.3% in the prior quarter. The FNB/BER Consumer Confidence Index rose slightly to -10 in Q3 ‘21 from -13 in the previous period, as the faster roll-out of vaccines along with government support for its employees helped to counter the civil unrest during July. The value of recorded building plans passed advanced 48.8% in July, the sixth straight month of increases. Mining production rose by 10.3% y/y in July, following a 19.1% jump in the previous month. It was the fifth straight month of rising mining activity, reflecting the gradual recovery from the Covid-19 shock a year before. On the flip side, the composite leading cycle indicator fell by 2.5% from a month earlier in July, following a revised 4.4% fall in the previous month. Retail sales shrank 0.8% y/y in July, following an upwardly revised 10.5% rise in June. It was the first decrease since March, probably due to the violent events across the country. Manufacturing production shrank 4.1% y/y in July, following a revised 11.9% jump in June. It was the first decline in factory activity after four consecutive months of expansion, likely linked to the social unrest that forced businesses to shut down.

Consumer price inflation rose to 4.9% in August from 4.6% in July, in line with market expectations. The annual core inflation rate edged up slightly to 3.1% in August, from 3.0% in the previous month. The South African Reserve Bank unanimously voted to keep its benchmark repo rate unchanged at 3.5%, as expected. The MPC revised its growth forecasts higher for 2021 (from 4.2% to 5.3%), but lower for 2022 and 2023 (to 1.7% and 1.8% respectively) and raised its CPI forecast slightly for 2021 (to 4.4% from 4.3%) but kept the outer years unchanged. Risks to its inflation forecast were assessed to be to the upside.