Date published -2023-07-04
Happy US Independence Day! Last week markets ended the second quarter of 2023 on a high note as stocks (and risk assets in general) rallied strongly. The key catalyst to the ‘risk on’ scenario last week was better than expected macroeconomic data (for more see economic section below). Friday's trading session was particularly strong with all eleven of the S&P 500 sectors ending in positive territory for the day led higher predominantly by tech stocks. For Q2, the Dow Jones closed +2.5%, the S&P 500 + 7% and the NASDAQ + 13.3%, taking year to date gains to 3.8%, 16.4% and 32.8% respectively. Nike fell over 5% from its intraweek highs (ending the week 1% higher) after releasing weaker than expected quarterly results which missed on earnings despite meeting revenue forecasts.
The JSE also ended the quarter on a high note last week although the longer-term picture paints a slightly less rosy picture than global markets. Year to date total returns on the JSE All share clocked in at a paltry 5.86% with the large cap Top 40 faring marginally better at 7.23%. The rand has also weakened around 11% on a year-to-date basis implying that when measuring the returns of local investors in dollar terms, local markets went backward.
In company specific news, Naspers released results that showed an operating loss for the year ended March 2023 of $1.338 billion. The groups e-commerce operations continued to lose money. The rally in the share price more recently (+13% last week) is largely a product of the unwinding of the cross-holding structure (and the resultant discount to Net Asset Value). Financial services group Alex Forbes (+5.6%) released a strong set of results for the year ended March 2023. The company showed operating income +8%, headline earnings +22% and a 35% increase in dividends.
In the real estate sector, we had an update from MAS Real Estate (+2.7%). The company indicated that tenant turnover was up 29% from pre pandemic levels, indicating a strong performance in its central and Eastern European operations. The company continues to dispose of properties in Germany and the UK as it focuses on managing its balance sheet. Staying with real estate, Hyprop (+2.4%) put out a decent set of numbers. Interestingly, the company indicated an increase of 8.6% in trading density in South Africa versus an increase of 18.7% in its Eastern European operations. This highlights an interesting regional trend across the two companies with Eastern Europe appearing to be a standout region.
In the resources space, Exxaro (+4%) put out a pre close announcement for the six months to June 2023. The company has been hurt by lower demand from Eskom as well as being impacted by bottlenecks at Transnet which have hurt their exports.
This week is relatively quiet on the earnings front with trading sessions in the US shortened by the 4th of July holiday.
This week's feature chart is a winning position we have been riding for just over a month. More cautious traders may want to consider a partial profit take or closing the position and waiting for another entry as the risk/reward ratio deteriorates.
Despite the rally in stocks on Friday, there was a fair amount of position squaring given both the end of the second quarter of 2023 as well as an upcoming holiday in the US meaning many market participants may have taken a long weekend.
It was a data heavy week in the US last week. U.S. housing data came in stronger than expected and coupled with hawkish commentary from US Federal Reserve speakers, resulted in an increased concern around the possibility of further hikes from the US central bank at its July meeting. Encouragingly, all large U.S. banks passed the US bank stress tests on Wednesday. We indicate to our subscriber what we think we should watch for from the US banks now.
The week ended with stronger than expected US GDP data for Q1 2023 as well as lower than expected inflation data from the US. The Fed's preferred measure of inflation, personal consumption expenditure (PCE) index increased by 3.8% in May from 4.3% in April. There are interesting trends when considering the drivers of inflation which we highlight in our full report.
South Africa's trade balance for May recorded a surplus of R10.2 billion, significantly above consensus estimates of R6 billion as well as April's number of R 4 billion. Exports rose by 12.3% with a strong performance from the agricultural sector. Imports rose at a slower 8.7%, leading to a wider surplus overall. A wider trader surplus is generally viewed as positive for the rand and offerred some marginal support later in the week.
Other economic data for South Africa was less encouraging. We had consumer confidence fall further to -25 points, the second lowest reading on record since 1994. A combination of interest rate hikes, the electricity crisis and currency depreciation all acted as headwinds to sentiment indicators.
The economic data calendar is quite light this week but tail heavy. The key focus will be on the release of the FOMC minutes around mid week shedding some light on the Fed’s deliberations and thinking at the last meeting. This is followed by the release of the US employment data on Friday. Domestically in addition to PMI data, we have vehicle sales, and foreign exchange reserves data.
In total – our market carousel now has 2 open long positions (down from 3) with both being in a partial profit take stance. We maintain 3 open short positions (down from 4) across an assortment of equity, FX and commodity markets. We now hold 5 ‘No Position’ stances (from 3 last week) after closing out 2 speculative positions albeit above our stop loss levels. Our trade ideas this week include a domestic stock (long), a global stock (long) and a global in-sector pair trade!
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