Last week was a tremendously turbulent week in the financial markets. Markets had to digest weaker-than-expected manufacturing PMI results from China at the start of the week which ignited risk-off investor sentiment. The risk-off feeling was amplified on Tuesday after the Fitch ratings agency downgraded US government debt from AAA status to AA+ which sent US bond yields and the dollar soaring while riskier assets such as the rand and stock were left reeling. Fitch Ratings cited rising debt at the federal, state and local levels and a “steady deterioration in standards of governance” over the past two decades for their decision.
US Treasury Secretary Janet Yellen came out in full force and stated that the decision to downgrade was “arbitrary and based on outdated data.” Yellen said that the US economy has recovered well from the pandemic recession, with the unemployment rate near a 50-year low, and the economy expanding at a 2.4% annual rate in the April-June quarter. The week was closed out with a weaker-than-expected US non-farm payrolls print of 187 thousand for July which saw the dollar give back some of the gains it made earlier in the week. Coupled with the deteriorating US labour market conditions in July, both the US manufacturing and non-manufacturing ISM PMI results came in lower than expected. It seems as if the “mild recession” previously forecasted by the US Federal Reserve may very well still be in play.
The spike in volatility will most likely persist this week with the latest US CPI and Chinese CPI and PPI figures being the headlining data prints. Higher than expected CPI figures will support the narrative that US interest rates will remain higher for longer while weak inflation figures could ease the risk-off investor sentiment from last week. Locally the latest mining and manufacturing results for June will be released.
To kick off this week’s chart pack we’ll start by highlighting the volatility in the biggest market in the world, the US debt market. US 10-year yields flew past 4% following the Fitch rating downgrade. The US 10-year yield managed to close the week above the psychological 4% mark despite the aggressive drop following Friday’s weaker-than-expected US non-farm payroll report. As long as yields remain above 4%, the target will be the 2022 high of 4.328%. Another leg higher in US yields will not bode well for risk assets.
The DXY managed to test levels above the 50-day MA resistance level of 102.380 but the dollar sell-off on Friday, following the non-farm payrolls report, strengthened the resistance level. The 50-day MA level is the level to watch. A break above it will allow the DXY to test the 200-day MA level of 103.573. Technically, the MACD is still holding a buy signal for the dollar while the RSI has room to move higher before hitting overbought zones. There also seems to be a textbook 5-wave impulse pattern for the dollar which could push the dollar higher.
The rand’s fortunes turned last week. Despite being hit with a sea of risk-off sentiment, the weaker-than-expected SA manufacturing PMI results for July strengthened the tides which washed the rand out onto the shore. The break above our previously mentioned critical rate of R18.00/$, the 200-day MA, sent the rand packing which saw the USD/ZAR pair test levels above the 50-day MA rate of 18.51. The dollar sell-off on Friday luckily strengthened the 50-day MA resistance rate which allowed the rand to pull the pair to a weekly close of 18.44. It is extremely difficult to take a position on the rand at the moment.
A break above the 50-day MA resistance will see the rand slide to 19.14, the 23.6% Fibonacci retracement rate. On the flip side, a failed break above the 50-day MA will allow the rand to pull the pair back towards the 200-day MA. The rand’s direction will be dictated by how markets digest the latest US CPI results and how they will impact interest rate expectations and investor sentiment. For now, markets seem to be risk-off which is rand negative.
Looking over at the US equity market, the S&P500 index experienced a sharp sell-off last week which saw it drop to the bottom of the current upward channel. The index is forming a 5-wave pattern which could allow the index to climb higher towards $4,650.00 if the current track holds its ground. A break to the bottom of the current channel will however see the index slide lower towards the 50-day MA support rate of $4,400.00.
Similarly, the JSE all-share index tumbled by just over 2.50% but the 50-day MA support rate of R71,250.00 held its ground. The current risk-off sentiment will however continue to weigh on equities which could see the index re-test the 200-day MA support of R70,000.00.
The recent bounce in Brent crude oil is at least one positive sign for commodity prices which have been suppressed so far in 2023. Crude broke above the 200-day MA resistance of $81.50 per barrel and this rate will now serve as a support. A break above $87.00 per barrel will allow crude to climb higher towards the 38.2% Fibonacci retracement level of $93.62 per barrel.
