Market volatility spiked rapidly last week, which caused a bloodbath in the stock and bond markets, and we expect more of the same this week. The main factors pushing volatility are expectations of a shift in the global monetary policy direction and continued warnings from global rating agencies. 

Risk in the markets rose early last week after a host of poor Chinese economic data prints hit the wires. The optimism surrounding China’s reopening has all but faded and China’s economy is currently showing serious signs of stagnating. The weak Chinese data prints included weaker-than-expected growth rates for Chinese fixed asset investment, industrial production and retail sales results for the month of July. Additionally, the People’s Bank of China (PBoC) is the first central bank to switch monetary policy lanes as confidence across China’s financial markets is declining. 

The PBoC surprised markets with a 15-basis points rate cut to the medium-term lending facility, pulling rates from 2.65% to 2.5% last week Tuesday. The bank is also expected to cut the 5-year prime rate from 4.20% to 4.05%. The central bank also cut the 7-day reverse repo rate by 10 basis points to 1.8%. The woes in the Chinese housing market, slowing economic activity and a rising debt-to-GDP ratio has analysts warning of a balance sheet recession for China. 

The concept of a balance-sheet recession, which Richard Koo came up with in the 1990s, is simple. After asset markets turn from boom to bust, households and companies need to save to pay down debt. When they do it at the same time, no one spends, which sucks the oxygen out of the economy. In response, the government should step in as the borrower and spender of last resort. Adding fuel to the fire, Fitch Ratings has warned it may reconsider China’s A+ sovereign credit rating should its non-government debt liabilities balloon. The move to stimulate the economy suggests that Chinese policymakers are in a panic.

Turning our attention to Western monetary policy, the annual Jackson Hole Economic Symposium will start on Thursday. Every year, the symposium focuses on an important economic issue that faces world economies. Participants include prominent central bankers and finance ministers, as well as academic luminaries and leading financial market players from around the world. Global markets will be hanging on the lips of Fed chair Powell when he delivers his post-symposium speech on Friday for any clues regarding the way forward for monetary policy.

In terms of local data prints, the latest CPI figures for the month of July will be released on Wednesday. Expectations are for a year-on-year inflation print of 5.2%, down from 5.4% in June. The data from SA will likely do little to influence the rand due to the heightened global volatility which is driving risk-off sentiment which is rand negative. 

Lastly, geo-political attention will turn to our hometown, the city of gold, Johannesburg. The BRICS summit, hosted by SA, will commence on Tuesday and there is speculation that member countries will discuss alternative trade arrangements which will seek to lessen the dependence on the current dollar-based system for the member countries. Additionally, new member applications will be reviewed with a host of countries showing interest in joining the alliance. 

The first chart of the week is the Chines yuan. Much like the rand and other emerging market currencies, the yuan is under severe pressure from the dollar and the dovish stance from the PBoC is not helping its cause. The yuan is at risk of breaking above the 2022 high of 7.32. The yuan has depreciated roughly 8.80% against the dollar in 2023 and continued weakness could force the PBoC to sell US treasuries to support their ailing currency. Chart link: https://www.tradingview.com/x/xdPoinsn/

Looking over towards the big daddy dollar, DXY is holding levels above the 200-day MA of 103.20 which has switched from a resistance to support. The dollar is currently nearing overbought territory which could see the greenback pullback and re-test the 103.20 level. A break below 103.20 will allow the DXY to fall lower towards the 50-day MA level of 102.184. Thereafter the DXY will continue to make its higher towards the 38.2% Fibonacci retracement level of 107.01. Chart link: https://www.tradingview.com/x/vlGYcXfM/

The bonds bloodbath accelerated last week (remember when yields rise, the price of the bond falls and vice versa). US 10-year yields touched the 2022 high of 4.33%. The rise in bond yields is attributable to the US treasury increasing bond issuance (increasing the supply of treasuries) and investors demanding higher yields due to heightened inflation expectations. Continued upward pressure on US 10-year treasury yields will drive risk-off investor sentiment which is negative for risk assets such as equities. The Fed may have to step in as a buyer of last resort in order to suppress the treasury sell-off, basically reigniting quantitative easing in the form of yield curve control. Chart link: https://www.tradingview.com/x/Lii0ixgf/

US equities were on the ropes last week which saw the S&P 500 break below the critical 50-day MA support rate of $4,450. The break below $4,450 invalidates the expected move higher towards levels above $4,600. The next support level to watch is the 23.6% Fibonacci retracement level of $4,345 and $4,300. The index is however nearing oversold territory which could allow it to bounce and re-test the critical 50-day MA. Chart link: https://www.tradingview.com/x/nb3k9e8X/

Looking over at our beloved rand, the USD/ZAR seems to have completed a 5-wave impulse pattern. The pair will test the critical support of 18.96, the 61.8% Fibonacci retracement rate and a break below this level will allow the rand to pull the pair towards the 50-day MA rate of 18.44. If 18.96 however holds its ground, the rand will slide towards rates above 19.35. It is extremely difficult to make a call on the rand at the moment. Weak commodity prices and heightened global volatility will remain the main headwinds that keep the rand on the back foot over the near term. Chart link: https://www.tradingview.com/x/eMIxvh21/


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