Fresh optimism over China and interest rates lifts markets higher

Global equities continued to claw back losses from earlier in the year, registering a second consecutive month of gains. The MSCI All Country World Index, a broad measure of global equity markets, gained close to 8% during November, as the US Federal Reserve (“Fed”) signalled that it may reduce the pace at which it is raising interest rates following a slowdown in US inflation.

The 7.7% annual increase in October’s consumer prices signalled that inflation in the US may be cooling at a pace sufficient for the Fed to lower the intensity at which it is trying to tame inflation through interest rate hikes. The prospect of the Fed reducing is aggressive hawkish stance buoyed market participants as the possibility of lower interest rate increases, at least in the near-term, led to sharp rises in stock prices. Towards the end of November, market sprits were lifted even higher, along with stock prices, following the announcement from Fed chairman, Jay Powell, which confirmed earlier suspicions, that the Fed may indeed slow the pace of interest rate increases. He also noted that the central bank is preparing to raise its benchmark rate by 50 basis points, a departure from four consecutive 75-basis point increases earlier in the year. The gains resulting from the positive sentiment surrounding interest rates led to the S&P500 Index rising over 5% during November.

Inflation in the Eurozone has also begun to show signs of easing having come in at 10.0%, lower than the 10.6% level in the prior month but more importantly, the first decline in price growth in over a year. The European Central Bank (“ECB”) is expected to continue on its path of raising interest rates at its next meeting in December but the slowdown in inflation may see the ECB follow the Fed in opting for a 50-basis point increase as opposed to the 75-basis point hike that it made in October. European equities reacted even more positively to a possible slowdown in interest rate hiking with sizable increases in major European indices such as the Dutch AEX (+8.3%), the French CAC 40 (+7.6%) and the German DAX (+8.6%). One notable area within Europe that continues to experience a rise in prices is the UK as its October’s inflation hit a four-decade high having come in at 11.1%. The Bank of England raised rates by 75 basis points during November but seemed to indicate that future rate hikes may not be as high as previously expected as the central bank anticipated a slowdown in inflation. As with other equity markets, UK equities reacted positively to the more dovish approach from global central banks with the FTSE 100 Index gaining 7.1% during November.

Following a torrid October, Chinese equities rallied forcefully, leading to the mainland CSI 300 Index gaining close to 10% during November while the Hang Seng Index returned a whopping 26.7%. Many regions within China have been placed into severe lockdowns for large parts of the year in accordance with China’s “zero-covid” policy. However, rumours swirling around suggesting that China had created a task force to consider the possibility of reopening filled the market with renewed optimism, lifting Chinese equity markets higher. Chinese authorities were however quick to quash such rumours and in an unusual turn of events, at least in the case of China, people have begun to protest against the strict Covid-19 policies with footage emerging of demonstrations in Beijing, Shanghai and various other cities. The continuation of lockdowns and civil unrest did not however lead to a reversal in gains as Chinese equities across the board, be it technology, financials or property, recorded major double-digit price moves during the month.

The South African Reserve Bank implemented a 75-basis point hike during November which means that South Africa’s prime lending rate now stands at 10.5% and is now above its pre-Covid level. Despite interest rates being set at their highest level since 2016, November was still a positive month for local equities as the JSE All Share Index registered a gain of over 12% for the month. Apart from the health care sector and one or two other exceptions, gains were fairly broad-based and there were notable increases in the stock prices of Naspers and Prosus, benefiting from the strong price performance of Chinese tech giant, Tencent. The stock price of luxury goods holding company Richemont also shot up during November, owing to renewed sentiment around China as well as from its release of better-than-expected half-year results. News of China possibly relaxing its zero-Covid policy led to a leap in industrial metal prices which resulted in resource counters surging higher during the month. Kumba was the standout, gaining close to 40%, and there were sizable gains across the platinum group metals cohort. The price of platinum rose 12% during the month benefitting the likes of Anglo American Platinum, Impala Platinum, Northam Platinum and Sibanye-Stillwater.

Another precious metal that enjoyed a positive month was gold as the price of the yellow metal increased 7% during November, rising above the $1,700 level before eventually closing at $1,754/ozt. Gold miners reacted positively to the price increase, leading to sizable gains in the likes of AngloGold Ashanti, Gold Fields and Harmony Gold.

One notable commodity that did come under pressure this month was oil. Despite the possibility of China relaxing the country’s harsh lockdown provisions, markets are concerned that the global demand for oil might fall as the odds of a global recession continue rise.  The net result was that the prices of Brent crude and WTI fell during November closing at $81 (-6.9%) and $85 (-8.4%) a barrel respectively.

The possibility of the Fed pivoting to a slightly more dovish stance might have been the reason for the US dollar’s weaker performance against other major currencies during the month. The US Dollar Index, a measure of the performance of the US dollar against other major currencies declined 5.0% during November and its performance against the rand was even weaker as the rand gained over 7% against the greenback eventually closing just below the $17 level. Year-to-date however the US dollar has still outperformed other major currencies by more than 10% though the rand had fared slightly better having only weakened a little more than 6% as at the close of November.

While the US dollar may have suffered a pullback during the month, cryptocurrencies, such as Bitcoin or Ethereum, were dealt an agonising blow following a scandal that quickly unravelled at one of the world’s large cryptocurrency exchanges, FTX. The company, which can also be somewhat likened to a brokerage in that it accepts and holds client funds, experienced a liquidity crunch and concerns over the solvency of FTX led to mass withdrawals by customers. Making matters worse for FTX’s major shareholder and the now former CEO, Sam Bankman-Fried, are reports indicating that client money from FTX was being siphoned off fraudulently to a trading company called Alameda Research, also owned by Sam Bankman-Fried. Contagion risk sparked a sell off in major cryptocurrencies as the prices of Bitcoin and Ethereum declined 17% and 23% respectively during the month.