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Weekly Commentary - 12 March 2021

Weekly Market Commentary 

The End of Four Years Of Reaganism


What made the headlines...


South Africa's long-delayed R37bn Lesotho Highlands Water Project (LHWP) — facing funding pressures, Covid-19 delays and protests in the mountain kingdom — will begin water delivery under the next phase in 2027.  Started in 1984, the LHWP was designed to have five phases over 30 years and transfer up to 2-billion cubic metres of water annually from Lesotho to S.A.'s commercial hubs and industries such as Sasol and Eskom.


Water delivery under phase 1 started in 1996. Phase 2, which includes the 2.3-billion cubic metre Polihali Dam and a 1,200MW hydroelectric plant in Lesotho, was meant to be completed by 2020.  The department said the R60bn needed by the Trans-Caledon Tunnel Authority (TCTA), S.A.'s state-owned company responsible for the Lesotho project, will be generated through further debt issuance.


Kenyan legislators have ratified the country's trade deal with the U.K., despite concerns by some M.P.s on lack of room for further amendments and an ongoing court case against the agreement.  Under the agreement, Kenya will maintain its duty and quota-free access for its agricultural products such as tea, coffee, cut flowers, fruits and vegetables to the U.K. market.  On the other hand, import taxes on 82.6% of products originating from the U.K. will be abolished after 25 years.  A court case has been filed by small scale farmers who have complained of a lack of public participation.  The annual value of trade between Kenya and the U.K. is estimated between $638m-820m (£459m-590m).


The Paris-based research body, The Organization for Economic Cooperation and Development, now expects the world economy to reach pre-pandemic levels of output by the middle of this year, six months earlier than it expected when it last published updated forecasts in November. It now sees global output increasing by 5.6% in 2021, having declined by 3.4% in 2020. In November, it forecast global growth for this year of 4.2%.


The House of Representatives approved the $1.9tn (£1.4tn) relief bill 220-211 along partisan lines, with no Republicans voting in favour.  It is the most expensive single bill in U.S. history and delivered Joe Biden his first major legislative victory as president. The White House has said the president would sign the bill on Friday.


The final bill includes $400bn to fund $1,400 direct payments to most Americans and extends weekly jobless benefits until September.  It also allocates $350bn to state and local governments, some $130bn to school re-opening, $49bn for expanded Covid-19 testing and research, as well as $14bn for vaccine distribution.


At a bill enrollment ceremony, the House speaker, Nancy Pelosi, and the Senate majority leader, Chuck Schumer, celebrated the passage of the "historic" legislation. "So what do we say to America? We say to America: help is on the way," Schumer said.


In 1986 Ronald Reagan oversaw a significant tax overhaul, resulting in colossal inequality and a massive budget deficit. This orthodoxy held and dominated the political centre-ground. In 2017, Trump followed Reagan's lead with a $1.5tn bill that slashed taxes for corporations and the wealthy. 


Advocates for the American Rescue Plan bill say it will cut the number of Americans living in poverty by a third and reduce child poverty by nearly half. It contains, at $31bn, the biggest federal investment in Native American programmes in history. It also delivers the most important legislation for Black farmers in half a century, allocating $5bn through debt relief, grants, education and training.  Jim McGovern, the Democratic congressman who chairs the House rules committee, has said: "This bill attacks inequality and poverty in ways we haven't seen in a generation."


Biden's $1.9tn Covid relief bill marks an end to four decades of Reaganism. 




Global Weekly Commentary


South Africa


The economy is expected to rebound over the medium term with the rollout of a vaccination programme and the further easing up of restrictions. According to the February 2021 budget estimates, GDP growth of 3.3% is projected for 2021, moderating to an average of 2.2% in 2022 and 1.6% in 2023.


The sharp contraction (7%) in 2020 was mainly led by decreases in manufacturing, which contributed -1.4 percentage points based on growth of -11.6%; trade, catering and accommodation, which contributed -1,3 percentage points based on growth of -9.1%; and transport, storage and communication, which contributed -1,3 percentage points based on growth of -14.8%.


Stats S.A. announced that it would be publishing the quarter-on-quarter real GDP growth rate as the headline rate.


"The quarter-on-quarter annualised rate shows what the annual growth rate would be if the quarter-on-quarter rate were to occur over four consecutive quarters. During periods of steady economic growth, annualising is a useful way of expressing quarter-on-quarter performance in annual terms," Stats S.A. said.









However, during periods of economic instability such as Covid-19 annualising can be misleading because it exaggerates growth rates that are unlikely to be repeated. This was shown during 2020 when the second-quarter GDP contracted by 51% quarter-on-quarter, rebounding by an annualised rate of 66.1% in the third quarter.


The Rand Merchant Bank (RMB)/Bureau for Economic Research (BER) business confidence index for the first quarter of 2021 was released on Wednesday. It declined from 40 to 35 points - below the 50-neutral mark. About 1 300 businesspeople were surveyed during the second half of February when the peak of the second wave of Covid-19 infections had passed and adjusted lockdown level 3 restrictions were lifted.


The retail sector suffered the most significant decline – falling from 50 to 37. Among the contributing factors to the drop include "lingering" disappointment with Black Friday and festive sales, as well as weak sales volumes, especially for durable goods.


Manufacturing confidence declined from 31 to 25 points. Despite exports improving, domestic sales lost momentum, according to the report. Production was also hit by disruptions to supply chains.


New vehicle dealers' confidence also weakened from 41 points to 35.  "Although sales volumes improved marginally further in the first quarter, they remained depressed overall."


There was a slight deterioration in building contractors and wholesale traders' sentiment – each slid by one point to 20 and 58, respectively.


Notably, building contractors' confidence slid as growth in residential activity – such as the completion of projects and renovations – receded.


Confidence levels, although low, are still better than the massive slump in 2020 during the hard lockdown.





Italy's industrial production rose 1% from a month earlier in January of 2021, accelerating from a revised 0.2% increase in December and above market expectations of a 0.7% gain. Output rebounded for both consumer goods (1.2% vs -0.4% in December) and investment goods (1.4% vs -0.5%). Meantime, production of intermediate goods slowed (0.4% vs 1.2%), and energy output declined (-0.8% vs 3.1%). On a work-day adjusted year-on-year basis, industrial production fell 2.4%, following a downwardly revised 1.6% drop in December and compared to market consensus of a 4.6% slump. It was the 23rd straight month of declines.


Payroll employment in the French private sector declined 28,200 or 0.1% to 19.4mn in the fourth quarter of 2020, less than a preliminary estimate of 0.2% fall, mainly due to the COVID crisis. Payrolls in industry dropped 0.4%, a fourth consecutive quarter of decline, and those in market services also went down 0.4% (vs 2.4% in Q3). By contrast, employment in construction increased 0.7%, slowing from a 1.5% growth in the third quarter. Temporary employment continued to recover for the third consecutive quarter, rising 5.1%. Year-on-year, private payroll employment fell by 320,200 or 1.6%.


Germany's trade surplus increased slightly to €14.3bn in January of 2021 from €13.7bn a year earlier. Exports sank 8% year-on-year to €98.1bn, the most significant drop since August, and imports decreased by 9.8% to €83.8bn, the lowest value since August. Sales to the E.U. countries dropped 6%, of which those to the Euro Area countries declined 6.5%, and imports from the E.U. went down 5.9%, of which purchases from the Euro Area fell 7.4%. Shipments to third countries plunged 10.3%, namely those to China (-29%) and imports from those countries by 13.9%, namely those from China (-56.2%).  After calendar and seasonal adjustment, exports were 3.3% and imports 5.2% lower than in February 2020, the month before restrictions were imposed due to Germany's coronavirus pandemic.


For years, Ireland has encouraged multinationals to set up shop in the tiny country by offering low corporate tax rates. Big tech companies, from Facebook Inc. to Alphabet Inc.'s Google, have established glitzy regional headquarters in Dublin, while pharmaceutical companies such as Pfizer Inc. and Merck & Co.'s international unit MSD have set up big manufacturing plants.


Today, the booming profits from those sectors are generating taxes that help the Irish government pay for the costly lifelines it has thrown to much of the rest of the economy, which the pandemic has hammered. Overall, about a quarter of Ireland's workforce has been idled.


The Central Statistics Office (CSO) confirmed that Ireland experienced the fastest GDP growth in the developed world last year. Even after falling by 5.1% quarter-on-quarter in the fourth quarter, GDP grew by 3.3% in 2020, buoyed by a robust contribution from the multinational-dominated sectors of pharma and ICT. The dichotomy between the exporting and domestic sectors was never more extensive than it was in 2020; Output (Gross Value Add(GVA)) in the foreign-owned sector increased by 18% in 2020, while other domestic industries declined by 9.5%.


The foreign-owned sector now accounts for more than 50% of total GVA, up from 25% in 2014. In a year of domestic lockdowns, Ireland benefited from its world-leading positions in hosting the so-called largest companies in sectors that are considered the beneficiaries of the pandemic – pharma & I.T.


United Kingdom


The Halifax house price index in the United Kingdom rose 5.2% from a year earlier in February 2021, the smallest increase since last August and compared with market expectations of a 4.55% advance, pointing to a solid housing market following an extremely strong period of activity in the second half of last year.


The Confederation of British Industry's (CBI's) quarterly gauge of manufacturing optimism in the U.K. dropped to -22.0 in the first quarter of 2021, the lowest since an all-time low of -87 was hit in the second quarter of 2020, as manufacturers expect a sharp fall in output and new orders in the three months ahead. At the same time, stockpiling picked up ahead of Britain's departure from the E.U. "This appears to be linked to widespread COVID-related supply disruption, such as delays in shipments from abroad, a shortage of containers across the world, and knock-on impacts from disruptions to production over 2020," the CBI said. "Border challenges and customs-related delays arising from Brexit also appear to be playing a role," it added.


European Commission Vice President Maros Sefcovic said the British decision to take unilateral action on trade rules relating to Northern Ireland marks the second time Prime Minister Boris Johnson has declared his intention to breaching international law.  After a testing first two months of their new relationship, the move puts the U.K. and E.U. on a collision course.


Last September, the U.K. considered breaking the terms of the Brexit divorce agreement relating to Northern Ireland, only to back down. With a trade deal agreed on 24 December, the E.U. has less leverage now but can nonetheless start legal proceedings through the terms of the accord.




United States


The Labor Department reported that the U.S. economy generated 379,000 new jobs in February, well above forecasts. The unemployment rate dipped to 6.2%, a bit lower than estimates of 6.3%. Nearly all of last month's job gains came from the battered leisure and hospitality sector, as some states started to relax Covid dining restrictions in some areas.  The number of initial jobless claims climbed to 736.00K in the week ended 27 February 2021, less than market expectations for an advance to 750.00K. In the previous week, the seasonally adjusted number of initial jobless claims had recorded a level of 730.00K.


Congress looks poised to extend another $15.00bn in aid to beleaguered U.S. airlines — a reprieve for employees, but one that raises questions about the industry's final destination.


The Labor Department said its consumer price index increased 0.4% last month after rising 0.3% in January. In the 12 months through February, the CPI gained 1.7%, the most considerable rise since February 2020, after climbing 1.4% in January.  Economists polled by Reuters had forecast CPI rising 0.4% and advancing 1.7% year-on-year.  U.S. consumer prices picked up early this year as the economic recovery pace increased following a winter lull, buoyed by higher gasoline and energy costs.


Gasoline prices jumped 6.4% over the previous month, driving more than half of the overall increase, while electricity and natural gas prices rose 3.9%. New vehicle prices were flat, and used vehicle prices fell for the fourth straight month.  Total vehicle sales dropped to 15.67mn in February, compared with a reading of 16.60mn in the prior month.  Apparel and medical care costs both fell.






Business sentiment among workers with jobs sensitive to economic trends in Japan posted the largest rise in eight months in February, as the government began lifting its latest coronavirus state of emergency in stages amid a decline in infections.  According to a survey by the Cabinet Office, the diffusion index of confidence in current conditions compared with three months earlier among "economy watchers" such as taxi drivers and restaurant staff rose 10.1 points from January to 41.3.


China's exports spiked 60.6% on-year in the January-February period, well above analysts' expectations, while imports rose 22.2%.  The latest customs figures stand in stark contrast to last year's fall of around 17% in exports and a 4% drop in imports.  Electronics exports rose 54.1%, while textiles, including masks, rose 50.2%.  China's overall trade surplus came in at $103.3 billion, its customs administration said.


The consumer price index in China dropped by 0.2% year-on-year in February 2021, after a 0.3% fall a month earlier and compared with the market consensus of a 0.4% decline. Food prices decreased by 0.2%, the first drop in three months, with pork prices declining sharply (-14.9% vs -3.9% in January). Also, cost for non-food goods continued to fall (-0.2% vs -0.8%), mainly driven by transportation & communication (-1.9% vs -4.6%); clothing (-0.5% vs -0.2%); rent, fuel & utilities (-0.3% vs -0.4% ); household goods and services (-0.2% vs 0.0%); and other goods and services (-0.8% vs -0.9%). Meantime, inflation slowed for healthcare (0.3% vs 0.4%), but picked up for education (0.6% vs 0.0%). On a monthly basis, consumer prices rose 0.6% in February.


Retail sales in Hong Kong fell 14.5% year-on-year in January of 2021, the most significant decrease in 6 months amid the 4th wave of coronavirus and distortions in the Lunar New Year's timing. Local consumer spending typically attains a seasonal high before the Lunar New Year Festival, which fell on 12 February this year but on 25 January last year. Still, retail sales have been falling consistently over the previous two years due to the pandemic and social unrest. In January, the biggest decreases were seen in jewellery sales, watches and clocks (-45%) and clothing and footwear (-25.3%).


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