| The podcast of the newsletter is available and you can download it HERE. We welcome all your input so please don’t hesitate to contact us if you’ve got any queries or suggestions. From this week we are going to be publishing a second podcast on Thursday mornings based on Dawn’s Wealth Ecology posts (which can be found on our website and on Moneyweb). These are going to be co-hosted by another advisor in our team, Liam Wright. Market Watch The JSE all share is holding steady, ending the week at 81,200.72, increasing by 1.5%. A strengthening Rand bolstered investor sentiment.  After having suffered losses for two weeks, the S&P 500 closed on yet another decrease. Despite strong earnings reports from some of the major tech companies, such as Microsoft, Meta, Nvidia, and AMD, the market was not impressed by Intel and Amazon’s earnings. The S&P 500 is headed into August under heavy pressure as weak employment data piles onto the market’s fears of a future recession.   FED and rate cuts As widely expected, the Fed left rates unchanged at 5.50% and will continue reducing its holdings of Treasury securities, agency debt and agency MBS by $60bn a month. There was no update of its economic projections, and only marginal changes to its statement, which was therefore more hawkish than expected. However, Powell very clearly put a September rate cut on display in the press conference. Overall, recent developments in inflation and unemployment seem to warrant a rate cut ahead. However, inflation could still prove sticky. How many rate cuts we see in 2025/2026 is really going to depend on who wins the White House – and sentiment around that has clearly done a 180 in the last couple of weeks. Trump is looking every one of his 78 years and sticking to his equally tired playbook. The spotlight is back on him, and on Wednesday he had to be hauled off stage by his team after making gaff after gaff at the Association of Black Journalists National Convention .  Commodities – critical minerals Demand for critical minerals such as copper, cobalt, lithium and nickel is soaring. These raw materials are used in a range of new technologies, from electric cars to wind turbines, which are becoming ever more important as the world moves towards a green transition. Experts forecast that this trend is set to accelerate, with global production of cobalt, graphite and lithium set to increase nearly six-fold between now and 2050 (World Bank). China accounts for around two-thirds of the world’s processing/refining capacity for critical minerals. While the extraction of these materials takes place all around the globe, China currently accounts for more than half of the world’s refining of aluminium, lithium and cobalt, around 90% of that of rare earth metals and manganese and 100% of that of natural graphite. In addition, more than a third of the world’s copper and nickel processing is carried out in China.  While China is in the lead for critical minerals production, the nation is losing its dominance. For example, the United States and Australia have increased their production of rare earths from 2010 onwards and most recently, Myanmar and Thailand have started to mine far more than before. This area is obviously a ripe opportunity for Africa. Zambia have identified this with its massive deposits of Copper. Africa needs to do much more in terms of vertical integration of the manufacturing/refining process and move away from just exporting the raw materials. Government needs to get out of the way and let private enterprise get on with it, we don’t want a repeat of the Total gas fiasco. The Bloomberg Commodity Spot Index (BCOMSP) has wiped out all gains so far this year. After peaking in late May (+12%), the index quickly slipped into negative territory by late July. This downward pressure on BCOMSP stems from faltering economic growth in China, which has sparked concerns about falling demand for agricultural goods, crude oil, crude products, copper, iron ore, and other essential commodities. Some traders are on high alert, fearing a potential repeat of a 2015 China slowdown.   US stocks, AI and cooling winds Wednesday last week was rough day for the US stock markets, let’s unpack it: * AMD related which was up more than 10% and presumably helped rally almost 15% adding more than $300 billion of market cap. * Microsoft, MSFT, gaining traction from the immediate post-earnings reaction as their conference call did a lot to soothe investors – a nice turnaround in a market that has been punishing “misses * The Fed. Yields moved down across the curve, even though the Fed didn’t cut rates, and only signalled that September was a possibility, not a done deal. (Donald is not going to like that, but with the reinvigoration of the Democratic race the FED might want to be on the right side of the race. If Donald does win, Powell will likely get a pink ticket). * Relief rally from what has been a few tough weeks for stocks, buy the dippers being enticed back in, and some chatter about money on the sidelines moving in from money funds now that rate cuts are in sight. * Not only are we getting buyback announcements, but as companies make it through their earnings, they are able to enter back into discretionary buybacks and may view recent dips as great buying opportunities. * Powell didn’t commit to September, but with the market likely to be pricing in close to 100% certainty it would take some unusually strong numbers on either inflation or employment to have them not cut. How much might he cut by? Probably 25 bps, not 50bps. Steeper cuts are likely to come later – after the US election is over. * The Fed seems more comfortable with the employment situation than many in the market. This is a big potential wildcard – if employment deteriorates more rapidly than the Fed is expecting (or is priced into the market), but the Fed feels handcuffed and cannot commit to easing quickly in response to employment data (they are still afraid of inflation returning). Poor jobs data can quickly turn the soft landing into a far bumpier ride. * The Japanese Yen, has broken below 150 for the first time since the middle of March. Improving 7% versus the dollar in 3 weeks could have some repercussions for anyone funding positions with Yen. That was listed as a reason for stocks declining a few weeks ago, and is worth paying some attention to. (See Cobie’s piece below). * While events in the Middle East didn’t affect markets , there is once again increased risk of an escalation directly between Iran and Israel . We have some more earnings to get through, and it really does seem like “get through” is the watchword, as opposed to being an excuse to rally like they have been in some prior earnings cycles. * The Mag-7 are showing all the classic signs of topping out – moving sideways with significant volatility. You can see this in the graph below.   Bonds We often talk about “Boring old Bonds” here and on our podcast – for a good reason. They are the backbone of almost all of our income-generating portfolios (here in RSA) and in the US they have finally awoken from their decades-long slumber where they generated a paltry 50bps or less and have increased in yield several times over into the 400-500 bps range. The norm is for funds to flow into bonds when equites soften – but equities have been on a 12 year bull run, so they’re thrashing out the ‘new normal’. Last week the Fed announced that the quarterly refunding would be $125 billion, with issuance raising $14 billion in new cash from private investors, as follows: • $58 billion in 3-year notes • $42 billion in 10-year notes • $25 billion in 30-year bonds Note the emphasis on short-term bonds – the FED is trying not to ‘lock in’ the historically high interest rate for decades – interest has to be paid on those bonds and the bill is getting uncomfortably high. This is all part of the “great Monetisation” that has become a familiar topic in these newsletters.  The refunding total is just shy of the record $126BN first reached in Feb. 2021; auction sizes across the curve began rising in 2018 to finance tax cuts and surged in 2020 to finance the federal pandemic response. Many US dealers have said in recent weeks that the Treasury will have to bump note and bond sales higher again given the fiscal outlook as the US continues to run its largest federal deficit outside of crisis times, a deficit which will only get much larger regardless of who the next US president is. Marketable Treasury debt outstanding has already grown to $27 trillion from about $12 trillion a decade ago; and total US debt just hit an eye-watering $35 trillion last week.  Chips The US announced last week that plans to exempt semiconductor equipment makers in Japan, the Netherlands, and South Korea from the upcoming Foreign Direct Product rule targeting China’s tech complex. This rule will be introduced next month and aims to restrict the export of products utilizing American tech to about six Chinese chip manufacturing facilities. This is yet another sign that US-Sino relations continue to deteriorate amid the ongoing tech/AI war between the two superpowers. The new rule will halt the exports of semiconductor manufacturing equipment from certain foreign countries to Chinese chipmakers. However, with shipments from Japan, the Netherlands, and South Korea, excluded, this sent shares of Dutch chip equipment manufacturers ASML (+6.5% in EU trading) and ASM International (+5.5% in EU trading) and in Tokyo, Tokyo Electron (+7.4% in Tokyo trading), all higher. The news also forced a bid in semiconductor stocks tracked by the iShares Semiconductor ETF (SOXX), which was up nearly 4% in premarket trading in New York. You can see that it has been cooling down for months now – indicating that this sector is starting to saturate and mature. Investors might be mistaken in thinking that non-US chipmakers will be able to pick up the slack in exports to China. The only reason we can think of why the US would exclude SPEs made in the Netherlands, Japan and Korea is that those countries will likely conform to its demands for stricter export policies to China without the US needing to resort to invoking the Foreign Direct Product rule (self-regulation)  Japanese Bonds Much has been written about the Japanese economy and we have touched on its realities but often it is quite misunderstood. Last week, the Bank of Japan (BOJ) hiked their short-term policy rate to 0.25% and announced that they would cut back on the purchase of their own bonds which over time has artificially kept bond prices high and yields depressed. The net effect of this is higher yields as bond prices fall. The central bank is aiming to keep inflation going forward at the 2% level (not unlike what the Americans are trying to achieve) which as you can see from the chart below has been a real struggle. The economy after its property market deflated in the 90’s has battled to get going again. Japanese Inflation  Ultra-low rates have allowed the man in the street to afford debt and it has artificially weakened the Yen against the Dollar as yield-seeking capital left its borders. The latter was welcomed by policy makers as this allowed for a strong export market. But this status quo is now changing. Japanese real rates are still negative with current inflation at 2.8% and the policy rate at 0.25% which means that the BOJ can easily continue to hike rates which ultimately could make their bond market an attractive investment destination, something it hasn’t been for decades. As a matter of fact, the Japanese have been exporting their cash for a long time. They have been buying foreign bonds at higher rates with Japanese foreign bond holdings in US-denominated bonds amounting to over a trillion dollars. European bonds held by the Japanese are well over $300 billion. These purchases have been executed by swapping Yen for a foreign currency and then hedging out the currency risk. This trade has mostly worked in the past but hedging costs have gone up and this has made this trade unprofitable with Japanese investors looking to exit. This can only put pressure on US bond prices. It also takes away an important client for the US Treasury which is hoping to refinance its debt as it comes up for maturity. it is for this reason that bond markets hold more risk than what is exhibited through current rates and the direction of future rates. Bond mechanics are broken, and the great monetization is best left to policymakers to fight out. As Japan emerges as a yield-positive environment, it will now start competing like other countries on a yield basis. During the week the FED in the US decided to keep rates constant between 5.25% and 5.5%. They hinted to an imminent drop in rates. For now, the US is providing to be a better environment for yield-seeking investors but as they drop rates and the Japanese hikes rates perhaps all of this changes… only time will tell. Author:- Cobie Legrange EXCHANGE RATES:  The Rand/Dollar closed at R18.26 ( R17.95, R18.23, R18.20, R17.91, R18.37, R18.90, R18.87, R18.42, R18.26, R18.43, R18.51, R19.09).  The Rand/Pound closed at R23.28 ( R23.32, R23.34, R23.00, R22.63, R23.37, R24.18, R23.98, R23.46, R23.11, R23.80, R23.22, R23.62)  The Rand/Euro closed the week at R19.94 (R19.58, R19.74, R19.49, R19.14, R19.67, R20.59, R20.42, R19.97, R19.08, R19.86, R19.92, R20.35)  Brent Crude: closed the week down at $77.56 ($85.03, $83.83, $84.86, $85.22, $82.30, $79.91, $81.73, $82.16, $83.43, $82.73, $82.82,$87.39)  Bitcoin closed at $61,903 ($59,760, $56,814, $61,436, $65,635, $ 66.975, $71,257, $68,362, $69,391, $66 328, $60,880, $63,154, $64,135). Articles and Blogs: Should you change your investments with changing politics? NEW Taking a holistic view of your wealth Why do I need a financial advisor ? Costs Fees and Commissions The NHI and what to do about it New-Normal for Retirement? Locking-In Interest rates – The inflation story Situs – The Myths and Reality Tax Residency – New Rules new headaches Are retirement annuities dead A new look at retirement Offshore investing – an unpopular opinion Cobie Legrange and Dawn Ridler, Rexsolom Invest, Licensed FSP 45521. Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za Website: rexsolom.co.za, wealthecology.co.za |