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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden (until 2pm) and Nick Fletcher

South Africa falls into recession, sending rand sliding – as it happened

Cityscape with Lionshead and Tafelberg, Cape Town, Western Cape, Republic of South Africa
Cityscape with Lionshead and Tafelberg, Cape Town, Western Cape, Republic of South Africa Photograph: Alamy Stock Photo

European markets end lower

Investors are being rather cautious ahead of Thursday’s UK election, ECB meeting and the testimony by ex-FBI boss James Comey. So most stock markets have fallen back again, while the dollar has hit a seven month low. Oil has recovered some of its early losses after the latest tensions in the Middle East, with Brent crude edging up 0.2% to $49.57 a barrel having fallen as low as $49.

The FTSE 100 has ended virtually flat, outperforming the bulk of its European peers, as the latest polls show a Conservative lead. The FTSE 250, hit by weakness in sterling, has lost 1%, its worst daily performance since the middle of April. The final scores showed:

  • The FTSE 100 edged down 0.81 points or 0.01% at 7524.95
  • The FTSE 250 fell 1.08% to 19,654.84
  • Germany’s Dax dropped 1.04% to 12,690.12
  • France’s Cac closed down 0.73% at 5269.22
  • Italy’s FTSE MIB finished up 0.19% at 20,760.01
  • Spain’s Ibex ended down 0.05% at 10,879.7
  • In Greece, the Athens market dropped 1.15% to 777.53

On Wall Street, the Dow Jones Industrial Average is currently down 21 points or 0.1%.

On that note, it’s time to close for the day. Thanks for all your comments, and we’ll be back tomorrow.

One of the big events on Thursday is the latest meeting of the European Central Bank, with president Mario Draghi expected to make a minor shift in the tone of the bank’s message. Marchel Alexandrovich, senior European economist at Jefferies, said:

On Thursday the ECB is widely expected to change some of the language around its forward guidance, but the implications of these changes are likely to be downplayed by Mario Draghi during the Q&A session.

In the last two meetings the ECB hinted that a further cut to the depo rate was unlikely – and we expect this position to be formally confirmed in the Monetary Policy Decisions statement. However, the shift to a more neutral policy stance with regards to interest rates will not affect the ECB’s other key messages: the depo rate will remain at present level until after QE comes to an end; and QE will carry on until the end of the year “or beyond, if necessary”.

All in all, the take-away is expected to be that while the ECB is taking a small step toward eventual policy normalisation, this process is not on a predetermined path. For the markets, Draghi is unlikely to provide any useful guidance in terms of when tapering may start, or what form it may take.

Draghi
Draghi Photograph: Emmanuel Dunand/AFP/Getty Images

Here’s the Reuters take on the US job openings figures:

U.S. job openings surged to a record high in April while hiring slowed, suggesting a recent moderation in job growth was the result of employers having difficulties finding qualified workers.

The monthly Job Openings and Labor Turnover Survey, or JOLTS, released by the Labor Department on Tuesday showed there were 6.0 million job openings on the last day of business in April, an increase of 259,000 from March. Hiring decreased by 253,000 jobs to 5.1 million.

Investors are shying away from risk at the moment, with precious metals and defensive shares reaping the benefit.

Gold is at its highest level in seven weeks, up $14 to $1293 an ounce, while silver is up from $17.54 to $17.68 an ounce. Jasper Lawler, senior market analyst at London Capital Group, said:

There has been a clear shift into haven trades to protect against any fireworks following key events on Thursday. Brits heading to the polls, central bankers deciding interest rates in Europe and testimony from FBI Director Comey all pose a threat. With three big events clustered in one day, it only takes one to go way to set things off.

Stocks mostly retreated with a tendency for more defensive areas of the market to outperform. Utilities, a typical haven when staying invested in stocks rose over half-a-percent on the Euro Stoxx 600 while most other sectors were lower...

A 1% decline in the FTSE 250 while FTSE 100 was essentially flat on the day was notable. Investors appear to be shunning UK domestic shares before the election. Within the broader FTSE 350, retail shares were biggest decliners, which are typically closely tied to the health of the British economy. While a Labour victory remains a distant outlier, polls would indicate a hung parliament is possible. The fear is that with the country entering at least two-years of economic uncertainty because of the Brexit negotiations, higher personal and business taxes under a new government could tip the economy over the edge.

US job openings higher than expected

And here are the job openings figures, and they have come in at a record high.

According to the Bureau of Labor Statistics, job openings rose from a revised 5.78m in March to 6m in April, the highest level since the survey began. But hires were weaker, falling from 5.3m to 5m while the quits rate edged marginally lower from 2.2% to 2.1%.

jolts

Last week’s US non-farm payroll numbers were much weaker than expected, but analysts agreed they were unlikely to prevent the US Federal Reserve raising interest rates next week. But some observers suggested they could slow down the pace of any further rises.

Another set of US jobs data is due shortly, and it is one that Fed chair Janet Yellen is known to pay particular attention too, even if it is not as well followed as the non-farm numbers. The Job Openings and Labor Turnovers Survey (JOLTS) gives another snapshot of the state of the employment market, with indications on job openings, hiring, layoffs and the quit rate. The latter in particular, if it is increasing, shows a more optimistic market, if employees feel confident enough to leave their jobs in search of new ones. However David Madden, market analyst at CMC Markets, said the job opening figure could see a decline on last month:

The expectation is for 5.65 million, and that compares with 5.74 million in March. This report will be of particular importance given the disappointing non-farm payroll figure last week.

Wall Street opens lower

Ahead of Thursday’s triple whammy of the UK election, European Central Bank meeting and ex-FBI director James Comey’s testimony, US markets are following the trend elsewhere and heading lower.

The Dow Jones Industrial Average is down 57 points or 0.28% while the S&P 500 opened 0.26% lower and the Nasdaq Composite lost 0.22%.

Meanwhile the FTSE 100 is down 0.26%, the FTSE 250 has fallen 0.95%, Germany’s Dax is down 1% and France’s Cac is 0.8% lower.

The weakness in the pound is a factor behind a drop in the FTSE 250.

At one point, the mid-cap index was on track for its worst day since November although it has recovered from its worst levels.

Even so, the index is down 0.9% and currently sitting at a near three week low as jitters about the UK election continue to unsettle investors. To be fair, the mid-cap index has been hitting new highs in recent days so the day’s fall needs to be seen in that context.

After a bright start to the morning, the British pound has taken a lurch lower.

Sterling is now down 0.2% today at $1.2875, as traders worry about Thursday’s general election.

Ken Odeluga, market analyst at City Index, says sterling is “coming under renewed pressure from polls showing the Conservative Party’s out-sized lead dwindling.”

Those polls have left investors scratching their heads. Last night, Survation released a phone poll giving the Conservatives a lead of just 1 percentage point.

Other pollsters have reported a much wider gap, with ICM putting Theresa May 11 points ahead.

And then there’s YouGov, whose controversial daily seat projections suggests the Conservatives will fall short of a majority.

Back in the UK, one of the bankers at the centre of the 2008 financial crisis is being spared from giving evidence about his actions in court.

A group of Royal Bank of Scotland shareholders have settled their claim that they were misled when they backed its rights issue in 2008, shortly before its collapse.

That means that Fred Goodwin, who lost his knighthood after RBS was nationalised, will not have to answer questions about the bank’s demise.

Here’s the full story:

South African Rand coins

The South African rand has slumped to 12.875 to the US dollar, down from 12.7 yesterday.

Lukman Otunuga, research analyst at FXTM suspects it could fall further:

Sentiment towards the South African economy took a hit on Tuesday following reports of the nation falling into a technical recession for the first time since 2009. The latest GDP data released by Stats SA showed that the economy declined by 0.7% in the first quarter of 2017 with all industries excluding agriculture and mining contracting. Despite this decline, there remains some optimism over GDP growth finding some ground and rebounding to 0.7% in the second quarter of 2017 amid the stabilizing economic data seen in recent months.

The South African Rand weakened following this news with the USDZAR edging towards 12.9000. Repeated weakness from the Rand should encourage a further incline towards 13.0000 on the USDZAR.

Updated

South Africa’s slide into recession piles more pressure on president Jacob Zuma.

Zuma was already feeling the heat over his links to the wealthy and influential Gupta family.

Last week, leaked emails purported to show that the Gupta family had used their friendship with Zuma to advance their business interests.

Zuma had previously repeatedly denied allegations that the Guptas had unfairly won state contracts, and even influenced the choice of government ministers.

Magda Wierzycka, CEO of financial services group Sygnia, says South Africa’s leaders need to focus on fixing its economy:

Read the full South African GDP report here

The full South African GDP report is online here.

This neat graphic sums it up:

South African GDP

Here are the key points from today’s South African growth report.

  • In the first quarter of 2017, both the secondary and tertiary sectors recorded negative growth rates. Trade growth shrank by 5.9% and manufacturing by 3,7%.
  • On the positive side, the agriculture and mining industries both contributed positively to growth in the first quarter, but not enough to avoid recession.
  • Trade experienced production falls across the board, particularly in catering and accommodation and wholesale trade.
  • Manufacturing found itself hamstrung by lower production levels in seven of its 10 divisions, most notably petroleum and chemical products (accounting for over 20% of the manufacturing industry). It was the third consecutive quarter of decline in total manufacturing.
  • The tertiary sector, which is make up of finance, transport, trade, government and personal services, recorded its first quarter of decline since the second quarter of 2009, when South Africa was in a recession as well.

Social media users in South Africa have been reacting to the news:

Emerging markets analyst John Ashbourne confirms that today’s growth figures are much worse then expected:

Statistics South Africa deputy director general Joe de Beer has confirmed that the country is in recession, saying:

“We can now pronounce that the economy is in recession,”

“The major industries that contracted in the economy were the trade and manufacturing sectors.”

Bloomberg is reporting that South Africa’s economy has been dragged into recession by political infighting.

That row saw the country’s respected finance minister, Pravin Gordhan, sacked three months ago, alarming international investors.

Bloomberg says:

While rains are helping Africa’s most-industrialized economy recover from a 2015 drought that was the worst since records started more than a century earlier, political uncertainty has hampered implementing reforms aimed at boosting growth. President Jacob Zuma changed his cabinet and fired Pravin Gordhan as finance minister in March, a move that saw the nation lose its investment-grade status with two ratings companies for the first time in 17 years.

“There is a risk that these contractions are not over and we could see another negative coming out in the second quarter of this year,” Annabel Bishop, the chief economist at Investec Ltd., said by phone from Johannesburg.

More here: S. Africa Has Second Recession in 8 Years as Economy Shrinks

The South African rand has has slumped by 1% on the foreign exchange markets, as traders react with alarm to the disappointing GDP figures.

South Africa falls into recession

The Johannesburg skyline.
The Johannesburg skyline. Photograph: Getty Images

Breaking: South Africa has fallen back into recession, for the second time in eight years.

South Africa’s economy shrank by 0.7% in the first quarter of 2017, figures just released show.

That follows a 0.3% contraction in the final three months of 2016; two consecutive quarters of contraction mean a recession.

The downturn was caused by a sharp contraction in trade. Manufacturing output also shrank, while government and household spending both fell too.

Government agency Stats SA has tweeted the key points:

It’s something of a shock. Economists had expected growth to rebound in the last quarter.

Details and reaction to follow.....

Updated

Risk aversion hits markets

European markets have weakened this morning, dragged down by worries over America’s economy and the diplomatic row between Qatar and its neighbours.

Despite the jump in eurozone investor confidence, all the main indices are in the red today.

European stock markets this morning
European stock markets this morning Photograph: Thomson Reuters

Risk aversion is gripping the markets, driving money out of shares and into gold and the Japanese yen.

Signs that the Britain’s general election race is tightening are also gripping the City.

Joshua Mahony of IG explains:

On a day which is largely devoid of major economic releases, the focus remains firmly fixed on Thursday’s blockbuster schedule and what it could mean for the future of politics either side of the Atlantic. UK election polls have been widely conflicting of late, reflecting the significant impact different methodology has upon results.

Previously we have seen the pound fall with any mention of a hung parliament, yet with the pound rising gradually over recent weeks, it is clear that the markets continue to foresee a Tory majority.

More eurozone data just landed, showing that retail sales crept higher in April.

Retail spending across the eurozone rose by 0.1%, weaker than the 0.2% which the City expects.

On an annual basis, spending was 2.5% higher than in April 2016.

Eurozone investor morale hits 10-year high

Breaking: Investors across the eurozone are at their most confident in a decade!

The monthly gauge of investor morale produced by Sentix has risen to 28.4 points this month, up from 27.4 in May.

That’s the highest reading since July 2007 (just before the credit crunch struck, triggering the financial crisis).

Investors reported that the current economic situation has improved, and they’re also more optimistic about future economic prospects.

The data suggest that Europe’s recovery is gathering pace, Sentix says:

The assessment of the current situation has climbed to the highest level since January 2008, underlining that it is not just ephemeral expectations, but increasingly hard data, that are driving the upswing in the eurozone.

UK rents fall for the first time since 2009

The cost of renting a home in the UK has fallen for the first time since the financial crisis, as the slowdown in the sector gathers pace.

Average rents were down 0.3% in May, compared with a year earlier, at £901, according to industry body HomeLet. This is the first annual decline since 2009,

Rents in London are 3% lower than a year ago; they’re also down in the North-East of England, the South-East, Yorkshire & Humberside, and Scotland.

It’s good news for tenants, but a painful time for landlords.

HomeLet’s Chief Executive Officer, Martin Totty, says:

“May 2017 saw average rents nationally fall for the first time in eight years when the economy had suffered the shock of the financial crisis. HomeLet rental data suggests landlords are now facing a difficult balancing act between ensuring rents are affordable for tenants in a low real wage growth environment whilst covering their own rising costs.”

Financial advisor Claire Walsh reckons Britain’s vote to leave the EU is now rippling through the economy:

The Japanese yen has hit a six-week high against the US dollar, as traders dash for safe-haven assets.

Russian intrigue and the looming UK general election are to blame, says FXTM chief market strategist Hussein Sayed:

In currency markets, the dollar fell to lowest levels in six weeks against the Yen.

This shouldn’t be surprising given the scale of event risks this Thursday, specifically UK’s general election and former FBI director James Comey testifying before the US Senate intelligence committee about potential Russian interference in 2016’s US election.

The weakening dollar is good news for the pound, which has gained 0.3% to $1.293 this morning.

US dollar hits seven-month low

The US dollar has fallen to its lowest level since Donald Trump won the US presidential election.

Investors appear to be increasingly anxious about the American economy, after learning yesterday that its services sector grew slower than expected in May. That followed Friday’s underwhelming US labour report, showing fewer jobs created than expected.

Markets are also bracing for potential bombshells on Thursday, when former FBI chief James Comey is due to testify to Congress. That appearance could provide more problems for president Trump.

As Reuters puts it:

It has been reported that Comey plans to testify to conversations in which U.S. President Donald Trump pressured him to drop his investigation into former National Security Advisor Mike Flynn, who was fired for failing to disclose conversations with Russian officials.

The US dollar against a basket of currencies
The US dollar against a basket of currencies Photograph: Thomson Reuters

A dishwasher.

Online electrical chain AO World has added to the gloom in the retail sector this morning, with an underwhelming set of results.

AO World, which sells domestic appliances as well as computers, has warned the City that sales will slow “significantly” between April and June, its first quarter. It said the tough trading environment in the UK that hit sales in the second half of last year had continued into its new financial year.

Its operating loss for the year to 31 March widened to £12m from £10.6m, as a £15.6m profit in the UK was offset by losses in Germany and the Netherlands.

The company was founded in 2000 by John Roberts, a former kitchen salesman, who ran the business as chief executive until February. When it floated on the stock market three years ago the shares soared – but soon dipped below the 285p offer price.

They are now worth just 136p, after tumbling by 6% in early trading today.

Brushing aside the difficulties, the new chief executive Steve Caunce said:

“We remain relentless in pursuing our goal to be the best electrical retailer in Europe.”

The agenda: UK retail sales slide as inflation rises

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

With two days to go until the UK general election, we have new evidence that parts of Britain’s economy are slowing.

UK retail sales shrank by 0.4% in May, according to the latest healthcheck from the British Retail Consortium. The report found that households are cutting back as rising inflation hits them in the pocket.

Worryingly, people have less to spend on discretionary items once they’ve covered essentials such as food.

Online sales -- typically a big growth area -- also slowed. They only rose by 4.3% during the month, compared to over 13% a year ago.

Paul Martin, UK head of retail at KPMG, said many shoppers are now suffering from falling real wages, leaving them less to spend in the shops.

“The impact of inflationary pressures on the nation’s purse continues to play out in this month’s figures, with shoppers evidently spending more on food and drink than on non-food purchases.

“With inflation continuing to rise and wage growth stagnating, consumers are starting to feel the pinch - although the highly competitive nature of the UK grocery market continues to play out in the consumer’s favour.

Here’s Katie Allen’s full report:

That’s set the tone for a rather subdued day, with many stock markets in Asia dipping and the US dollar coming under pressure.

The agenda:

Today we’ll find out whether eurozone retail sales kept growing in April, and whether investors across Europe remain confident.

  • 9:30am BST: Sentix’s eurozone investor confidence survey for June
  • 10:00am BST: Eurozone retail sales for April
  • 3pm BST: US Jolts report, showing how many job vacancies were created in America last month

Updated

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