The upturn in global sentiment seems to have continued this week, with markets strengthening across
the board after a tough start to the 2016 year. Oil prices have also risen from their twelve year lows,
largely owing to rumours that OPEC and Russia are in talks to cut supply. Over the next few weeks,
central bank optimism is likely to drive sentiment, with further quantitative easing from both Japan
and the ECB expected. Focus will also remain on the US and the impact global markets are having on
the US economic outlook.
Oil is now trading at $35/bbl after reaching a twelve year low of $27/bbl. The recovery in the oil price is
largely due to speculation that an agreement will be reached between producers to cut supply. At the
World Economic Forum in Davos, Khalid al-Falih, chairman of the state-owned oil company in Saudi
Arabia, described the current oil prices as “irrational” and said that he expects the market to recover in
2016. While it was made clear that Saudi Arabia would not cut production unilaterally, he said that they
would be willing to cut production if other OPEC countries as well as some of the largest producers (such
as Russia) would do the same. However, he did note that there has been a structural shift in the oil
market with the introduction of shale oil in the US. Even if the OPEC countries and the likes of Russia do
agree to cut supply, this may not be enough to have a significant influence. In response, the vice president
of Russia’s second largest oil producer said they would not oppose joining output cuts as long as
they received political backing from their government.
While an agreement between oil producers is still far off, the talk of a deal has been enough to calm
markets and the price of oil. The World Bank is forecasting oil to average $37/bbl for 2016. This is down
from $52/bbl three months ago.
In the US, the Fed released a statement following their January FOMC meeting, which was slightly more
dovish than expected. The Fed have been consistent in stating that their decisions regarding further rate
hikes will be largely data dependent and in the statement they acknowledged that some economic indicators
have deteriorated since their last meeting. Inflation forecasts were downgraded and the Fed will be
keeping a close watch on global developments and the impact these will have on the US economy.
While a rate hike in March has not been ruled out, it seems the economic and financial picture will need
to improve significantly for this to occur.
In the Euro Area, any doubts of additional easing by the ECB have been all but implemented by Mario
Draghi who stated that the credibility of the ECB would be at risk if they failed to drive inflation higher
from the current level of 0.2% towards the 2% target.
Joining the easing party, the Bank of Japan (BoJ) announced that they too would be adopting negative
interest rates, lowering the rate on bank deposits with the BoJ to -0.1% (from 0.1% previously). This surprised
economists who were expecting the BoJ to leave rates unchanged. With a target inflation rate of
2%, the BoJ also revised inflation expectations downwards. It expects CPI to remain around 0% for the
This upcoming week, markets will look to the US payroll numbers, especially in light of the recent dovish
comments by the Fed. Attention will also be focused on data out of Europe with the Bank of England
and ECB due to meet during the week.
DOWNGRADE CONCERNS CONTINUE …
The SARB hiked the repo rate by 50bps, to 6.75%. In a markedly split vote, out of the six MPC members,
three voted for a 50bp hike, two for a 25bp hike and one member voted for no change; clearly illustrating
how difficult the current environment in South Africa is with regards to monetary policy. While the mandate
for the MPC remains an inflation targeting regime, voting members have a lot of other factors to take
into consideration. On the one hand they have rising inflation which needs to be contained but on the
other hand they have a struggling economy which will be further crippled by higher interest rates.
In their statement, the MPC pointed to a deterioration in its inflation forecasts, principally due to the sharp
depreciation of the Rand since the last MPC meeting as well as to higher than expected food price inflation.
Headline inflation is forecast by the SARB to average 6.8% in 2016 and 7% in 2017 (up from 6% and 5.8%
respectively). Inflation is forecast to peak at 7.8% in Q4 2016.
Aided by a more positive global sentiment, the markets have reacted positively to the interest rate decision.
The Rand strengthened 3.5% over the week, bond yields fell and equities ran, the JSE All Share rising 3.1%
over the week.
Prior to the SARB interest rate decision, S&P rating agency released another statement regarding their
outlook for SA. S&P reiterated its view that persistent slow growth impacted by factors such weak demand
for SA manufactured goods from Europe, low commodity prices, electricity shortages and subdued confidence
were major inhibitors to the country’s credit worthiness. S&P also warned that low growth combined
with potential needs of state owned enterprises posed risk to the country’s fiscal consolidation objectives.
Finance Minister Pravin Gordhan has promised to deliver a strong budget. The pressure is certainly on and
whether he manages to achieve this remains to be seen.
February will be an important month in determining the near term outlook for South Africa with both the
State of the Nation Address as well as the Budget Policy Statement on the agenda. While markets have
reacted positively to the SARB’s interest rate decision, there are still concerns of a downgrade by rating agencies
and strong focus will be on how the government plans to reduce the fiscal deficit and grow the economy.