US DOLLAR STRENGTHENS TO NEAR TWO-MONTH HIGHS
INTERNATIONAL MARKETS

May saw the US dollar strengthen to near two-month highs (against a basket of currencies), while European shares climbed and concerns grew around the UK economy after polls showed those campaigning for an European Union exit had taken the lead.

In the US, minutes from the US Federal Reserve’s (Fed’s) April policy meeting showed that policy-makers have kept the door open to raising interest rates this month if the US economy continues to improve.

Last week the US Commerce Department also revised its GDP growth forecast for the first quarter of 2016 upwards, driven mostly by better inventories and housing data.

In China, manufacturing activity data releases suggested the country’s economy was still struggling to regain traction while earlier in the month data on new lending, retail sales, industrial production and fixed-asset investment in China missed estimates.

In terms of the major global indices, the S&P 500 Index closed the month 1.5% higher, its third straight month of gains, while the Dow Jones Industrial Average (DJIA) advanced 0.1% compared to April and the tech-heavy Nasdaq Composite jumped 3.6% MoM.

Elsewhere, the FTSE 100 fell back 0.2% month on month, while the CAC 40 gained 1.7% and the DAX 2.2% month on month. China’s Shanghai Compo-site Index declined 0.7% month on month, while the Hang Seng Index dropped 1.2% MoM. In Japan the Nikkei ended May 3.4% in the green.

RATINGS DECISION DOMINATES
LOCAL MARKETS

The JSE All Share Index advanced for a fourth month in a row ending May 1.8% higher (year to date up by 6.3%) but the local currency did not have the best month as the latest rating by agency Standard & Poor’s weighed heavily on sentiment.

The downgrade did not happen in the first days of June but commentators noted that it remains a strong possibility for later this year. A downgrade by S&P Global Ratings would move the company’s assessment of the nation’s creditworthiness to below investment grade for the first time in 16 years and put South Africa in line with Turkey and Indonesia.

While foreigners were net buyers of South African bonds in the seven days to Wednesday, the longest streak of inflows in six weeks, investors still consider South Africa more risky than some junk-rated countries. The cost of insuring against non-payment of debt for five years using credit-default swaps is 53 basis points higher than for Russia, which is rated
speculative grade by both S&P and Moody’s, according to data compiled by Bloomberg.

The JSE performance was led by industrials with the Indi-25 closing at 5.9% higher compared to April. Year to date the industrial index stands at +3.1%.

The rand ended the month 10.2% down against the US dollar pressured by the rating by S&P, ongoing threats that Finance Minister Pravin Gordhan might be arrested and bleak economic data. Most alarming was the report by Stats SA that the economy lost 355 000 jobs in the first quarter of the year.

In addition disappointing manufacturing and mining production data was announced. Several economists are forecasting negative growth for the first quarter. The rand has lost 1.3% of value for the year to date.

Other sectors on the JSE did not fare as well as industrials – financial and resource counters retreated with the Fini-15 down 2.2% compared to previous month (-0.6% year to date) and the Resi-20 ending the month 2.7% lower (+23.5% YTD), its first month on month decline since January.

Some positive news made the headlines as Stats SA reported that the number of SA households connected to electricity supply increased from 77.1% in 2002 to 85.5% in 2015. Stats SA further reported that electricity generation increased by a relatively low 0.8% year on year in April 2016.

Moneyweb reports that the first five months of 2016 has been one of the quietest periods to date for merger and acquisition activity in South Africa. Continued political woes, concerns over falling oil prices, the slowdown in emerging markets and a cautious investment mood has upended investor confidence and created an uncertain economic climate.

A closer look at the transactions by JSE-listed companies for the year to date reveals a growing trend towards offshore expansion by those companies fortunate enough to be in a financial position to make acquisitions and so increase the percentage of earnings in hard currency. This is no mean feat when one considers that 79 of the 386 listed companies (20% of the market), have so far this year issued profit warnings.