GLOBAL MARKETS
BREXIT MARKET TURMOIL CONTINUES

Repercussions from Brexit continue to be felt in the markets, as well as on the British political scene. The week saw the pound depreciate even further to 1.29/USD from 1.33/USD at the end of last week. In a continued flight to safety, the yield on the British 10y gilt fell steadily through-out the week to reach a low of 0.73% from 1.37% on the day prior to the Brexit vote.

The FTSE nonetheless held gingerly onto its gains post the Brexit turmoil, to trade roughly flat over the week. Despite that, the UK’s commercial property funds have been hard hit by withdrawals as investors fear that multinational companies headquartered in London might move to the continent. Many funds have seen their NAV reduce substantially, and a few closed-end funds have restricted trading and withdrawals to stem panic selling from the fall-out.

Politically, Theresa May and Andrea Leadsom are the candidates between which conservative party mem-bers have to choose to be the next prime minister of Britain, and on whose shoulders the negotiations with the EU will largely rest.

In the meanwhile BOE governor Mark Carney re-iterated that the central bank would do everything it could to protect the economy from the impact of Brexit, but warned that the financial implications of the event have begun entrenching themselves.

There is a real risk that the British economy might drift into recession over the next year, and to top it all, the IMF has downgraded the Eurozone’s economic growth to 1.6% and 1.4% for 2016 and 2017 respectively from 1.7% in both years. Clearly top-line growth is going to be hard to come by over the next few quarters, with the markets relying on ever lower bond yields to justify valuations.

Despite the bearish stance of the Fed post-Brexit, the US ISM manufacturing PMI numbers for June surprised on the upside at 53.2 above an expected reading of 51.3. In addition, after a rather poor reading in May, June’s US Payrolls numbers surprised heavily on the upside, printing 287k new jobs as opposed to the 180k expected. Markets reacted in a muted fashion as other key aspects of the report were softer. Nonfarm payrolls for April and May got revised downwards, and the unemployment rate rose from 4.7% to 4.9%. The upside surprise did little to increase expectations of a rate hike from the Fed. The jury remains out as to whether this signifies the beginning of grass roots growth for the US economy.

The Chinese economy continues to transition from a manufacturing to a services orientated economy. This continued to be confirmed when the June Caixin Chinese Services PMI (52.7) reached its highest level since July 2015 versus the Chinese Manufacturing PMI (50.3). The MSCI World index and the MSCI Emerging Markets index in USD terms returned -56bps and -85bps respectively for the week.

DOMESTIC MARKETS
SOMBER PICTURE FOR LOCAL ECONOMY

Economic news on the domestic front continues to paint a somber picture. NAAMSA figures released last week shows that vehicle sales growth contracted -10.6% against the expectation of -10.4% y/y. This was a result of lower vehicle exports to our main trading partners as well as fewer vehicle sales domestically.

Adding to this, Stats SA’s release of employment data for Q1 2016 indicates that 15000 jobs were lost. That means that employment fell by -0.2% q/q from an increase of 0.5% q/q in Q4 2015. The sectors mainly affected by job losses were transport, mining and manufacturing.

BER consumer confidence figures released last week indicate that South Africans are more pessimistic about the economic position of their country. This index disappointed coming in at -11pts for Q1 2016 against expectations of -8pts.

Additional disappointing data released last week was the Standard Bank South Africa PMI for June. A value of above 50pts on this index is a positive indicator of the economic health of the manufacturing sector. The reverse is also true, a value of less than 50pts is a negative indicator.

Unfortunately the 50.2pts in May was short lived as June’s PMI came in at 49.6pts, mainly due to declines in output, employment and new orders.

To add to our woes, the IMF downgraded South Africa’s economic growth outlook for 2016 from 0.6% to 0.1%. They are also expecting modest growth in GDP thereafter. The reasons given for downgrading the country’s growth outlook stems from an increase in global financial market volatility, a negative outlook on Chinese growth, and South Africa’s domestic political situation with municipal elections looming.

On the positive side, gold and foreign exchange reserves for June showed a surprise to the upside. Net reserves came in at $40.83bn, beating market expectations of $40.70bn, primarily due to a stronger Rand.

All in all, not one of the best weeks for South African economic statistics.

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