GLOBAL MARKETS
FLIGHT TO SAVE HAVEN ASSETS SHORT LIVED

Risk-off trade dominated global sentiment as markets opened on Monday following an attempted coup in Turkey, which further demonstrated the uncertain geo-political climate in the middle-east. The flight to safe haven assets was however short lived, with developed market bond yields coming off recent lows and the German 10yr bund moving into positive territory for the first time since the Brexit vote. Gold ended the week down -1.1% and most equity markets closed marginally positive, the MSCI World Index up 0.4%.

In reaction to the attempted coup over the previous weekend, Turkey has now declared itself in a state of emergency, with President Tayyip Erdogan vowing to cleanse all “viruses” within the armed forces and to remove perceived enemies of the state. The three-month emergency status gives the president and his cabinet almost complete control to bypass parliament when drafting new laws and to restrict or suspend rights and freedoms, ostensibly to tackle a “threat to democracy.” In reaction, western leaders, including France and Germany, have raised serious concerns that the state of emergency will do exactly the opposite and is instead being used to acquire more power for the presidency.

Despite attempts by the Turkish finance minister to restore confidence in the economy, S&P downgraded Turkey’s sovereign credit rating further into non-investment grade territory. S&P now has both Turkey’s foreign & domestic currency at noninvestment grade, with foreign currency being rated at BB with a negative outlook and domestic currency at BB+.

The Borsa Istanbul Index was down almost 13% over the week and the Turkish Lira depreciated over 5% against the USD, hitting all-time record lows.

In the EU, the ECB released their monthly monetary policy statement, keeping European central bank rates on hold. In his statement, ECB president Mario Draghi announced that the Eurozone might benefit from a “public backstop” for bank rescues, sending the Eurozone bank index soaring. Draghi also commented on the Brexit situation, cautioning that large uncertainties still remain and that the world should be careful of relying on any forecasts until the negotiations have been completed. This was subsequent to the release of the IMF’s World Economic Outlook where it downgraded its global growth fore-casts for 2016 and 2017 to 3.1% and 3.4%, largely as a result of lower growth expected out of the EU and the UK.

More specifically, the IMF downgraded global growth to 3.1% (from 3.2%) and 3.4% (from 3.5%) for 2016 and 2017 respectively. This is however based on the assumption that the EU and UK negotiate a deal that does not lead to increases in economic barriers. Ac-cording to the IMF, if talks were to break down, growth could slow even further to 2.8% in both years.

Looking to the week ahead, focus will largely be on the Fed which will conclude its latest FOMC policy meeting on Wednesday. Whilst there is no expectation of a rate hike this time round, the market will be interested in seeing to what extent the door is open to a hike at the next meeting scheduled for September.

DOMESTIC MARKETS
INTEREST RATES REMAIN UNCHANGED

South Africa had a relatively quiet week with much of the attention being on global news flow. However, while the search for yield continues amidst a low global yielding environment, emerging markets remain beneficiaries as does South Africa. The Rand strengthened over the week and is now the top performing currency among its EM peers, both month and YTD. The Rand closed the week at ZAR/USD 14.33.

June CPI data was released, with both headline and core CPI increasing slightly but coming in line with expectations. Headline CPI increased to 6.3% y/y from 6.1% in May and core CPI rose to 5.6% y/y from 5.5% the previous month. The increases can largely be attributed to higher food prices, with food inflation rising 11% y/y. Subsequent to the CPI data prints, the MPC released their monetary policy statement, keeping rates on hold at 7%.

The committee indicated that they are cognisant of the growth pressures the economy is facing and while they still see upward inflationary pressures, the slight moderation of late has allowed them to pause in their interest rate hiking cycle. Risks to the inflation outlook however remain to the upside, especially from rising food prices and the possible negative impact of Brexit on global economies.

The JSE All Share Index closed the week slightly negative, down -0.2% w/w. Most sectors where positive over the week, however resources pulled the index down posting, -4.0% w/w (total return).