GLOBAL MARKETS
MONETARY STIMULUS DOMINATES SENTIMENT

Risk-on sentiment continued to dominate global markets over the week in the wake of further monetary stimulus, with both the Bank of England (BoE) and the Reserve Bank of Australia (RBA) cutting rates. The recent poor GDP numbers out of the US also aided the risk-on environment and emerging markets strongly out-performed developed markets over the week.

Friday saw a slight turn of events with US non-farm payroll numbers coming out significantly stronger than expectations of 180k jobs, with 255k jobs being created in July. However, with inflation still below the Fed’s 2% target, the possibility of weaker growth for longer and risks to the global economy, the market is still only pricing in a small chance of a rate hike in the US this year.

In the UK, the BoE cut rates by 25 bps to a historical low of 0.25%. While the rate cut was largely expected, they also announced a stimulus package of GBP 435bn in an attempt to further ease post-Brexit fears and stated that there is still capacity to expand easing (although a negative interest rate scenario is unlikely). The BOE did however down-grade their economic growth forecast for the UK for 2017 to 0.8% from 2.3%. This is the biggest downgrade in growth from one inflation report to the next and the cut is larger than that seen during the financial crisis in 2008.

A host of manufacturing PMI data was released, with that of the UK coming out worse than expected at 48.2 and reinforcing the view of an economy under pressure. However, in contrast to this, Eurozone manufacturing PMI for July came in ahead of expectations at 52.0. While this was slightly down from June’s number, manufacturing in the region remains in expansionary territory. China manufacturing also surprised to the upside, the Caixin PMI coming in at 50.6.

While EM markets (the MSCI EM Market Index) ended up 1.4% over the week, the MSCI World Index closed slightly negative at -0.3% w/w. Benefitting from the actions taken by the BOE, the UK was among the top performers, the FTSE 100 Index up 1.2% w/w.

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DOMESTIC MARKETS
RAND REMAINS TOP PERFORMING CURRENCY (YTD)

In line with other emerging market economies, the Rand continues to show strength as it becomes more and more evident that major central banks will continue to stimulate their economies and keep interest rates lower for longer. The Rand remains one of the top performing currencies year-to-date and with the focus this past week predominantly on the municipal election results, any SA specific strength can be viewed as expectations of an improved political economy. As the election results trickled in, the Rand got as low as ZAR/USD 13.63 at one point and appreciating 1.1% over the week, closed at ZAR/USD 13.70.

While it had been expected that the ANC was going to lose some ground in the municipal elections, a scenario of the ANC’s support falling below 55% was certainly not widely expected. Since 1994, the ANC has never got below the psychological 60% level in any national election and in the last municipal election in 2011, it gained 62% of the vote. However, the final outcome on Friday indicated that the ANC had gained only 53.9% this time around. This was in contrast to the improved performance of the DA which gained 26.9% (up from 23.9% in 2011) and the EFF’s 8.2%.

More specifically, the ANC lost significantly more traction in the main cities and retained only three of the eight metropolitan areas, while it seems the DA could do no wrong. Although marginal, the official opposition gained the majority in Tshwane with 43.11% against the ANC’s 41.22% but in JHB the gap was slightly larger with the ANC and DA at 45.85% and 37.21% respectively.

The DA however gained even further support in the Western Cape, now governing 63% of the province and strongly outperformed the ANC in Nelson Mandela Bay, gaining 46.71% of the votes against the ANC’s 40.92%.

The political parties now have until 22 August to form coalitions and we are likely to see alliances in most of the areas. Both the DA and the EFF have hinted that they are open to the possibility and while the likelihood of an alliance in Nelson Mandela Bay is unlikely, they will almost certainly have to consider this for JHB and Tshwane. The EFF has made it clear that they will not ally with the ANC at this stage but with policies radically different in some areas, it is going to be interesting to see if the DA and the EFF will be able to work together.

In conclusion, the peaceful conduct of the elections and the results indicate SA politics may be taking a turn for the better and the ANC is certainly going to have to step up their game ahead of the 2019 national elections if they hope to regain some of the lost ground. However, regarding President Zuma, the ANC has announced that they will collectively take responsibility for the results and hence members are not about to launch a campaign to recall the president.

With the elections out of the way, focus for the remainder of the year should turn to growth and advances made by businesses and government to avoid a sovereign downgrade. While confidence in the economy seems to have somewhat improved, any negative event will almost certainly impact the recent strengthening of the Rand.