GLOBAL MARKETS
CAUTIOUS SENTIMENT AROUND THE GLOBE

This week began with cautious sentiment weighing on EM currencies and commodities. The rand trad-ed at 14.32/USD for the week, a depreciation of 6.31% while the Brazilian real traded at 3.27/USD (depreciation of 1.9%). Global markets were mixed with the S&P500 Index closing 1.42% up while the FTSE100 closed 0.27% down.

The main focus last week (and the main contributor to the cautious sentiment) was the Fed’s Jackson Hole annual symposium. The key theme was “Designing Resilient Monetary Policy Frameworks for the Future”, which focused on the options available to global central banks when the next economic slowdown arrives and interest rates are still at very low levels.

This is contrary to previous years where the main focus was on when and how the Fed would tighten their monetary policy. Markets were hoping that Janet Yellen, the Chair of the Board of Governors, would give key clues on immediate Fed policy and in the event, her comments indicated that there could be two possible rate hikes this year and that markets best start preparing for higher rates. These comments came as a surprise and the US market sold off as a result. This followed hawkish comments from FOMC governors Esther George and Robert Kaplin where they hinted that the case for tightening is strengthening. Meanwhile, the US existing home sales print for July came in at 5.39m when markets expected 5.55m.

This was the first monthly drop since February and the main cause was lack of inventory. On the other hand, headline durable goods orders for July surprised on the upside coming in at 4.4% m/m when expectations were for an increase to 3.4% m/m. US Q2 GDP grew 1.1% q/q as expected by the market.

In Europe, the German IFO survey saw the business climate reading fall 2.1 pts to 106.2, which was the largest decline since May 2012. Besides a stable sentiment from construction, there was negative sentiment broadly across the other industries which will likely weigh on their Q3 GDP estimates. However, in the UK, the CBI’s Distributive Trade Sur-vey revealed a big pickup in retail sales volume to positive 9pts from negative 14pts post-Brexit.

In the East, Japanese CPI inflation disappointed when it came in at -0.4% y/y, which increases the pressure on the Bank of Japan to take action next month. EM’s underperformed DM’s over the week with respective boards returning -0.98% and -0.33%.

Most global currencies underperformed relative to the USD after the hawkish comments from the Fed. The Swiss Franc and the Japanese Yen were the worst performing DM currencies, falling 1.62% and 1.48% respectively for the week and on the EM side, after the rand and the Brazilian Real (two worse performers), the Polish Zloty and Mexican Peso followed, falling 1.67% and 1.60% respectively.

DOMESTIC MARKETS
GORDHAN INVESTIGATION CAUSES FEAR IN MARKETS

Once again, political news was the cause of idiosyncratic risk for investors and a sharp depreciation in the rand (-6.31% for the week). In the event, the National Treasury confirmed that Finance Minister Pravin Gordhan has to present himself to the Hawks for further investigation into the rogue unit he allegedly formed at SARS when he was in charge. This caused fear in the markets, the R186’s yield spiked up to over 9% and the rand sold off aggressively.

In spite of the warning from the Hawks, Gordhan refused to heed so there is still a lot of uncertainty surrounding this, which will continue to dent business confidence. To add to these woes, the cabinet announced that President Jacob Zuma will oversee the presidential committee in charge of strategy of all State Owned Enterprises (SOE) and government interventions that are necessary. This will no doubt cause increased tension within government over the SOE’s (SAA and Denel in particular) and increase the probability of a sovereign downgrade to below investment status in December.

In economic news, the SA leading indicator released by the SARB for June increased to 91.6 pts from 90.8 pts in May, indicating an advance in the business cycle.

The main contributors were the number of building plans passed as well as the increase in the leading business indicators of SA’s main trade partners. However, the narrowing of the interest rate spread (difference between rate banks lend at and the rates they borrow at) and the decline in the average number of hours worked in the manufacturing sec-tor were both detractors. On the inflation front, the July SA CPI print came in at 6% y/y, down from 6.3% in June, while the July PPI printed 7.4% y/y, up from 6.8% in June.

The R186 (SA 10y bond) ended the week at 8.96%, while the R208 (SA 5y bond) ended at 8.44%. The JSE All Share index ended 1.45% higher, mainly supported by Resources (JSE Resource 20 up 2.99%) and Industrials (JSE Industrial 25 up 2.74%) due to the weaker rand. With added political uncertainty, the Financials board was the primary detractor falling 2.67%. This week sees the release of the SA Balance of Trade and the Manufacturing PMI prints, both of which will be closely monitored.