GLOBAL MARKETS
MIXED ECONOMIC SITUATION AROUND THE GLOBE

Cautious sentiment continued into last week after hawkish comments from the Chair of the Board of Governors, Janet Yellen. Reiterating these comments, the Vice Chairman of the Fed, Stanley Fischer, said the trajectory of rate hikes would be highly data dependent and that the US labour market is close to full employment. More Fed governors have therefore thrown their weight behind the sentiment that conditions for a rate hike have im-proved. With all the uncertainty around, emerging market currencies mostly depreciated on the whole, none more so than the Colombian Peso and the Malaysian Ringgit which fell 1.18% and 1.05% respectively.

In economic news, US core PCE price index for July surprised on the upside posting 1.6% y/y, above expectations of 1.5% y/y. This index measures the prices paid by consumers for goods and services excluding food and energy and is the Fed’s preferred measure of inflation. Furthermore, the Conference Board’s US consumer confidence measure for August increased to its highest level in a year coming in at 101.1 pts when expectations were for 97.0 pts.

Importantly, US ADP employment data for August surprised on the upside too, posting 177k when expectations were for 175k while US non-farm payrolls disappointed coming in at 151k when market expectations were 180k. With US economic data mostly surprising on the upside, the probability of a rate hike increased and the dollar appreciated against most major currencies ending the week at 1.12USD/EUR (+0.28%) and 1.02USD/CHF (+0.23%).

Across the Atlantic, economic news was mixed. The Eurozone economic and business confidence measure released by the European Commission, declined to 103.5 pts for August. This was less than the market expectation of 104.1 pts and signals the first sign that the Brexit vote may be starting to have an adverse impact on Europe. In the UK, consumer confidence for August came in at -7 pts, above expectations of -8 pts while the UK Market manufacturing PMI also surprised on the upside at 53.3 pts when expectations were for 49.0 pts. The weaker pound was the main factor causing this positive print. YTD, the pound has depreciated 9.58% versus the USD and ended the week at 1.33USD/GBP.

In Japan, the August consumer confidence index surprised on the upside at 42.0 pts, above expectations of 41.8 pts. However, industrial production for July disappointed at -3.8% y/y when expectations were for -3.0% y/y, which increases the chances that the Bank of Japan will ease monetary policy even further. Retail sales for July posted -0.2% y/y above expectations of -0.9% y/y with a rise in super-market sales as the main contributor.

Household spending also surprised on the upside for July posted -0.5% y/y when expectations were for a print of -2.3% y/y. The yen ended the week depreciating to 103.33 Yen/USD while the Nikkei 225 closed 3.52% higher.

DOMESTIC MARKETS
POLITICAL ECONOMY CONTINUES TO DOMINATE

SA’s political economy continued to affect the market this week. In latest developments, the probe against Finance Minister Pravin Gordhan is still on-going and no conclusion is in sight. Furthermore, National Treasury has requested cost supply contracts from Eskom, indicating a list of payments they made to Tegeta (mining operation owned by the Gupta family), which Eskom is refusing to furnish. These are both leading to increased uncertainty in the SA market and some investors are now no longer prepared to risk lending to State Owned Enterprises (SOEs), voicing governance concerns. This should increase the cost for SOEs to obtain funds in the open market, which could lead to less spending, lower growth and an increased probability of a sovereign debt downgrade come the end of the year.

On the economic front, budget deficit data released by National Treasury for July came in at -R73.16bn, lower than expectations of -R59.4bn. In other news, SARS released trade balance data for July posting a surplus of R5.2bn when expectations were for a larger surplus of R8.0bn. Exports dropped (-9.0% m/m) by more than imports (-2.4% m/m). The biggest declines in exports were in precious metals (-22% m/m) and wood products (-18% m/m) while the biggest declines in imports emanated from equipment components (-10% m/m) and machinery (-6% m/m), indicating that consumers are facing increasing pressure.

The Barclays PMI for August was expected to be at 51.0 pts. In the event, the manufacturing index disappointed at 46.3 pts. This was substantially lower than expected and was driven by exchange rate weakness during the first three weeks of last month. The primary sub-indices driving this print lower was an 11.9 pts fall in new sales orders followed by a fall in business activity (-4.7pts). Adding to the woes, Private Sector Credit extension (released by the South African Reserve Bank), posted 6.78% y/y for July when expectations were for 6.90% y/y. On the other hand, new vehicle sales, reported by NAAMSA, increased in August to 48146 vehicles when consensus was for a total of 44617, but still down 7.65% y/y since February.

The JSE All Share index ended the week flat (+0.06%) while the sectors that moved the most were Resources (-2.60%) and Industrials (+1.42%). The rand ended the week at 14.42/USD, depreciating 0.86%, mainly due to a stronger dollar (hawkish comments from the Fed) and the political uncertainty domestically. In the week ahead, key GDP and business confidence data will be released, which will be closely monitored by the market.