GLOBAL MARKETS
DRAGHI KEEPS RATES ON HOLD IN EUROPE

News from Europe seemed to dominate global financial media this week, as many countries prepared to begin their summer holidays. Investors awaited the outcome of the latest ECB meeting to see if hawkish comments made in Sintra in June would be reiterated. In the end, cen-tral bank president Mario Draghi kept rates on hold and maintained the asset purchase target of EUR 60 billion. No expectations for the timing of a policy decision were set, but some analysts suspect an announcement may come in October after the committees are tasked in early September.

CPI CONFIRMED FLAT IN EUROPE, WEAKER THAN EXPECTED IN UK
Europe’s headline CPI for June was confirmed as flat MoM and 1.3% YoY, and core inflation was confirmed at 1.1% YoY, unrevised and up from 0.9% in May. In the UK, June’s headline CPI came in at 0.0% MoM, lower than the 0.2% expected, which pushed the annual rate down more than forecast to 2.6% YoY. Core CPI also fell to 2.4% YoY, returning to April’s print, after consensus was for no change. The fall was attributed to lower prices for clothing, recreation, food and alcohol.

EUROPE: EASING CREDIT, Q2 EARNINGS SEASON STARTS WEAKER
The Q2 ECB bank lending survey reported a net easing in credit standards for corporates as well as growing loan and CAPEX demand. Germany and the Nether-lands could see more easing in credit conditions, while Italian banks may see a net tightening. Corporate and consumer loan demand is expected to increase, but demand for mortgages may be slightly lower. Demand for fixed investment by corporates increased in the Euro area in the second quarter of 2017, particularly in Italy, Netherlands and Germany.

In terms of the Q2 earnings season, the quarter is off to a weak start. A recent study by Deutsche Bank noted that only around 20% of Stoxx 600 companies have reported so far, and only 47% of companies have beaten expected EPS. With the euro stronger by 4% during Q2, forex pressures are likely to hamper the Q2 beat ratio, and negatively impact full-year earnings expectations.

UK: BREXIT NEGOTIATIONS CONTINUE
UK newspaper The Guardian reported that the British cabinet will agree to the free movement of EU citizens for up to four years as part of a transitional deal. The article suggests that there is consensus in the cabinet for the deal, with the news likely to boost supporters of a softer Brexit.

US: MANUFACTURING SURVEY COMES IN LOWER THAN EXPECTED
The New York Fed’s empire manufacturing survey for July slipped 10 pts to 9.8, lower than the forecast of 15.0 pts, but remaining higher than the level seen in April and May.

JAPAN: BANK OF JAPAN KEEPS POLICY UNCHANGED
The Bank of Japan met this week, but there were no changes to policy. The policy balance rate was kept at -0.10% and 10y JGB yields will continue to be tar-geted at around 0.0%. The BoJ raised its assessment of the economy, but revised its inflation outlook lower. The BoJ’s 2% inflation target was again delayed, this time to around the 2019 fiscal year, from November 2016’s postponement to the 2018 fiscal year. Inflation forecasts for 2017 and 2018 were also revised lower.

DOMESTIC MARKETS
SURPRISE RATE CUT BRINGS SOME RELIEF

Making local headlines this week was the SARB’s surprise 25 bps cut in the repo, to 6.75%. Standard Bank analysts believe that even under fairly conservative assumptions, the SARB’s real repo rate will now be too high for at least the next 12 to 16 months, and that an affordable real repo rate is around 1.20%. A real repo rate that is too high is likely to boost rand strength – either because the current account compresses due to lower imports from weaker domestic demand, or because South Africa sees capital in-flows as foreigners are overcompensated. Even after the 25 bps cut and revised inflation forecasts (4.9% YoY in 2018 and 5.2% YoY in 2019), the SARB will still run an average real repo rate next year of 1.85%, which should support the rand.

JUNE’S CPI COMES IN LOWER THAN FORECAST
Statistics SA reported June’s CPI as coming in lower than expected at 5.1% YoY, down from 5.4% YoY in May. Core CPI remained unchanged at 4.8% YoY in June, reflecting a weaker exchange rate. Moderating inflation and revised inflation forecasts indicate that weak domestic demand continues, and may lead to further rate cuts later this year.

MAY RETAIL SALES EXCEED EXPECTATIONS
Retail sales for May came in better than anticipated at 1.7% YoY, from an upwardly revised 2.0% YoY in April. The Bloomberg consensus for May was a contraction of 0.3% YoY. Despite the positive data, weak economic fundamentals are likely to weigh on retail sales performance this year, and will result in lowering private consumption expenditure to the end of the year.

ESKOM RELEASES FINANCIAL RESULTS
Eskom’s financial results were released yesterday, which although not in themselves significant, are of interest due to the Minister of Finance’s 14-point “action plan” which outlined the need for relief. The results reflected increased revenue at the SOE, but showed declining profits and an alarming R3 billion worth of irregular expenditure.

POSSIBLE RESTRICTION OF MINING AND PERMITTING RIGHTS
Mineral Resources Minister Mosebenzi Zwane gazetted a proposal yesterday to limit the granting of new mining and permitting rights, as well as the transfer of mineral rights between companies. These proposals will not affect applications already in place, but will likely hamper growth in the mining sector if successful. The news follows the recent postpone-ment of the new Mining Charter, adding to uncertain-ty around the future performance of the sector.