GLOBAL MARKETS

Tensions between USA and North Korea continues. Geopolitical risk between North Korea and the US extended into last week. At the UN General Assembly, US President Trump threatened to “totally destroy North Korea” to which the North Korean leader Kim Jong Un referred to as reflective of “mentally deranged behaviour”. Towards the end of last week, safe haven assets began to rally as markets were expecting another hydrogen bomb test from North Korea over the weekend. This did not transpire, however, a war of words between Trump and Kim Jong Un continued. US equity markets broke into all-time high’s last week but closed off these levels as global risk rose. The S&P500 and the Dow Jones Industrial Average indices ended the week 0.08% and 0.36% up respectively.

Central banks had their say last week. In the run up to the Federal Open Market Committee (FOMC) meeting, markets were expecting interest rates to remain on hold and in the event, expectations were matched. Details of how the Fed would reduce their USD4.5tn balance sheet were eagerly awaited as was hints of which path they would take to normalise interest rates. Markets were surprised by the hawkish stance taken by the Fed. More specifically, they revealed the balance sheet run-off will begin next month. They went on to add that the hurricane destruction was unlikely to affect growth as spending and investment has been steady. Furthermore, slack in the US labour market has subsided meaning wages could push inflation even higher. With the increase in likelihood of another rate hike this year, the US 10Y treasury traded lower as its yield rose 0.06% to close the week at 2.26%. The USD strengthened against most major currencies and closed the week trading a 0.97/CHF (appreciation of 1.01%) and 1.35/GBP (appreciation of 0.74%).

Germany held elections on Sunday. The Christian Democratic Union (CDU) and its Bavarian sister party the Christian Social Union (CSU), led by current German Chancellor Angela Merkel, won 33% of the vote. Although it was expected that Merkel would remain in power, her winning margin was down from 41.5% in the 2013 election and lower than what polls were suggesting in the run up to the election. This was the party’s worst result since 1949.

The Bank of Japan (BOJ) keeps interest rates on hold with no changes to monetary policy. BOJ Gover-nor Haruhiko Kuroda stated it was too early to begin tapering quantitative easing, which bucks the trend of most other develop markets. On the whole, the BOJ maintained their upbeat view of the economy. This can be seen as a sign of their confidence in a solid recovery in Japan, which could lead to higher inflation without additional stimulus.

S&P Global Ratings agency downgraded China’s sovereign debt to A+ from AA-. Despite still being investment grade, S&P noted rising debt levels and a decrease in financial stability as their primary reasons for the downgrade.

UK retail sales came in significantly above expecta-tions in August. Worth noting, although the BOE kept interest rates on hold at their previous meeting (citing a constrained consumer as a primary reason), this print may signal that wage growth is starting to pick up in the UK resulting in higher disposable income. An interest rate hike may therefore be on the cards sooner rather than later. Inflation in the EU came in at 1.5% y/y in August vs 1.3% in July. This was the highest inflation figure since April and upon further investigation, a jump in energy prices led price levels higher. This increases the possibility that the ECB will taper quantitative easing at their meeting next month. The German 10Y Bund yield rose by 0.02% in accordance and ended the week at 0.45%.

DOMESTIC MARKETS

Interest rate remains unchanged in SA. Hawkish rhetoric was again on show last week when the SARB kept interest rates on hold at 6.75% as before the announcement, a 0.25% interest rate cut was priced in. In the event however, market participants were surprised by the announcement which led to the rand strengthening somewhat. The SARB then kept their inflation forecast unchanged at 5.3% y/y for 2017 but revised their 2018 and 2019 forecasts higher from 4.9% to 5.0% and 5.2% to 5.3% respec-tively. The higher inflation outlook was driven by the strong possibility that electricity tariffs will rise in the near future. Additionally, the SARB mentioned risks of further sovereign downgrades and the effects that would have on weakening the rand, and as such, cause inflation to rise.

MSCI Emerging Markets index (0.01%) underper-formed the MSCI World index (0.35%) last week in the risk off environment. The JSE All Share index closed the week 0.59% up. The industrial and finan-cial board led the charge higher by closing 0.67% and 2.00% up respectively while the resource board lost -0.41% over the week.

Higher petrol price drives higher inflation.…… Markets were expecting a figure of 4.9% y/y for inflation in August. In the event, the print of 4.8% came in below expectations even though it was above the 4.6% reported in July. Petrol prices rose the most due to a weaker rand in August and was the main cause of increasing price levels from July to August. On the other hand, food prices (with the exception of meat products) have been falling and is the most likely culprit resulting in the surprisingly low inflation figure.