The past week has been a very turbulent time for the markets, with many global benchmarks experiencing significant corrections, down over 10% since their previous highs. Although recovering somewhat towards the end of the week, year-to-date most markets are still in the red, the MSCI World Index being down 7.5% and the MSCI EM Index down 10.5%. While the start to the year has certainly been dominated by negative sentiment, the end of the week saw renewed hope following comments from the ECB suggesting further monetary easing and speculation over more stimulus out of China also playing a part. Nevertheless, 2016 remains set to be a bumpy ride. As participants square the likelihood of increased liquidity along with deteriorating fundamentals, there should be increasingly divergent views as to which way things will go.

In line with the trend of deteriorating economic fundamentals, the IMF has added to concerns by cutting global growth forecasts for 2016 and 2017 to 3.4% and 3.6%, both years 0.2% lower than their previous forecasts. The largest downward revision was for Brazil, forecast to grow at -3.5% in 2016 and 0.0% in 2017, down from -1% and 2.3% respectively. Largely owing to the decline in oil prices, Saudi growth was cut 1% to 1.2% and 1.9% for 2016 and 2017 and the US was also revised to 2.5% for 2016 (down from 2.7%). One bright spot in the IMF’s forecast was India, forecast to grow at 7.5% this year. Expectation for growth in China remained unchanged at 6.3% for 2016.

The rally in some markets towards the end of the week was sparked by ECB President Draghi announcing that due to updated macroeconomic projections, their monetary policy stance was under review and would possibly be reconsidered. Up until now, most market participants were only expecting further easing to occur in June but Draghi has all but assured that the ECB will take action in March. It seems the ECB is prepared to stimulate the region at all costs, fighting any headwinds the global economy may bring.

Oil also recovered over the week after reaching a low of USD27/bbl. However with oversupply dominating market fundamentals, oil is likely to remain under pressure for the near term. Even though production outside of OPEC is projected to drop by around 600k barrels of oil per day, Iran is expected to add 500k barrels per day now that sanctions have been lifted. In addition, demand is expected to decline due to the slowing Chinese economy and a stronger USD.


In China, the picture remains mixed. Fears of a slowdown continue to be at the forefront of investors’ minds but Tuesday saw a slight recovery in sentiment as China GDP numbers came in roughly in line with expectations.
Q4 GDP numbers indicated the economy grew at 6.9% y/y, broadly in line with the 7% target China was aiming for. In addition, data indicated that housing prices were up 1.6% y/y in December, the third month of consecutive increases. Perhaps the monetary policy stimulus in the country is slowly starting to have an effect and the “hard landing” many are expecting may be slightly softer than originally thought.



In their updated World Economic Outlook, the IMF cut South African growth forecasts for the next two years to 0.7% for 2016 (from 1.3%) and to 1.8% for 2017 (from 2.1%). In line with most major economic institutions, the IMF is of the opinion that emerging markets face near term headwinds, in particular those exposed to commodity prices and higher borrowing costs. South Africa remains in a dilemma, with rising inflationary pressures prompting further interest rate hikes in a struggling economy which cannot bear the increased costs associated with this.

S&P ratings agency also commentated on South Africa, stating that the country is on the verge of a ratings downgrade should any “policy mistakes” materialise. The comments come on the back of the dismissal of former Finance Minister Nene coupled with slow growth and a bleak macroeconomic outlook. All eyes will be on the budget statement in February for any signs of improved fiscal discipline.

December CPI came in as expected with both headline and core inflation printing at 5.2% y/y, up from 4.8% and 5.1% respectively. Despite the considerable depreciation of the Rand since November last year, the pass through effect does not seem to have yet been felt. For example, both clothing and vehicles saw little inflationary pressures. Food prices however (which contribute roughly 15% of the CPI basket) saw a material acceleration, rising 1% to 5.9% y/y. The risks to further inflationary pressures (both from the Rand and rising food prices) are therefore skewed to the upside, making it very difficult for the SARB not to react at their meeting on 28 January. The market is now pricing in 25 bps hike at the SARB meeting later this week.

November retail sales were also released, rising 3.9% y/y, significantly stronger than expectations of 2.8% y/y. While a solid number, retail sales tend to be volatile and the print should therefore be viewed with caution when assessing the consumer environment. The average consumer’s disposable income has certainly benefited of late from the drop in oil prices; however rising interest rates and inflation should both put negative strain on real income.

After a very poor start to the year, most local markets ended the week in positive teritory. Resources were among the top performers, the Resource 20 Index ending 3.8% higher. The JSE All Share Index and Top 40 Index were up 1.5% and 2.0% respectively.