Markets remain extremely nervous about the outlook for the global economy. This past week saw even further decreases in developed bond yields, the US 10yr reaching a low of 1.54% and the Japanese 10yr temporarily moving into negative territory. Negative bond yields essentially imply investors pay the borrower to lend them money. However, while developed market government bond yields are declining, the cost of protecting against default by non-investment grade companies has escalated to levels not seen since 2012. This is illustrated by the risk premium on the Markit CDS North American High Yield Index, a credit default swap benchmark tied to the debt of 100 junk-rated companies. The increase in the index further reinforces the uncertainty dominating global sentiment.

This past week gold rallied 5.5% as investors fled to safe haven assets. Since the beginning of January, gold has risen over 15% and is now trading at USD 1218/oz. In contrast, oil continues to suffer; fluctuating around the USD30/bbl level, putting the ratio of gold to oil prices at an all-time high. Although the oil price recovered somewhat towards the end of the week, comments at the International Petroleum Week, which brought some of the biggest oil industry leaders together, further confirmed that the price of oil is likely to remain lower for longer. While not everyone is in agreement, many at the conference warned that the oil price is unlikely to recover for some time, largely owing to oversupply.

In the US, Fed Chair, Janet Yellen gave her testimony in front of congress where she warned that turmoil in global markets could negatively impact US growth, in particular the slowdown in China and Chinese exchange rate policy. However, Yellen made it clear that while these risks should be carefully monitored, they had not yet materialized. She defended the decision to hike rates in December, stating that US policy remains accommodative and that gradual rate hikes would be implemented in such a way that would not constrain economic growth. Expectations for a Fed rate hike in the first half of the year are now low.

US retail sales numbers were also released, coming in better than expected. January retail sales rose 0.6% y/y against expectations of 0.3% y/y. This is a marked improvement on the -0.3% decline in December.

Despite a recovery towards the end of the week, most global markets ended the week in the red, the
MSCI World Index down 2.5% but slightly better than EM markets (the MSCI EM Index down 3.8%).
Amongst the worst performers was Japan; Nikkei 225 Index down 11.1% w/w and now down 21.4% YTD.


The main highlight of the week revolved around President Zuma’s State of the Nation Address (SONA) on Thursday night. After all the commotion finally settled down and members from the Congress of the People (COPE) and the Economic Freedom Fighters (EFF) left the National Assembly, Zuma managed to deliver his speech (an hour after the event was scheduled to start).

Given the recent warnings by credit rating agencies, expectations were elevated that the SONA would focus on the economy. Developments in recent weeks have led many to believe that the government may be pulling together to avoid a credit rating downgrade but in summary, while the address did highlight the severe implications of a credit downgrade and the need to boost economic growth, it failed to reveal any new confidence-boosting initiatives.

On austerity, some highlights revolved around cost cutting on wasteful expenditure within government and the nuclear programme, which is supposedly only going to proceed at a scale the country can afford. There was also a focus on the importance of partnerships between government and the private sector, the need to stabilise the labour market as well as issues facing some SOEs, in particular issues around management and financing, which need to be addressed. However, Zuma failed to identify how these objectives would be achieved.

For the remainder of the month, focus will be on what Finance Minister Pravin Gordhan has to say at the Budget Statement on 24 February. The rating agencies are primarily focused on the debt-servicing ability of borrowing entities, which means they will focus on aspects of austerity and on possible improvements to economic growth, which affects tax revenue. While it could have been much more specific in areas and in particular numbers, the SONA was a step in the right direction. The pressure is therefore now on Gordhan to follow through with how these are to be achieved and funded.

SA mining and manufacturing numbers were released, both indicating these sectors performed better than expected in December despite the continued slide in commodity prices and the recent PMI survey which hinted at ongoing strains in the manufacturing sector. Mining output slowed less than expected by -0.3% y/y against expectations of -0.9% y/y and manufacturing production rose 0.4% y/y (against consensus expectations of a 1.5% decline).

This upcoming week, focus will likely be on the January CPI numbers as the market seeks a clearer sense of the effect the drought and exchange rate have had on consumer prices. Expectations are for headline CPI to touch the upper end of the band at 6% (up from 5.2% in December).

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