Market focus for the first week of the month was once again on US payrolls. Following a sequence of relatively hawkish comments from the Fed in recent weeks, expectations for a near term rate hike have been on the rise.

Just over a week ago, speaking at Harvard, Fed Chairperson Janet Yellen announced that an increase in US interest rates would probably be appropriate in the coming months if the economy were to continue to improve.

She did note that inflation was still below the Fed’s 2% target, but attributed the slow rise towards the target mainly as a result of low oil prices and a stronger USD, which was impacting demand for imports.

In the event, non-farm payrolls came out significantly below expectations, with the fewest number of jobs added since September 2010.

Only 38 000 jobs were added in May, against expectations of 160 000. In addition, the past two months payroll numbers were revised downwards. The market sold off in reaction and the chances of a Fed rate hike in June and July are now very unlikely.

In the Euro Area, the ECB met in Vienna and kept rates unchanged and in line with expectations. ECB President Draghi continues to promote the need for low rates and in addition, commented on the possible impact of the Brexit referendum, which is scheduled for 23 June. Draghi reiterated his view that the UK economy would be better off if it remained in the EU but said that the Bank was ready for “any outcome.”

After various polls in the UK showing the “stay” campaign to be in the lead, a ICM/Gaurdian poll recently revealed a swing with voters split 52% – 48% in favour of leaving the EU. After the unexpected results in last years’ general election, there is a healthy scepticism that polls do not give an accurate picture. However what is clear is that it is going to be a very close outcome.

Also in Vienna, OPEC met to discuss possible oil production cuts but once again could not come to an agreement to reduce supply. As a result, Brent crude fell over 2%. It has since rebounded, and closed the week down -0.6%, trading just over USD50/bbl.

Markets had a volatile start to the month, with risk-on trades slightly dominating. EM’s outperformed DM’s, the MSCI EM and MSCI World indices up 1.0% and 0.2% respectively.


In South Africa, all attention was on the S&P rating decision, which was released after hours on Friday evening. Much to everyone’s relief, S&P decided to leave the country’s foreign credit rating unchanged at BBB- with a negative outlook, one notch above sub-investment grade.

In reaction, the Rand strengthened substantial-ly, gaining about 20 cents on the Dollar to ZAR/USD 15.10. The weak non-farm payrolls also aid-ed further Rand strength on the day, resulting in a 4% appreciation of the currency over the week and the Rand closing at ZAR/USD 15.13.

While South Africa has managed to maintain its investment grade status this time round, S&P is expected to review the country’s credit rating again in December.


The rating agency warned that its assessment could change if GDP growth did not improve in line with expectations or if political interference affected the government’s ability to implement its intended reforms.

The agency did however give South Africa credit for the strength of its institutions, including the media, public prosecutor and judiciary. Growth forecasts were revised down to 0.6% for the year (from 0.8% previously).

In addition to growth and institutional concerns, the agency added that government debt ratios could pose a threat to the country. However, a revision to a “stable” outlook was also possible if it observed “policy implementation leading to improving business confidence and increasing private sector investment”.

With the S&P rating review now out the way, this upcoming week’s attention will turn to the Fitch rating agency that is expected to make an announcement later this week.

Like S&P, Fitch have SA’s foreign currency one notch above investment grade, however they have this on “stable” outlook. Many are expecting the outlook to be downgraded to “negative” but a downgrade to non-investment grade is unlikely.