Uncertainty once again dominated market performance this past week as investors internalized the weak US payroll numbers and the World Bank further downgraded their forecasts for global growth. In reaction, developed market bonds have found further support, with bond yields in the US, Germany, the UK and Japan all declining lower.

The US 10 year bond remains below 1.70% while the German Bund is at an all-time low of 0.02%. In Japan, the 10 year remains well in the negative at -0.15% .

According to the World Bank, global growth is now expected to be 2.4% for 2016, down from 2.9% previously. The Bank cited the main reasons for the revision due to weak growth in emerging and commodity exposed economies, low commodity prices and subdued global trade.

Copper has also fallen sharply on evidence of higher inventories, adding to concerns over global growth. Copper fell 3.8% over the week and is now down 4.1% year-to-date.

Brent crude on the other hand reached an 8 month high of USD 52/bbl with unplanned disruptions impacting supply. Amongst other factors, militant action against oil infrastructure in Nigeria and wild-fires in Canada are having the biggest effect.

In response to the weak employment numbers, Fed Chairperson Janet Yellen spoke at a conference in Philadelphia where she implied that the Fed would not raise rates in June, although a rate hike in July was not off the table. Overall, her message was positive, stating that she views the forces supporting employment growth and inflation to outweigh the forces hindering this.

She also cautioned against placing too much importance on a single month’s payroll report, implying that the Fed would continue with their strategy to gradually increase interest rates if the May number turned out to be an anomaly.

In her speech, Yellen also mentioned the challenges a Brexit may cause. The referendum is scheduled for 23 June and polls continue to indicate that the outcome is going to be tight. Leading up to the event volatility in the European markets is likely to remain.

With most markets ending the week in the negative, Europe was amongst the worst performers, the Euro Stoxx 50 Index closing -2.8% lower. EM’s outperformed DM’s, the MSCI EM and MSCI World indices up 0.9% and down -0.8% respectively.


In South Africa, markets started the week optimistically with the country having avoided a downgrade to junk status by rating agency S&P and risk-on trade from investors who believed rates would be lower for longer in the US.

However, following the poor global growth fore-casts from the World Bank along with other negative economic indicators, sentiment turned with most markets ending the week in the negative. After having reached an inter-week low of ZAR/USD 14.68, the Rand closed the week at ZAR/USD 15.24.

In addition to downgrading global growth, the World Bank reduced its forecasts for South Africa for 2016 to 0.6% from 1.4% previously.

Stats SA reinforced this view, releasing negative Q1 GDP figures which were significantly below expectations. Expectations were for a slight con-traction of -0.1% q/q but in the event, GDP came out at -1.2% q/q.

This equates to a -0.2% y/y decline. The fall in GDP was largely driven by mining, impacted by a large number of safety related stoppages as well as agriculture, the effects of the drought still evident.

Mining and manufacturing data for April was also released, both indicating the sectors remain under pressure. Mining production declined -6.9% y/y but this was better than expectations of -8.5% and substantially better than March’s number of -17.8% y/y. Manufacturing production also exceeded expectations at 2.9% y/y, well ahead of the -2% y/y the previous month.

On a more positive note, Fitch Ratings Agency left South Africa’s foreign currency credit rating unchanged at BBB-.

While a downgrade to junk status had not been expected, many had forecast the agency to downgrade the country’s outlook from “stable” to “negative.” S&P, who announced their credit rating for South Africa last week, have the country on a “negative” outlook.

Given the challenges of boosting growth and political tensions, the government is going to have to work hard to avoid a downgrade before the end of the year. However, it seems for now the agencies are giving SA the benefit of the doubt.


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