Risk-off trade once again dominated the week, largely as a result of fears over Brexit with the referendum date on Thursday 23 June looming closer and further polls indicating that the UK is leaning towards leaving the Eurozone.

However, following the murder of Labour lawmaker Jo Cox and the halting of some campaigns, it seems sentiment may have turned back to the ‘stay’ camp so whichever the outcome; it is likely to be close.

Monetary policy decisions in the US, Japan and the U.K over the week also added to the risk-off environment but all three central banks decided to keep interest rates unchanged, highlighting the impact from Brexit as a significant concern. In reaction, safe haven assets and developed market bond yields benefited with both the Japanese and German 10 year bonds now trading around zero at -0.14% and 0.05% respectively. The US 10 year is also sitting near record lows, at 1.6%.

As mentioned, in the US the Fed kept rates on hold, noting that the jobs market has slowed (apparent in the recent poor non-farm payroll number) and that inflation expectations have also come down. While the median Fed forecast still indicates there will be two rate hikes this year, the market is pricing in much less of a chance.

If Britain decides to leave the Eurozone, this should have downward pressure on both US and global growth, making the likelihood of further rate hikes even lower.

In their monetary policy statement, The Bank of Japan also cited lowered inflation expectations as a concern as well as uncertainty surrounding EM and commodity currencies. They however made it clear that further easing could occur in the future and believe the economy “is likely to be on a moderate expanding trend.”

The Bank of England cited the possibility of Brexit as the “largest immediate risk facing the UK financial markets, and possibly also global financial markets.” Seven out of the ten most recent polls have indicated the ‘leave’ camp is in the lead but news flow over the weekend indicates this sentiment may have changed.

With risk-off trade dominating, DM’s outperformed EM’s over the week, the MSCI World and MSCI EM indices down -1.8% and -2.1% respectively. This upcoming week, all attention will be on the UK referendum and volatility can be expected.


In line with other EM and commodity based currencies, the Rand was once again on the back foot this past week as risk-off trade dominated. However, Friday saw a rebound in the currency as sentiment surrounding Brexit turned, with investors determining the likelihood of a leave probability lower than originally thought. After reaching a low of ZAR/USD15.32, the Rand closed the week 0.5% stronger at ZAR/USD 15.00.

The SARB released its Q1 2016 Quarterly Bulletin with the Q1 current account data coming in significantly worse than expectations. Consensus was for a narrowing of the deficit to -4.1% of GDP from -5.1% the previous quarter. In the event, the deficit instead came in at -5.0% of GDP. The underlying data indicated that the deterioration was largely due to invisibles account which offset a marginal improvement in the merchandise trade balance. The trade deficit narrowed from –R41bn in Q4 2015 to –R38bn in Q1 2016.

April retail sales were also released, coming in worse than expected. Consensus was for April retail sales to have moderated to 2.5% y/y from 2.8% in March. Instead, retail sales came in at 1.5% y/y. With inflationary pressures from a weaker Rand, higher interest rates and slow GDP growth, the consumer is likely to remain under pressure for some time.

Most local indices closed the week negative, with resources and listed property being the worst hit, the JSE Resource 20 and JSE Listed Property indices both down -2.3%.

In line with global markets, which will be focused on the upcoming UK referendum, the Rand and local markets can be expected to be highly reactive to whatever the outcome may be.


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