ALL EYES ON NEW UK PRIME MINISTER
After the significant sell-off following the Brexit referendum, global markets continued to regain losses over the week with risk-on trades dominating on good numbers out of China and expectations of further monetary stimulus from central banks. The US also saw significant gains over the week, reaching record highs in the wake of the recent good labour data. As a result, US rate hike expectations have somewhat increased but the market is still only pricing in one rate hike this year.
In the UK, focus remains on Brexit with Theressa May being sworn in as the new prime minister and on whose shoulders the negotiations with the EU now rest. Her cabinet consists of, amongst others, Boris Johnson as Foreign Secretary, David Davis as Secretary of State of Exiting the EU and Philip Hammond as Chancellor. The cabinet is now in a position to lead the UK’s renegotiations with global trading partners.
At their monetary policy meeting, the BoE kept rates unchanged at 0.5%. This was in contrast to market expectations of a 25bp rate cut and in reaction, the GBP marginally regained some of its recent losses stemming from the Brexit referendum and the FTSE Index benefitted.
The market had expected the BoE to cut rates for the first time since 2009, largely based on comments from Mark Carney, the BoE Governor, who stated that “the economic outlook has deteriorated and some monetary policy easing will probably be required over the summer.” It seems the BoE may be waiting for more data before embarking on further stimulus and further light on this will be shed at the next monetary policy meeting scheduled for 4 August. The FTSE Index ended the week 1.2% higher and the GBP closed the week at GBP/ZAR 18.94.
In China, a host of data was released, all surprising to the upside and adding further momentum to the positive global sentiment. Q2 2016 GDP numbers indicated growth of 6.7% y/y against expectations of 6.6% y/y and retail and industrial production numbers for June were also released.
Retail sales rose 10.6% y/y (above expectations of 9.9% y/y) and industrial production 6.2% y/y (above expectations of 5.9% y/y). These figures again suggest the Chinese economy is moving away from construction and heavy industry towards consumption and services. With risk-on trades dominating market performance, EM’s outperformed DM’s, the MSCI Emerging Market Index and MSCI World Index up 4.7% and 2.3% respectively.
RESOURCES & FINANCIALS LEAD JSE HIGHER
In line with other emerging market and commodity based currencies, the Rand strengthened over the week and was one of the top performing currencies amongst its EM peers. Appreciating 1.4%, the Rand closed the week at ZAR/USD 14.32.
Possibly adding to the strong country specific performance, evidence is mounting that the Democratic Alliance (DA) may take three key metropolitan areas from the ANC ruling party in the upcoming municipal elections in August. The latest eNCA/IPSOS polls indicate that the DA is leading 34.7% to 31.0% in Johannesburg, 39.2% to 25.3% in Tshwane and 42.0% to 27.2% in Nelson Mandela Bay.
Mining and manufacturing production data for May was released. Whilst showing a slight improvement from the -6.9% y/y decline in April, mining production came out worse than expected at -4.4% y/y, marking the ninth consecutive month production has been in negative territory. Manufacturing production on the other hand came in better than expected; increasing 4% y/y, up from 3.1% in April and ahead of an expected 2.5% increase.
May retail sales were also released; coming in significantly stronger than expected. Retail sales increased 4.5% y/y against April’s revised increase of 1.6% y/y and ahead of expectations of 1.5%. However, given the nature of retail sales which tend to be fairly volatile, this strong umber should be read with caution as it stands in stark contrast to the recently released consumer-related data which illustrates a consumer under pressure and is not sustainable given the current headwinds such as rising interest rates and lower disposable income.
Benefitting from the risk-on environment, the JSE All Share Index closed the week 3.5% higher. The main sectors contributing to the large weekly move were Resources, the JSE Re-source 20 gaining 5.5%, and Financials, the JSE Financial 15 closing 4.6% higher.