The focus of the week was once again on central banks, with both the Fed and the Bank of Japan (BoJ) reporting on their monetary policy stances. In line with expectations, the Fed kept rates on hold but the BoJ, who had been expected to cut, surprised the market by keeping rates on hold and introducing only a limited monetary stimulus plan.

In a statement released following the latest FOMC meeting, Fed chair Janet Yellen indicated that while they had decided to keep rates on hold, a hike could still be on the cards this year and possibly as early as September. However, she cautioned that while “near-term risks to the economic outlook have diminished” and that the labour market has some-what improved, they remain on guard for renewed global turbulence. On inflation, they have a slightly more dovish stance, stating that survey measures have changed little and inflation remains below the desired 2% target level. US Q2 GDP numbers were also released, coming in significantly worse than expected at 1. The market is now only pricing in a small chance of a rate hike in December.

Contrary to expectations, UK Q2 GDP figures surprised to the upside at 0.6% q/q, above Q1’s growth of 0.4% q/q. In addition, EU confidence indices also came in ahead of consensus, surprising given the uncertainty stemming from the implications of Brexit on the region. However, the recently released UK manufacturing PMIs have slipped below the desired 50pt benchmark and business confidence in July fell significantly below June’s number.

This suggests that the UK is in for a tough time over the next few months and the economic consequences of Brexit on the economy will therefore likely only be visible in Q3 and Q4 this year. In the week to come, the BoE will meet to discuss their monetary policy. A rate cut from 0.5% to 0.25% is expected.

The results of the latest European Banking Authority (EBA) tests were published on Friday night and showed only Banca Monte di Paschi di Siena out of the 51 covered banks had a negative fully loaded Common Equity Tier 1 capital ratio (CET1) at year-end 2018 under the EBA’s adverse economic scenario. The good news is that 49 out of 51 banks were above 6% on this same CET1 measure. The fact that there were no nasty surprises came as a relief. There are also moves afoot to recapitalise Banca Monte di Paschi. Most banks were in the solvency region of where analysts had expected them with maybe a few micro surprises. However, the adverse stress test did not model the effects of Brexit on the European economy, neither did it account for a prolonged period of negative interest rates. We thus continue to watch this space with interest.

Despite the uncertainties surrounding Brexit which have dominated attention over the month, most markets have recovered any losses, ending the month significantly stronger. The MSCI EM index slightly outperformed the MSCI world over the week, up 0.9% and 0.5% respectively.


In line with other emerging market currencies, the Rand appreciated strongly against the USD over the week as the search for yield continues among a low yielding environment and expectations of a rate hike by the Fed remain lower for longer. The positive sentiment was further added to by the South African trade balance which came out significantly stronger than expectations. Trading at levels not seen since early November, the Rand has appreciated 11.5% against the USD year-to-date and breaking through the ZAR/USD 14 level, closed the week at ZAR/USD 13.88.

The SARB released its leading indicator for June which was dragged down for another consecutive month, further reinforcing the picture of a deteriorating environment with other indicators such as vehicle sales and business confidence also on the decline. Stats SA also released the Q2 unemployment rate which slipped marginally to 26.6% with 5.634mil people being unemployed.

On a more positive note, both June PPI and private sector credit extension (PSCE) numbers exceeded expectations. PPI rose 6.8% y/y up from 6.5% in May and PSCE credit extension rose 7.3% against expectations of 7.1%. However, while an improvement, PSCE still remains week relative to the past three years.

While equity markets over the week were not particularly strong, most indices ended the week positive with resources (the JSE Resource 20 Index) up 3.3% and now up 24.6% year-to-date (total return). The JSE All Share Index closed the week slightly down -0.4% and is up 5.5% year-to-date. Looking to the week ahead, all eyes will be on the results of the municipal elections.