EYES ON POSSIBLE DOWNGRADE FOR PORTUGAL IN EUROZONE
Emerging market currencies were mixed last week. The central bank of Brazil cut interest rates by 25bps to 14% on the back of falling food prices and warned that further cuts would only take place if inflation dropped and if there is successful implementation of fiscal reforms. The Brazilian real closed the week at 3.16/USD (appreciation of 1.18%) while the Mexican peso and the Hungarian forint both appreciated 2.09% and 1.69% to close the week at 18.60/USD and 283/USD respectively.
In the US, retail sales came in at 0.6% m/m for September, which was in line with expectations. US Industrial production increased 0.1% m/m in September, indicating that the US manufacturing sector is in expansionary territory despite a stronger USD negatively impacting exports. US CPI also increased in September at its fastest pace in five months with at of 1.5% y/y. This moves inflation closer to the Fed’s target of 2% and increases the likelihood of a rate hike.
US Fed vice-chairman Stanley Fisher and Boston Fed president Eric Rosengren both made hawkish comments last week. Eric Rosengren, a long-time supporter of low interest rates, changed his stance when he said that the time to raise rates is nearing. Stanley Fisher reiterated this when he mentioned that the employment level is near full and inflation has been rising towards the Fed’s target level. In the final presidential debate before the US election, pundits generally called it a win to Hilary Clinton.
The Mexican peso, which is highly correlated to the outcome of the US election, appreciated on the back of the presidential debate.
Eurozone CPI for September came in at 0.4% y/y and is the highest level of inflation since October 2014. The European Central Bank (ECB) kept rates at -0.4% as expected by the markets. Focus now shifts to Portugal as they face a potential sovereign downgrade to junk status. If they were to be downgraded, the ECB would not be allowed to purchase their debt as part of their Quantitative Easing program as only investment grade debt may be purchased. UK inflation for September came in higher than expected at 1% y/y (up from 0.6% in August), which was at its highest level since November 2014 and was owed to the weaker pound and the fading effect of falling oil prices. UK PPI for September rose the most in three years (1.2% y/y) when expectations were for 1.1%. The main contributors were from price rises in transport equipment, alcohol and tobacco.
In the east, Chinese GDP for Q3 2016 squared with expectations at 6.7%. This puts the Chinese economy in line to meet their growth target for the year but current high debt levels and the government’s attempt to slow down their fast growing property sector could have a negative impact. The MSCI World index and the MSCI Emerging Markets index returned 0.44% and 1.58% over the week respectively.
VOLATILITY CONTINUES AS POLITICAL NEWS WEIGHS ON SENTIMENT
Political news again contributed to market volatility. This time, the National Director of Pub-lic Prosecutions (Shaun Abrahams) invited Pravin Gordhan to apply for a review on the decision passed to prosecute him on fraud charges, which he turned down. The rand appreciated 1.90% to the USD over the week and closed at 13.98/USD. Additional volatility in the rand and on the JSE (the financial board especially) as news breaks in this case would not be surprising.
In economic news, Stats SA released CPI data for September. Markets were expecting a print of 6.2% y/y, up from 5.9% in August. In the event, CPI came in below expectations at 6.1% y/y. Expectations for core CPI in September were for an unchanged print of 5.7% y/y. This also came in lower than expected at 5.6%. The main contributions emanated from food and non-alcoholic beverages, housing and transport. The CPI data was followed by the release of retail sales data for August. Expectations were for retail sales to have moderated to 0.6% y/y from 0.8% y/y in July but the print of 0.2% y/y surprised markets substantially to the downside. The main positive contributions came from growth in medical goods, toiletries, food and tobacco but this sector is still unlikely to make a positive contribution to Q316 GDP.
The JSE All Share index ended the week 0.96% higher. The financial and resource boards were the largest contributors ending 2.31% (JSE Financial 15) and 1.70% (JSE Resources 20) higher while the JSE Small Cap index lost 0.73% and was the main detractor. The SA 10y Treasury bond (R186) closed at 8.79%, a drop of 4bps. In the week ahead, focus will be on Pravin Gordhan’s Medium Term Budget Policy Statement Speech on Wednesday as well as on PPI data to be released on Thursday.