WEEK IN REVIEW – 08 APRIL 2016

GLOBAL MARKETS
GLOBAL CONCERNS RETURN

AFTER A RELATIVELY SOLID MONTH IN MARCH, THE FIRST WEEK OF APRIL SAW A RETURN TO NEGATIVE SENTIMENT AND VOLATILITY, WITH GLOBAL GROWTH CONCERNS ONCE AGAIN BEING AT THE FOREFRONT OF INVESTORS’ MINDS.

The change in sentiment comes largely on the back of continued weak economic data prints, as well as mixed messages from the Fed regarding the US economic recovery and the uncertain trajectory of interest rates. However, the end of the week saw a return to risk-on trade as commodities rebounded and Brent crude rallied above the USD42/bbl level.

Oil prices rebounded on the news that major producers could reach a production agreement at the April 17 meeting, even if Iran does not participate. A bullish report on US crude inventories also helped sentiment. Brent crude closed the week 8.5% higher.

Following rather dovish commentary from Fed Chairperson Janet Yellen towards the end of last month, the Fed released their March FOMC minutes which indicated that it is divided as how to proceed with US monetary policy.

Although all but one member voted for no change in the Fed funds rate in March, there was disagreement about when the next rate hike would be, with some members clearly more hawkish than others.

The next FOMC rate decision will be at the end of April and while the market is not expecting a hike this early, a small chance in June remains priced in.

In the EURO AREA, the monthly monetary policy meeting was held, revealing wide-spread agreement among the Governing Council (GC) to maintain the path of monetary easing along several dimensions.

The GC sees increased downside risks to mediumterm euro area inflation and real GDP growth, largely as a result of weak global demand and the oil price. Similarly in JAPAN, the case for further monetary easing also remains, with March composite PMI coming in below the desired 50 point level at 49.9.

This hence indicates contraction in many areas of the economy. The Bank of Japan cut interest rates earlier this year and as long as the weak economic data trend continues, the likelihood of increased monetary stimulus remains.

In contrast to the areas around the globe that are struggling economically, this does not seem to be the case in INDIA. The country has experienced a steady rise in manufacturing PMI since Dec last year, coming in at 52.4 in March, up from 51.1 the previous month and the highest print in almost a year.

THIS REINFORCES THE VIEW THAT INDIA IS ONE OF THE TOP PERFORMING ECONOMIES IN THE WORLD AT THE MOMENT. According to Bloomberg India is forecast to grow at 7.5% in 2016.

This upcoming week, focus will be on growth at the IMF and World Bank meetings in Washington. The IMF has recently expressed concerns over global growth, in particular for CHINA.

DOMESTIC MARKETS
POLITICS DOMINATE MARKET MOVEMENTS

THIS PAST WEEK, LOCAL NEWS CONTINUED TO BE DOMINATED BY POLITICS, WITH EVENTS CLEARLY HAVING SOME IMPACT ON MARKETS AS WELL AS ON THE RAND.

After a long and entertaining performance in parliament, the movement by the Democratic Alliance and Economic Freedom Fighters to impeach President Jacob Zuma was unsuccessful and the currency suffered accordingly, moving back to above the ZAR/USD 15 level.

However, news that the Guptas and Duduzane Zuma had quit their board posts at Oakbay as well as some well-respected figures calling for Zuma to resign, indicate that the political tide may be turning against the president.

This, together with broad based USD weakness, saw the Rand recover somewhat and close the week at ZAR/USD 14.93.

WHILE THE POLITICAL TURMOIL WE ARE GOING THROUGH SHOULD BE POSITIVE FOR THE COUNTRY IN THE LONG RUN, IN THE SHORT TERM THE UNCERTAINTY IS ADDING TO THE RISK OF A DOWNGRADE BY RATING AGENCIES TOWARDS THE SECOND HALF OF THIS YEAR.

AT A CONFERENCE LAST WEEK, S&P RATINGS AGENCY STATED THAT SA REMAINS ON THE BRINK OF A DOWNGRADE TO NON-INVESTMENT GRADE – THE MAIN RISK LIES IN WEAK ECONOMIC GROWTH.

The fiscus, especially the needs of state-owned enterprises, and political uncertainty could also have an impact as they may negatively impact policy implementation. The ratings agency has revised SA’s GDP forecasts lower to 0.8% (from 1.6%) and 1.8% (from 2.1%) for 2016 and 2017 respectively.

Electricity constraints, labour relations, weak business confidence and policy implementation challenges were all cited as contributing to the constrained outlook.

February manufacturing data was released indicating manufacturing output rose 1.9% y/y, outperforming expectations of a -2.1% decline and up from the -2.5% decline in January. The increase in manufacturing production was largely owing to positive contributions from food, petroleum, wood, radio and TV, and electronics.

While it is still early to say, it seems the weaker currency may finally be helping the manufacturing sector. However, with low global demand, the usual benefits of a weaker exchange rate on exports are likely to be muted.