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Market and Economic Update
Investment Weekly
16 May 2016
MARKET AND ECONOMICS
ROCKY RAND REMAINS OFF LOWS
By Dave Mohr and Izak Odendaal, Old Mutual Multi-Managers
Following an interesting start to the year, the rand remains volatile. From a
5-month high of R14.18/US$ in late April, it slumped to touch lows of R15.37/$
last week, before rebounding somewhat. The rand-dollar exchange rate is
still significantly higher than its record low level of R16.90/$ as in early
January. The rand’s recent weakness, despite Moody’s surprise decision not
to downgrade South Africa, is a reminder of how closely the fate of the
currency is tied to global market factors. More specifically, the rand is wedged
between expectations of US interest rate moves, which manifest in a stronger
or weaker US dollar, and commodity prices, which are largely expressions
of expected Chinese economic growth.
2014 and is above 50, suggesting that employment in manufacturing may
have started to grow again.
TURNING A CORNER?
What was notable about Moody’s announcement was that they expect an
improvement in South Africa’s economy, which reduces the likelihood that
the Government will not pay its debt in full (which is what a credit rating
measures) since a healthier economy generates more tax revenues. Some
of the shocks that pummelled the economy – including severe drought, and
load-shedding - are expected to ease. Moody’s also noted that they were
impressed by the strength and independence of our institutions as highlighted
Commodity prices were volatile, especially the oil price which jumped around
on mixed signals of supply and demand. Other commodity prices eased as
speculative buying in China’s futures exchanges has cooled considerably.
Iron ore shot from a low of US$40 per tonne in January to US$70 per tonne
and is now back at around US$54.
DIRE EMPLOYMENT NUMBERS
It is not to say that local factors don’t matter for the rand, just that they tend
to be overwhelmed by global conditions. The sharp jump in the local
unemployment rate didn’t help matters. According to StatsSA, the first
quarter usually sees a decline in employment after the busy festive season,
but this was the worst decrease since 2008.
Employment is typically a lagging indicator of economic activity as firms will
usually delay hiring and firing decisions for as long as they can due to the
cost and effort of retrenchments and the risk of adding an individual on a
payroll. South Africa’s employment data is also released with a significant
lag.
by court cases against the President, the South African Reserve Bank sticking
to its mandate by hiking interest rates despite the weak economy and the
Treasury’s determination to get the budget deficit under control and curb
wasteful spending. Moody’s rating was a notch higher than the other two
major agencies, and it was therefore widely expected to downgrade South
Africa. Instead they only changed the outlook to negative. S&P and Fitch
could still downgrade South Africa and will not make a decision by taking a
competitor into account. But if Moody’s is right about the economy, it could
address the main concern of the other two agencies.
US LABOUR MARKET IMPROVING
While South Africa’s employment numbers were poor, US employment
numbers are probably more significant, since the US Federal Reserve (Fed)
pays close attention to these on the theory that as more people find work,
wages will bid up, resulting in inflation. More recently, the Fed has also looked
at job growth as a sign that the economy is healthy while other indicators,
most notably the first quarter’s gross domestic product reading, disappointed.
US employment numbers are released monthly and therefore give a more
South Africa lost 217 000 formal and 111 000 informal jobs in the first quarter,
while the labour force expanded by 166 000, leading to the unemployment
rate increasing to 26.7%. At a sector level, trade (-119 000), manufacturing
(-100 000) and construction (-77000) saw the largest quarterly declines.
The mining sector lost 10 000 jobs in the quarter amid the downturn in the
industry, but the Quarterly Labour Force Survey contains a disclaimer doubting
its own accuracy when it comes to mining. Mining production numbers
released last week reiterated the severity of the problem as output slumped
18% year-on-year, the largest fall in two decades. The April employment
Purchasing Managers’ index (PMI) moved to the highest level since March
recent picture (although historic data are frequently revised). The US economy
added 160 000 jobs in April, below expectations, but at an annual growth
rate of 1.9%, consistent with previous months. Unemployment remained
steady at 5%. Wage growth increased to 2.5% year-on-year. Job openings
increased to 5.7 million, close to a 15-year high and an 11% year-on-year
increase.
IMPLICATIONS FOR MONETARY POLICY
This should give the Fed a reasonable amount of confidence in the health
of the US economy, but also enough reason to take things slowly. Another
Adviceworx is a juristic representative of Acsis License Group (FSP 33002)
and an authorised Financial Services Provider (FSP 44914)
Market and Economic Update
Investment Weekly
16 May 2016
MARKET AND ECONOMICS
rate hike later this year (after December saw the first hike in a decade) is
still on the cards. However, the Fed has also emphasised its “data dependence”:
it will assess the economic indicators as they become available and act on
these, instead of being on a predetermined course of action.
The South African Reserve Bank also claims to be data dependent, but often
appears to be guided more by risks than reality. It will remain concerned
about the volatility in the exchange rate and the increase in imported inflation
in recent months. However, it has hiked rates twice this year already (and
by 2% in total since 2014) and will probably pause to take stock of things.
CHART 1: RAND - US DOLLAR EXCHANGE RATE
18
17
Rand - US Dollar Exchange Rate
16
15
14
13
12
11
May 14
Jun 14
Jul 14
Aug 14
Sept 14
Oct 14
Nov 14
Dec 14
Jan 15
Feb 15
Mar 15
Apr 15
May 15
Jun 15
Jul 15
Aug 15
Sept 15
Oct 15
Nov 15
Dec 15
Jan 16
Feb 16
Mar 16
Apr 16
May 16
10
Source: Datastream
Adviceworx is a juristic representative of Acsis License Group (FSP 33002)
and an authorised Financial Services Provider (FSP 44914)
Market and Economic Update
Investment Weekly
INDICATORS
16 May 2016
BEST - Weaker currencies against the US dollar helped
WORST -A weaker rand and higher international oil
prices mean that South Africans can expect another
petrol price hike next month.
Japanese and European equities to outperform last week.
Equities - Global
Description
Index
Global
MSCI World
Currency
Index value
US$
1 636.0
-0.43%
Week
Month-to-date
Year-to-date
1 Year
-2.09%
-2.39%
-8.35%
United States
S&P 500
US$
2 047.0
-0.49%
-0.87%
-0.78%
-2.48%
Europe
MSCI Europe
US$
1 450.0
-0.28%
-3.46%
-5.72%
-15.89%
Britain
FTSE 100
US$
8 813.0
-0.29%
-3.35%
-5.20%
-18.39%
Germany
DAX
US$
1 036.0
0.10%
-1.71%
5.80%
-9.68%
Japan
Nikkei 225
US$
151.0
0.80%
-1.40%
-1.40%
-7.31%
Emerging Markets
MSCI Emerging Markets
US$
796.0
-1.12%
-5.24%
0.63%
-22.64%
Brazil
MSCI Brazil
US$
1 370.0
0.74%
-5.78%
33.79%
-23.72%
China
MSCI China
US$
52.9
-2.00%
-6.31%
-10.77%
-34.53%
India
MSCI India
US$
445.4
0.58%
-0.58%
-1.89%
-8.16%
South Africa
MSCI South Africa
US$
412.0
-2.14%
-11.02%
4.57%
-26.30%
Equities - South Africa (TR unless indicated otherwise)
Description
Index
All Share (Capital Only)
All Share (Capital Index)
Currency
Index value
Week
Month-to-date
Rand
51 603.0
0.36%
-2.56%
Year-to-date
1 Year
1.57%
-4.32%
All Share
All Share (Total Return)
Rand
7 007.0
0.36%
-2.56%
2.71%
-1.45%
TOP 40/Large Caps
Top 40
Rand
6 166.0
0.67%
-2.30%
0.03%
-2.31%
Mid Caps
Mid Cap
Rand
14 872.0
-1.25%
-3.97%
19.10%
3.42%
Small Companies
Small Cap
Rand
19 311.0
-0.59%
-3.11%
14.29%
1.58%
Resources
Resource 20
Rand
1 829.5
-1.16%
-5.95%
19.35%
-30.68%
Industrials
Industrial 25
Rand
12 927.0
1.44%
0.14%
-1.91%
5.94%
Financials
Financial 15
Rand
7 324.0
-0.50%
-6.63%
-3.12%
-12.80%
Listed Property
SA Listed Property
Rand
2 032.0
-1.12%
-5.14%
6.50%
5.67%
Currency
Index value
Week
Month-to-date
Fixed Interest - Global
Description
Index
Global Government Bonds
Citi Group WGBI
US$
936.7
-0.99%
0.95%
Year-to-date
7.60%
1 Year
6.07%
Fixed Interest - South Africa
Description
Index
All Bond
BESA ALBI
Currency
Rand
Index value
495.5
Week
-0.29%
Month-to-date
-1.18%
Year-to-date
6.31%
1 Year
1.74%
Government Bonds
BESA GOVI
Rand
494.4
-0.28%
-1.12%
6.09%
2.20%
Corporate Bonds
SB JSE Credit Indices
Rand
165.4
-1.70%
-1.85%
-9.95%
-20.94%
Inflation Linked Bonds
BESA CILI
Rand
243.2
-0.24%
-0.15%
5.15%
5.38%
Cash
STEFI Composite
Rand
340.0
0.14%
0.27%
2.54%
6.73%
Commodities
Description
Index
Brent Crude Oil
Brent Crude ICE
Currency
US$
Index value
Gold
Gold Spot
US$
1 273.0
-1.24%
-1.55%
19.87%
6.62%
Platinum
Platinum Spot
US$
1 052.0
-2.68%
-2.59%
20.78%
-7.15%
Currency
Index value
Month-to-date
Year-to-date
47.9
Week
Month-to-date
5.75%
1.81%
Year-to-date
1 Year
32.92%
-27.50%
Currencies
Description
Index
ZAR/Dollar
ZAR/USD
Rand
15.41
Week
-4.39%
-7.76%
0.81%
1 Year
-21.91%
ZAR/Pound
ZAR/GBP
Rand
21.91
-3.19%
-6.12%
5.11%
-14.15%
ZAR/Euro
ZAR/EUR
Rand
17.42
-2.61%
-6.40%
-2.44%
-22.71%
Dollar/Euro
USD/EUR
US$
1.13
0.88%
1.33%
-3.27%
-1.77%
Dollar/Pound
USD/GBP
US$
1.44
0.50%
1.69%
3.09%
8.66%
Dollar/Yen
USD/JPY
US$
0.01
1.09%
2.17%
-9.78%
-9.78%
Source: I-Net, figures as at 13 May 2016
Adviceworx is a juristic representative of Acsis License Group (FSP 33002)
and an authorised Financial Services Provider (FSP 44914)
Market and Economic Update
Investment Weekly
16 May 2016
THE WEEK AHEAD
SOUTH AFRICA
•
SA Reserve Bank’s Monetary Policy Committee meets to set interest rates
•
Consumer inflation
•
Retail sales
US
•
Housing starts, building permits and home sales
•
Consumer inflation
•
Industrial production
•
Leading indicator
EUROPE
•
UK consumer inflation
•
Eurozone trade balance
JAPAN
•
First quarter GDP
•
Producer inflation
•
Machinery orders
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