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Despite a rally last week, oil is still a hot market mess, while emerging markets did well amidst the first sign of change to the pessimistic outlook for the 2016 market. We look at what we can expect as GDP data is released, while locally our nation’s Budget Speech is imminent.
Towards the end of last week oil reversed its rally as investors remained cautious about the outlook of the global economy. The rally was the first sign of change to the pessimistic outlook that has battered the market in 2016.
The correlation between oil and equities is still high as investors speculated whether a deal will be struck to freeze oil supply – in a market already awash with unwanted oil – between Opec members and major oil producing countries.
Iran, determined to regain market share after years of sanctions, will ramp up oil output and threaten the initiative to limit production. Most producers need to balance their budgets with higher prices after ratings agency Standard &Poor’s downgraded ratings on major oil nations on Wednesday.
Data last week indicated that oil inventories are at record levels and, even in an optimistic scenario of flat Opec output this year, the world would continue to stockpile huge volumes of crude. United States Energy Information Administration (EIA) crude oil stocks change data to be released on Wednesday will be closely watched for supply trends affecting commodity linked assets, including the rand.
US unemployment benefit claims unexpectedly fell last week pointing to labour market resilience that could help the Federal Reserve hike interest rates this year. Other data on Thursday suggested the struggling manufacturing sector could be stabilising as factory activity in the mid-Atlantic region contracted at a slower pace than expected.
Jobless claims are being monitored closely for signs of an uptick in layoffs in the wake of the recent market turmoil. Claims have been below the 300 000 threshold – which is associated with a strong labour market – for 50 straight weeks. US unemployment claims are due on Thursday with a further update on the US labour market.
GDP data due on Friday is likely to show that the world’s largest economy grew at a slower rate the fourth quarter of 2015 as the health of the global growth engine, China, remains a concern.
Efforts by Beijing to stabilise the yuan and improve its communication with the market are positive for the global economic outlook. China pledged to better co-ordinate its fiscal and monetary policies to help counter the slowdown, said Liu Kun, a vice-finance minister.
Emerging markets performed well during last week’s rally and the rand strengthened as St. Louis Fed president James Bullard, a long-standing hawk, flattened the expected interest rate hike path. However, the picture for emerging markets is not all that rosy. Brazil, Latin America’s biggest economy, released data showing business activity fell for a 10th month in a row in December and Indonesia’s central bank escalated its efforts to lift sluggish growth and lending by cutting key interest rates.
The highly anticipated Budget Speech by Pravin Gordhan will be a major influence on what the rand does in the upcoming week, with potential for a violent deterioration should the speech fail to deliver. Wednesday’s inflation figures vindicated the SARB’s 50 basis point interest rate hike last month. Consumer inflation increased to 6.2% from 5.2% year-on-year. This is within the central bank’s expectations, but is the highest it’s been in 17 months, over and above being outside the 3% to 6% inflation target. Thursday, data will show the increase in price for producers and what the effect of the global market slowdown has had on our employment market.
Other market moving data this week:
Tuesday:
- German Flash Manufacturing PMI
- US Consumer Confidence
Thursday:
- Great Britain second estimate GDP
- US durable goods orders
Friday:
- US Prelim GDP
- G20 Meetings
Saturday:
- G20 Meetings
Giacomo Bonavera is head of foreign exchange trading at Capilis Asset Managers. Click here to visit the firm’s website.
