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Global equities made guarded gains on Friday, which set the tone for the G20 meeting in Shanghai. Officials met to focus on contingency plans to boost global growth after International Monetary Fund (IMF) managing director Christine Lagarde warned that large capital outflows from China pose risks to the global economy.
Meanwhile, locally the focus last week was on finance minister Pravin Gordhan’s Budget Speech which failed to appease investors’ expectations, weakening the rand by the most in six weeks, and sending South African government bond yields soaring.
The finance minister pledged to decrease the budget deficit, target civil-servant jobs and increase wealth taxes.
While the Budget Speech was in progress Moody’s Investor Service released its downgrade report of Brazil’s credit rating to junk status, adding to investor pessimism. The rand was the weakest performer against the dollar compared to 24 developing-nation currencies.
While investors were disappointed, credit rating agency Moody’s was happy with the targets for the Budget given the weak economic backdrop, but it is concerned about growth and doubts we can decrease our budget deficit.
Moody’s expects our economy to grow by 0.5% and 1.5% for 2016 and 2017 respectively, compared to the finance minister’s forecasts of 0.9% and 1.7%.
At Capilis we believe the market expectations for a turnaround based on the Budget Speech were near-impossible when weaknesses lie in mismanagement and corruption – not the allocation of funds or revenue streams.
We think the Budget Speech was broadly positive, but it cannot prevent a downgrade of SA’s sovereign debt to junk in June if economic data does not exceed expectations.
This week, important data to be released comes in the form of the Balance of Trade on Monday; the Barclays Manufacturing Purchasing Manager’s Index (PMI) and the GDP Growth Rate on Tuesday; and the Standard Bank PMI on Thursday.
A buoying sign for local markets came after oil staged a turnaround towards the end of last week on speculation that a March meeting of major oil producers might bring about crude price stabilisation.
Doubts, however, linger regarding the effect an oil freeze would have in a supply glut. Crude oil inventories in the US – due on Wednesday, and US Natural Gas Storage – due on Thursday, will provide clues on the demand and supply of oil.
China, the world’s second largest economy and global growth engine, is expected to show that the manufacturing sector shrunk for the seventh straight month in February as PMI figures are released early on Tuesday morning. A lower-than-expected number will certainly precipitate cold sweats on global trading floors.
Japan has its back against the wall as the Bank of Japan’s (BoJ’s) efforts to stimulate the economy have been rejected by the market.
That pushed BoJ governor Haruhiko Kuroda into a debate with G20 finance leaders to explain that his efforts were not aimed at weakening the yen – despite the fact that Japanese economy minister Nobuteru Ishihara said the continued strength of the yen (because of its perception as a safe-haven) will hurt the Japanese economy.
The European Central Bank’s (ECB’s) favoured inflation gauge dropped to a record-low just below 1.4, increasing expectations that more monetary stimulus would be coming from the Bank.
The ECB’s preferred gauge measures where markets expect inflation forecasts for 2026 to be at the start of 2021. However, GfK consumer sentiment measures in Germany improved as shoppers felt increasingly upbeat about their future income. Employment data from Germany and Europe is due on Tuesday.
Another silver lining came in the form of a pick-up – the most in 10 months – in new durable goods orders in the US’s downtrodden manufacturing sector for January as demand increased across the board.
Unemployment claims remained below levels associated with the tightening labour market for the 51st straight week. More US employment data is due on Wednesday, Thursday and Friday.
This data is sure to move markets as president of the Federal Reserve Bank of Richmond, Jeffrey Lacker, said the jobs market could give the US Fed justification for multiple interest rate hikes this year.
Other market moving data this week:
Monday
• South Africa Private Sector Credit
• South Africa M3 Money Supply
Tuesday
• South Africa Total New Vehicle Sales
• US ISM Manufacturing Purchasing Manager’s Index (PMI)
Wednesday
• Great Britain Construction PMI
Thursday
• Australia Trade Balance
• Great Britian Services PMI
Friday
• US Trade Balance
Giacomo Bonavera is head of foreign exchange trading at Capilis Asset Managers. Click here to visit the firm’s website.
