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A selloff in oil, uncertainty about the Fed’s monetary policy and global growth concerns impacted risky assets such as the rand and JSE stocks last week.
The JSE’s resource shares, however, seems to have underlying bull support. At January’s price lows investors saw resource shares as a bargain. Emerging markets experienced the biggest inflows of foreign investment in five years last month, suggesting that investors are beginning to take interest in local stocks.
Implied volatility in the US stock market rose over 23% last week, indicating increasing uncertainty. A selloff would likely spill over into other regions and could impact severely on emerging markets, which are seen as more risky than developed-nation assets.
Gold went up as investors shifted money to safe havens. Oil prices rose on Friday but the ongoing oversupply threatens another downturn.
Asia
Japan’s Nikkei strengthened on Friday after its finance minister Taro Aso pledged to guard the yen against strong moves in either direction.
The yen strengthened to a 17-month high against the dollar as market participants challenged the Bank of Japan (BOJ) to take monetary easing steps as it attempts to stoke up inflation and keep the yen at competitively low levels.
The BOJ stunned markets in January when it dropped interest rates below zero, but failed to convince investors that the loose monetary policy would have any noticeable impact on economic growth. The yen has strengthened approximately 10% year-to-date on a gloomy economic outlook as the low-yielding currency deposit is an attractive hedge during higher-yielding asset – such as stocks – sell-offs, prompting intervention by the BOJ to attempt to weaken its currency.
America
The US Federal Reserve (Fed) signalled caution in its Federal Open Market Committee Meeting minutes amid widespread concern that it would be unable to counter the blow of a global economic slowdown. However, Fed chair Janet Yellen defended her decision to tighten monetary policy later this year as she spoke alongside her three predecessors during a panel discussion at the International House in New York.
Said Yellen: “So yes, there is accommodation in the monetary policy that we have. But we think the gradual path of interest rate increases will be appropriate.”
Fed futures contracts showed that investors saw a 50/50 chance of a 25-basis-point hike in December and virtually no chance of a hike in this month’s meeting on 26 and 27 April.
The Fed’s dot-plot suggests that policy voters expect to see two 0.25% interest rate hikes this year.
The dollar has weakened as the number of expected interest rate hikes decreased from four hikes this year after January’s market rout. Investors see prospects of interest rate hikes as a potential risk to high-yielding asset prices such as equities at this stage of the global recovery.
Europe
European Central Bank (ECB) president Mario Draghi said “the ECB has and will continue to do whatever is needed to comply with its mandate”, underlining the bank’s willingness to take further steps to make its economies grow faster and raise inflation at the Portuguese Presidents’ Council in Lisbon. Europe’s inflation is teetering around 0.1% while the ECB’s target is 2%.
German Chancellor Angela Merkel and finance minister Wolfgang Schäuble have criticised the stimulus efforts, saying that the policies are “less favourable” for German pension programmes and savers.
Important data this week:
Monday
• China CPI
Tuesday
• Great Britain CPI
Wednesday
• SA Retail Sales
• China US-Denominated Trade Balance
• US Retail Sales
• US Crude Oil Inventories
Thursday
• SA Gold Production and Mining Production
• China Trade Balance
• US CPI and Unemployment Claims
Friday
• China GDP and Industrial Production
• Preliminary University of Michigan Consumer Sentiment Index
*Giacomo Bonavera is head of foreign exchange trading at Capilis Asset Managers. Click here to visit the firm’s website.
