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In the markets: What to watch this week

Commodities

Oil rose for the third straight week as Brent crude brimmed over the $45/barrel level, the highest since December, and an impressive appreciation of 70% from its January low of $27.08/barrel.

A production freeze deal between OPEC and non-OPEC members could not be reached on 17 April, but despite the failure to curb oil output, investor funds continued to flow into the liquid.  

Many attributed the unrelenting rally to a strike in Kuwait which took 1.6m barrels per day of supply out of the taps. However, three days later the strike was over and the widely anticipated sell-off did not spill over.

Sentiment in the entire commodity complex has become more confident despite the glut, with new cash being put into the market by investors, lifting prices.

While many expect the rally to continue, there seems to be no fundamental reason why it should.

SA

As a commodity-linked currency, the rand has correlated strongly with the oil price since October last year. The strength in the rand is expected to continue until there is a change in the direction of the trend in crude prices.

In the opinion of some investors, the oil price is the bellwether for the time being as the American S&P500 equity index has climbed in lockstep with the commodity.

The potential risk of a sell-off in oil may have a larger impact on emerging markets across the board. Emerging markets are at the lower end of the scale when looking at investor preferences during times of risk.

With Saudi Arabia, the world’s largest oil exporter, endeavouring to regain market share, there is potential for intervention by the Saudis to prevent oil prices from climbing too high and competition re-entering the market.

The JSE ended the week on the back foot in line with most global market indices. The directionless attitude of investors left market participants with their feet on their desks looking to others with a “you go first” stance.

Trade balance data for SA will be released on Friday and will show the impact of capital flows into the country at a weak exchange rate thanks to yield-hungry foreign investors.

Europe

The European Central Bank (ECB) kept rates unchanged at its regular interest rate decision announcement on Thursday. ECB President Mario Draghi’s press conference followed shortly after. Mario Draghi met investors’ expectations by defending loose monetary policy against sharp criticism from Germany.

“We obey the law, not politicians,” Draghi said as he went on to argue that low interest rates are necessary in a low-growth and low-inflation economic environment.

Draghi continued by pouring cold water on the idea – created by speculative journalists – that the ECB would make use of helicopter money , whereby a policy of money creation sees the central bank depositing money directly into individuals’ bank accounts to stimulate expenditure, much to the relief of the Germans.

USA

This week’s highlight is certainly the Fed’s FOMC Statement and Federal Funds Rate decision on Wednesday. We do not expect any change to current monetary policy from Fed chair Janet Yellen at this stage. However, speculation is rife that the statement may indicate that some policymakers forecast a possible hike in the June meeting.

Other market moving announcements this week:

Monday

  • EU German Ifo Business Climate Index

Tuesday

  • US Durable Goods Orders and Conference Board Consumer Confidence Index

Wednesday

  • Great Britain Preliminary GDP
  • US Oil Inventories

Thursday

  • Japan Monetary Policy Statement, Bank of Japan (BOJ) Outlook Report and BOJ Press Conference
  • SA Producer Price Index (PPI)
  • US Advance GDP and Unemployment Claims

Friday

  • SA Private Sector Credit and M3 Money Supply
  • US Personal Income and Spending

Giacomo Bonavera is head of foreign exchange trading at Capilis Asset Managers. Click here to visit the firm’s website.

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