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Trembling hands on the trading floors resulted in tentative tendencies as usual market correlations between dollar, gold, global equities, the rand and oil drifted in and out of typical consensus.
The JSE Top 40 was down around 3% last week, with the financial sector taking the biggest blow, while industrials and resources were within ranges.
The rand
On an intra-day level we are seeing a lot of volatility in the rand without any clear direction as to whether investors want to send the R/$ higher, or whether a continuation of the local currency strength will prevail.
There is a strong argument, built around purchasing power parity, showing the rand should continue to strengthen in the long term if the market sticks to economic theory.
Out of 13 emerging markets, the rand has been hammered second-hardest, only beating the Venezuelan peso.
Also, with one-third of the world’s bonds in negative territory, investors seeking higher yields are looking into South Africa and other emerging markets.
For advanced economy investors, emerging markets are the places to unload stockpiles of cash that they are sitting on in search of yield.
SA, US economies
The Fed seems to think the US economy is improving. Moody’s was quoted as saying that SA’s economy is bottoming out this year and our resource stocks are cheap offering great potential for return.
But it is not that simple, as many investors fear a slowdown in global growth after disappointing US and Chinese data. Our data also indicated declines in production.
For our resource-heavy index we need demand to go up before investors’ doubts can subside.
With the Fed planning two years ahead, with a possible interest rate hike in June, and Moody’s mention of “bottoming out” indicates that the timing of investor flows into our higher yielding economy might not come as soon as many believe.
The concerns that investors bear weigh down the market. US company earnings are estimated to have declined 5.1% as the last few earnings reports trickle through.
With the lofty levels of the S&P, many market participants question underlying buying support. What supported the S&P to spread its wings was the dovish Fed and its massive Quantitative Easing (QE) programme.
Wall Street banks took the freshly printed greenback and pumped it into stocks. The almost eight-year rally, and still counting, is in the record books as the second-longest rally ever.
The QE programme is long past, yet the S&P rallies while corporate earnings decline, pinging a red flag.
This week will get very interesting with FOMC Meeting Minutes to be released on Wednesday and the South African Reserve Bank Monetary Policy Committee meeting on Thursday.
Other important announcements this week include:
Tuesday
- Great Britain CPI
- US CPI
Wednesday
- SA Inflation and Retail Sales
- Great Britain Employment
- EU Final CPI
- US Crude Oil Inventories
Thursday
- Great Britain Retail Sales
- US Unemployment Claims
Friday
- US Existing home sales
*Giacomo Bonavera is head of foreign exchange trading at Capilis Asset Managers. Click here to visit the firm’s website.
