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Cape Town - Weak manufacturing and mining activity coupled with the impact of a severe drought on the maize harvest suggest annualised gross domestic product (GDP) growth is likely to remain below 1.0% in the first quarter, according to Overberg Asset Management's weekly overview of the SA market landscape.
The latest data on mining production, due on Thursday, is likely to show a slight contraction of -0.4% in March following the strong 3.8% month-on-month gain in February's mining production, according to consensus forecast.
The slight decline in expected production would leave first quarter production lower on a quarter-on-quarter basis by around -1.0%.
South Africa's manufacturing production increased more than expected by 3.8% year-on-year in March after a revised 0.4% contraction in February, official figures showed on Tuesday.
Statistics South Africa said in a statement on month-on-month basis, factory output grew 1.2%, but contracted by 0.6% in the three months to March, compared with the previous three months.
South Africa economic review
Gross reserves
Gross reserves increased from $46.44bn in March to $47.04bn in April, attributed to a $486m rise in foreign exchange reserves over the month. The gain in foreign exchange reserves is due primarily to the weakening in the US dollar over the period boosting the value of other currency holdings.
Gold reserves also increased following a slight uptick in the gold price. The level of reserves are likely to remain volatile over coming months due to changing foreign investor sentiment.
While SA’s relatively high interest rates should continue to attract foreign capital the yield advantage may dissipate once the Fed starts raising US interest rates.
Foreign investors
Foreign investors bought R0.7bn worth of SA bonds in the past week and sold R1.2bn worth of equities. Over the month of April foreign investors bought R15.2bn worth of bonds and R1.6bn worth of equities.
Foreign investors accounted for a lower than usual portion of daily trade volume, measuring 38.1% of total market activity in the past week, below the 42.8% year-to-date average. The below average reading is attributed to the May-day public holidays which in Europe and the UK fell on Monday last week.
Consumer confidence
The FNB/ BER Consumer Confidence Index fell from 0 in the fourth quarter of 2014 to -4 in the first quarter of 2015. The fall in consumer confidence is attributed mainly to a decline in the economic outlook index, which fell from +8 to -11 with optimism declining in the face of Eskom’s load shedding, tax increases and currency weakness.
The fall in consumer confidence was more pronounced among high- and middle-income group, while confidence in the low-income group showed a slight gain.
Electricity regulation
The National Electricity Regulator of South Africa (Nersa) received an application from Eskom for a 25.3% tariff increase over 2015/2016. While Nersa will spread the increase across two years, the bulk of the increase, expected to be over 20%, is likely in the first year.
The electricity tariff increase will dent household disposable income, consumer confidence and retail spending. Furthermore, the electricity tariff increase is likely to cause consumer price inflation (CPI) to breach the SA Reserve Bank’s 3-6% target range by year-end bringing forward the inevitable hike in interest rates.
SA political review
New DA leader
Mmusi Maimane was confirmed successor to Helen Zille as party leader of the DA after gaining 90% of delegate votes at the party’s elective conference.
According to the DA’s internal polls Maimane’s leadership will increase the DA’s share of black votes to 8%, up from the estimated 6% at the time of the 2014 elections.
Pre-paid electricity
According to senior officials at Eskom, it will be pressing ahead with installing pre-paid electricity metres in Soweto. The move is unpopular with the ANC, which fears it could undermine voter support.
Eskom also announced that from the June 5 it would interrupt power supply to municipalities which are in arrears. The top defaulting municipalities are all ANC-controlled including Soweto, which owes Eskom more than R4bn in unpaid bills.
Public sector wages
The mandatory period of conciliation over public sector wage talks has concluded without any agreement between unions and the government.
The deadlock in wage talks and conclusion in the mediation phase opens the way for strike activity if the unions choose to follow this route.
Technical analysis
- The rand remains below successive support levels suggesting a continuation in the rand’s depreciation. A break below the R/$ 10.80 level is needed to signal a disruption of the depreciation trend line, which has been in place since 2011.
A break above the key “Fibonacci” level of R12.15/$ would open up a further depreciation in the rand to the R13.00/$ level.
- The US dollar index is testing a major 30-year resistance line, which if broken will pave the way for further strong gains in the currency.
- The long-term JPMorgan global bond index bull trend remains intact, with the yield targeting a new low during the fifth and final wave.
- The US 10-year Treasury yield has broken below key resistance levels of 2.40% and 2.0% indicating a trading range of 1.70-2.2% over the medium-term. There is unlikely to be a major bear trend in US bonds as the deleveraging phase is still in its early stages.
- The benchmark R186 SA Gilt yield is testing support at 8.15% and needs to break below resistance at 7.90% in order to resume its bull trend.
- The MSCI World Equity index is in the 5th and final wave of a rising-wedge formation. A rising-wedge formation is a typical trend-ending signal. European equities are set to outperform US markets. The Nikkei exhibits the most bullish pattern.
- Since the 1950s the Dow Jones and S&P 500 have displayed 7-year up-cycles and the top of the current US equity cycle can be expected in the next year. The next major wave down will complete the 16-17 year secular bear market that started in 2000. The secular bottom should occur around June 2016.
- In the meantime the S&P 500 is displaying a bullish short-term pattern. The index is moving into an advanced triangle pattern which normally signals the continuation of an upward trend. If the S&P 500 breaks above resistance at 2070 a further upward move to 2150 is likely. This view is corroborated by the “downward flag” of the Dow Jones index, which is also associated with an upward break-out.
- The Coppock Curve is a long-term momentum indicator with an excellent track record in identifying major market bottoms. It shows that the March 2009 low was a long-term low unlikely to be broken.
- Although enjoying a temporary respite Brent crude had previously broken below key support levels at $60 and $50 suggesting a continuation of the weakening long-term trend. Copper is regarded a reliable lead indicator for industrial commodity prices and barometer of global economic growth. It has broken below the 2011 low of $6 500 and key support of $6 000 suggesting a further downside move to $5,500.
- Despite recent advances gold is in a protracted bear market signalled by rapid declines through successive support levels at $1 400, $1 300 and $1 250. Gold’s next target is $1 100 and is likely to breach $1 000 before the bear market ends.
- The All-share index has broken to new highs exceeding the 55 000 level for the first time indicating a continuation of the long-term upward trend.
Bottom line
- The fortunes of the rand and SA’s financial markets are dictated increasingly by developments in overseas capital markets. Foreign investors have accounted for an average 43% of SA’s equity and bond market trade since the start of the year.
Local asset prices are set largely by the level of global risk appetite. A key development affecting global risk appetite over coming weeks will be the debt negotiations between Greece and its creditors, the ECB, EU and IMF.
- The IMF is already working with national authorities in south-eastern Europe on contingency plans for a Greek debt default. However, although the probability of a technical default is rising the eventuality is unlikely to be dramatic. More importantly, a technical default will not automatically prompt Greece’s expulsion from the eurozone.
- As long as the debt repayment delay is temporary Greece’s creditors are likely to be lenient.
- For its part Greece is unlikely to precipitate an exit from the eurozone. The Syriza-led government does not have a mandate to leave the euro.
- While risk aversion may increase as debt negotiations continue unresolved, the chances of an actual exit by Greece from the eurozone is extremely remote.
For the full report, including a look at international markets, click here.
* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.
