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In the markets: What to watch this week

Asia

A rout in the Japanese Nikkei stock market index led global equities lower last Friday, after a gloomy survey of the Pacific island’s manufacturing sector triggered heavy fund selling, despite upbeat figures from China’s vast factory sector.

The Bank of Japan (BOJ) found that sentiment of major manufacturers was at its lowest in almost three years in a concerning survey which led the Nikkei to close down 3.55% on the day. The dampening data deepens concerns that the BOJ’s dramatic negative interest rate shift and the loose monetary policies dubbed “Abenomics” are not working.

The ripple effects spread across all time zones as major indices closed in murky waters.

Not helping the situation was Standard & Poor’s decision to cut China’s sovereign debt outlook to negative, citing Beijing’s reform agenda moving ahead slower than expected.

South Korea’s trade with China fell for a ninth month in a row in March imposing more negative sentiment into the outlook of the Chinese economy. Government data showed that exports fell 12.2 % from a year earlier, similar to February’s data of a 12.9% drop.

Unexpectedly, China’s manufacturing activity expanded in March – the first sign that the slowdown in the second largest economy is easing. The official version of the Chinese Manufacturing Purchasing Mangers’ Index (PMI) went up to 50.2 from 49.0, while the private Caixin/Markit Manufacturing PMI rose from 48.0 to 49.7. The 50.0 mark separates expansion from contraction.

USA

Investors took comfort at the beginning of last week when Federal Reserve Chair Janet Yellen struck a surprisingly dovish tone while delivering her speech Economic Outlook and Monetary Policy speech at the Economic Club of New York luncheon. Yellen commented that the central bank should tread cautiously amid uncertainties about China’s economy and low oil prices.

Yellen’s stance contrasted with recent comments from other Federal Reserve policymakers who sounded hawkish, suggesting the Fed Chairwoman wanted to control the message to market participants.

Investors sighed a breath of relief and stocks rallied.

The Federal Open Market Committee (FOMC), the committee that decides on the interest rate of the Fed, is scheduled to release the most recent meeting minutes on Wednesday, which will provide detailed insights into the influences of committee members’ votes.

Thereafter, on Thursday, Yellen is expected to participate in a panel discussion at the International House in New York.

ADP Non-Farm Payrolls, a comprehensive report about the health of US employment, came out on Friday with the headline figure better than expected, indicating an improvement in the labour market and an increased chance of more than one interest rate hike this year. Equities sold off as the prospect of higher interest rates increases fund flows to interest bearing assets with low risk.

Europe

It was a tough start for the first day of the second quarter in Europe. Energy stocks tracked lower oil prices and sentiment remained bearish although eurozone factories showed a slight improvement in activity.

In the background, Brexit fears place a hovering cloud of uncertainty and volatility over the region.

SA

The rand strengthened to its best level (R14.61/$) in four months after the Constitutional Court ruling that President Jacob Zuma must pay back the money spent on non-security upgrades to his Nkandla homestead.

In addition to the court ruling, positive trade data and an overall weak dollar helped the rand bulls.

The JSE was less bullish as it was in lockstep with other major indices.

Month and quarter endings last week were surprising subdued on Thursday. Friday’s sell-off came at a sensitive time for the market and could prompt investors to reduce their holdings.

Other important market moving data to be released this week:

Monday

  • EU Unemployment rate

Tuesday

  • SA Standard Bank PMI
  • US Balance of Trade
  • ISM Non-manufacturing Index

Wednesday

  • European Central Bank non-monetary policy meeting
  • US EIA Crude Oil Inventories

Thursday

  • Bank of Japan monthly report
  • SA Foreign Exchange Reserves and Manufacturing Production
  • US Unemployment Claims

Friday

  • China Trade
  • Germany Trade
  • Great Britain Trade

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

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