In the markets: What to watch this week

For the first time in nearly a decade the biggest driver of market sentiment may not come from the monetary policies of major central banks, but rather from politicians.

Last week ended off with the inauguration of Donald Trump, who was officially sworn in for his four-year term as the 45^th president of the United States of America. As Trump sets in motion his policies that will likely favour the super power, the governor of the SARB (South African Reserve Bank), Lesetja Kganyago, must provide guidance on monetary policy for South Africa in an effort on Tuesday to maximise the wellbeing of the local emerging economy.

In his latest interview on internationally broadcast television, speaking on how to implement local policy in response to president Trump’s agenda Kganyago said, “It’s difficult to figure out exactly what it means, because we’re not clear about what the policy is.”

One of the scenarios Kganyago spoke of was the bolstering of fiscal stimulus to the US economy and how that would impact emerging markets, “But what we would be seeing is that if the US economy is then also beginning to grow it might be giving the Fed [Federal Reserve] room to normalise monetary policy faster, which would lead to a further reversal in capital flows to emerging markets.”

The SARB governer expects that growth in the American economy can impact positively on the South African economy as the demand for raw materials could increase. Bear in mind a higher oil price with the recent Opec deal.

The impact of higher demand on raw materials, of which we export a lot, could stoke higher inflation costs and as such Kganyago mentioned the likelihood of an increasing interest rate cycle.

“We didn’t say we have reached the end of the tightening. We might be reaching the end of the tightening cycle. But we also cautioned that should the factors that have led to the stance that we have change, the MPC will then review its stance in the light of that.”

Kganyago also commented that it would be very hard to forecast exactly how Trump’s policies will play out and how capital flows will be influenced.

The job of keeping the exchange rate at a favourable level while monitoring the output gap and labour costs will certainly be difficult, but so far indications show that Kganyago will likely keep the interest rate at 7% after this week’s monetary policy committee (MPC) meeting.

GDP figures from the US will be released on Friday and it will be used as the benchmark for Donald Trump’s performance as president.

Other important economic announcements due this week include:

Monday

• Euro Area:  European Central Bank president Mario Draghi speaks & Consumer Confidence Flash

Tuesday

• Great Britain: EU Court Ruling
• Germany: Market Manufacturing Purchasing Managers’ Index (PMI) Flash
• US: Existing home Sales

Wednesday

• Germany: German Ifo Business Climate
• US: Crude Oil Inventories

Thursday

• SA: Producer Price Inflation (PPI)
• Germany: Gfk Consumer Confidence
• Great Britain: Preliminary GDP
• US: Unemployment Claims and New Home Sales

Friday

• Great Britain: Gfk Consumer Confidence
• US: Advanced GDP and Core Durable Goods Orders

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